Understanding cost
Lecture handout: Understanding cost* |
Textbook Reading: Chapter 2 (Intro and Section 2.4, pp. 39-34 and 59-63)
The aim of this session is to understand the economic concept of opportunity cost.
Group activity:
|
In Patrick McKenzie’s infamous blog post on salary negotiation, he says: “Every handbook on negotiation and every blog post will tell you not to give a number first. This advice is almost always right. ”
I recommend the following Lex Fridman interview with FBI hostage negotiator Chris Voss. Voss talks about the three “voices” of negotiation, which are:
- Assertive (loud and clear commands, direct and honest but recipients can feel attacked and not engage well)
- Accommodative (smiling, optimistic, hopeful – relationship building)
- Analyst (likes decision trees, systematic thinking, fact driven, and quite introspective. They recognise that accommodators often get better deals than assertives)
He also makes clear that lying is usually a bad idea, for the following reasons:
- If the other side are a better liar than you they’ll notice straight away
- It could be a trap to see if you’re willing to lie
- It’s likely that the other side will find out it was a lie, and then they will treat you much worse
I believe that the case discussion demonstrates our inherent reluctance to lie. However:
2 of the bestselling Holocaust memoir authors of the golden age of misery memoirs were both fakes, and they actually met each other at a conference and claimed to remember each other from the time. neither had ever been to Nazi-occupied Europe
— Ed West (@edwest) September 11, 2020
Here is a more recent example of obtaining copyright for the use of a photograph:
William Greenbladt, a photojournalist, who took this photo of the McCloskey’s pointing guns at protestors sent them a $1500 bill because they lifted the photo and used it as a Christmas card. pic.twitter.com/EpdRSp19Hx
— Michael Cali (@cali_photo) November 5, 2020
In the debrief it’s important to realise when someone is being evasive. A good example of this is in the U.S. version of The Office, where Andy has to repeat the same question to Angela 3 times before he gets to the truth. (Season 5, Episode 12, from 9:22 – 10:13).
Recommended article:
- “The Origins of EVA”, by Jeffrey Steele, Chicago Booth Magazine, Summer 1998
Recommended cases:
- Desai, M.A., and Ferri, 2006, “Understanding Economic Value Added”, Harvard Business School Case No. 9-206-016
- Desai, M.A., Egawa, M., and Wang, Y., 2004, “Continuing the transformation of Asahi glass: Implementing EVA”, Harvard Business School Case No. 9-205-030
Here’s a good post on the downsides of using EBITDA as a measure of profitability:
https://twitter.com/SecretCFO/status/1565027764813561862
Activity: Applying EVA |
Finally, The Economist reports that at the start of 2023 the e-commerce firm Shopify deleted 12,000 recurring meetings from their employees shared calendars, and asked managers to think seriously about whether they should be reinstated. The results:
“The company reports a rise in productivity as a result of the cull.”
Learning Objectives: Opportunity cost reasoning, basic principles of negotiation.
Focus on diversity: The Hamilton Real Estate case is used as the first session on the Harvard MBA course on negotiation. It was written by Deepak Malhotra who has a recent book called ‘Negotiating the Impossible‘. You can follow him on Twitter @Prof_Malhotra. |