The predictably irrational NBA lockout

Dan Ariely thinks Duke basketball fans are crazy. Or at least they act a little irrational sometimes. As a behavioral economics professor at the ACC school, he noticed something interesting -- that fans who won Duke basketball tickets through a lottery tended to overvalue those tickets. In fact, those randomly selected students valued those tickets 10 times more than what other students did. Cameron Crazies, indeed.

Ariely interpreted this phenomenon as an example of the endowment effect, an imperfection of the human mind that causes people to believe the things they possess are worth more than they actually are. It is just one of the many human quirks that Ariely studied in his book “Predictably Irrational,” which is a captivating read for those curious about the oddities of human nature. (For example, you’ll learn why bringing a bottle of wine to a pal’s party is absolutely bonkers from a rational perspective.)

The NBA lockout fascinates Ariely. It fascinates him because it’s a high-stakes, high-profile example of irrational behavior. Most of the complaints you hear about the lockout has nothing to do with basketball or law. No, most of the exasperation comes from a lack of common sense.

How did we get to this point? How can two sides, led by extremely intelligent, rational and savvy negotiators, fail to reach a timely agreement? Why can’t billionaires and millionaires strike a deal before it becomes a lose-lose situation? Why did irrationality take over?

Ariely admittedly may not know much about sports, but he’s an expert in explaining why smart people make poor decisions in everyday life. Before he sets off on a speaking engagement in Abu Dhabi, I got a chance to chat with him on the phone to ask him a few questions about the stalemate of NBA labor negotiations.

Tom Haberstroh: So let’s cut right to it. What are some of the common irrational behaviors that you’ve seen in the NBA’s labor talks?

Dan Ariely: First, in negotiations, there are salient objects which people focus the center of their attention, and then there are less salient ones. Often what happens is that people pay less attention to the salient one and lose out when they focus on the less salient one.

I’ll give you an example: When you do a trade-in of your car, people pay lots of attention to how much they get for their used junker and not so much what they pay for the new car. The dealer is basically giving them an extra good deal on the used car, and people are excited by this, and they think it’s a good deal, but they don’t realize they’re getting screwed on the bottom line.

The second thing is that this could be an occasion where the negotiation creates loss of goodwill between the two sides. Let’s say you and I negotiate, and the negotiation goes badly in a confrontational way, and then I need to work for you. I can do all kinds of things that would tick you off.

Imagine if the owners don’t pay the players what the players think they’re worth. Are their players going to play less well? Probably not, because it’s their own reputation on the line and their own excitement if they play well. But they might be more likely to, say, break something on the private plane of the team. Or will they might be more likely to not help an owner or coach if he needs a favor? This is something called sabotage, which is the fact that people sometimes destroy things for no benefit just to harm the company they work for.

In negotiations, ultimatums, like the one David Stern delivered over the weekend, happen pretty frequently, but do they typically have a real effect or is it just an empty scare tactic?

It depends on what the situation is, but what is very different in this negotiation is that all the producers are together. Imagine if Toyota has a labor dispute. If they stop producing, the employees know that GM is going to benefit from that. That’s not the case here. The owners know that there’s nothing the players can do. Here, the owners are saying to the employees, “Look, without us, you are useless. You cannot do anything. Work on our terms.” And of course, it’s a question of whether the laborers, the players, can say the same thing, “We’re not playing. You are useless, also.”

But there’s something very asymmetric about this. The people who run the teams need the team much less than the players who play in them. The people who own the team have lots of financial background, nothing terrible would happen if they stopped for, say, five years whereas the players would probably be wiped out. Not to mention there’s another aspect here which is different than a fair economic environment is that the players have reputations to uphold.

What’s happening here is that the players will look like jerks for stopping the negotiations because everybody who likes them thinks they’re making tremendous amounts of money. Now they seem greedy and it’s a little harder to admire them. But the owners don’t serve as inspiration for fans so they don’t lose that aspect.

We’ve heard the union claim that the owners aren’t negotiating “in good faith.” What does that mean? Is it a meaningful complaint?

Yes and no. Negotiating “in good faith” is cheap talk. It doesn’t really mean you’re obliged to do anything. But it turns out that when people say something, even if it’s not obligating the other party, it usually exerts social pressure to do so.

Imagine two situations. In one of them, you and I sign a contract, and in the other situation, we shake hands. The hand-shaking has no legal ramifications. But if you promise something, you feel like you’re going to do it. This is what saying “good faith” accomplishes. It has no legal ramifications, but both parties agree that they’re going to really try. It’s almost like a promise to themselves and to the others that things will be different.

We have two extremely competitive sides, which seems to be an explosive recipe for irrational behavior. Can competitive nature hijack a negotiation beyond reason? When does competition turn into ego, or can they be considered synonymous in negotiations?

They can become one in the same when negotiations become public. Imagine if you’re a team owner. Imagine somebody was going to ask you questions about this everyday because all your friends are thinking about it. “Are you giving up?” “Are you spending too much?” And if you’re the players, you’re worried about the same thing. It’s a full-time occupation for these people.

Pride is a lot of it. It’s very hard to create win-win situations in public negotiations. There are cases when there’s a win-win situation -- when there’s more information to be discovered. Imagine that what the players really want is somewhat more money, but they also want more time off to be with their kids, for example. They discovered they wanted something else.

On the point about trying, the players claim they’re making all the concessions, but the owners disagree on that. Stern established the starting point in the current talks and the owners have “conceded” many of those initial demands as the negotiations progressed. Is this a common negotiating tactic?

It’s a very nice trick by the owners, which we call anchoring. It is absolutely critical to control the starting position and the owners have done that. The other thing that is working for the owners is that 50/50 sounds very fair. We have this notion of a 50/50 split as being somehow logical for the two parties. But the two parties are not the same size, or value. The notion of fairness is working for the public opinion and any basic perception of fairness. 50/50 seems like the right thing to do, even if it’s not.

I think it’s going to be tough to break away from this 50/50 point simply because it sounds so reasonable. The players will probably have to agree to the 50/50 as a logical starting point, and try to do something else systematically that would get more income to the appropriate players. The owners have the upper-hand because of their income outside of the sport.

In a negotiation that involves an element of publicity, how much does winning the PR battle matter to winning the war?

Clearly, the PR war is not equal. The owners are much less affected by the PR than the players because the players are the ones to have to face the public, not the owners. I think there is a question of face and a question of coordination. I think PR has offered the chance to communicate to the other side what they’re going to.

The other part of it is that in doing this, they could make the whole sport less appealing. There is this potential here of cutting off your nose to spite your face, where they make the sport so unappealing and they all look like greedy monsters. At some point, nobody will want to watch.