Why your obsession with fairness in business is costing you dear.

I am from the UK, where fairness is almost a national sport. This isn’t a completely negative thing. It is great that old ladies don’t need to push in line, for example, because queuing is respected!

However, in business and investing, there are many things which are unfair, but are perfectly rational and profitable. Failing to accept an unfair situation, can cost people dear.

I was reading about an experiment that was done sometime last year. Some researchers from a university offered some participants $10,000 to climb a mountain.

The climb was about 1 hour long. Once they got to the top, the researchers told the participants that they had lied; now they would only be offering them $9,000 for the climb.

Now $9,000 is a lot of money for 1 hours work for almost everybody, but 65% of the people refused the money, and left with $0, because the situation wasn’t fair! Of course, the rational thing would have been to accept the money, when most people would have accepted even $1,000 at the bottom.

I have seen the same situation in business and investing. There are many things which are unfair, but perfectly rational and profitable.

Some examples;

1. It is perfectly fair and rational to offer introducers more money for providing leads. Most firms offer introducers a small basic wage and a small incentive like 10% of the sale. Offering 50%-80%, without basic pay, may not be fair, because you are doing most of the work as the owner of the business, but it is rational. You are incentivizing them to work harder, whilst also protecting your cashflow as the business owner.
2. You are a business owner, and you see somebody leave your company, even though you felt wronged by them. You approach them and offer them a fresh deal, as you have seen them succeed, after they left. This may not be fair. They wronged you in the past, but it may be rational, if they are now older, wiser and more talented than before.
3. Now let’s give an example of a company employee. Negotiating a small 10% pay rise worth $5,000 and then reinvesting that pay rise in markets would make you $1M-$2M richer in the next 30 years assuming average stock market returns, but it may not be fair that you are payed $5,000 a year more than your co-workers. You only took 5 seconds out of your day to ask after all.
4. Focusing on your top 5% of customers, cross-selling and up-selling them, and therefore earning more by doing less, is unfair on those that work harder than you, but perfectly rational.
5. Making money from saving and investing from a young age, to take advantage of compounding, may not be fair. You aren’t working harder for the gains, after all. All you are doing is delaying gratification.
6. Approaching your ex boss who fired you 2 years ago, or even 2 months ago, to see if you could collaborate is rational, and potentially profitable, if you can put pride aside.

And the best thing? Few will copy you. Unlike other ideas, profitable but unfair ideas are much less likely to be copied by others because most people have too much pride to implement the ideas, especially if they think it is unfair on themselves.

I spoke to an associate a few weeks ago who pledged he would never pay an introducer in his recruitment business 60% or more even if, quote, ‘it made me millions, because I am doing all the work!’.

So he would prefer to earn half, and keep his pride, and reassure himself that he is being fair.