Recruiting Wars 2010: Playing to win or just not to lose?

A hypothesis about the psychology behind the big deals
DEC 09, 2009
By  Bloomberg
Merrill Lynch and Morgan Stanley Smith Barney are reportedly offering over 300% to top producers. This reminds me of a business school exercise reportedly originally presented by a Harvard University Professor: The auctioneer holds up a $20 bill to be bid on. There are three rules. First, just like any auction, the highest bid wins. Second, unlike most auctions, the second highest bid also has to pay their amount and gets nothing. Third, the participants are not allowed to talk to each other as they bid in $1 increments. So, the first bidder generally will bid about $1. The second bidder sees a bargain and bids $2. This continues for awhile but gets more interesting when the bids get closer to $20. At some point, the bidders realize the trap they are in because their supposed bargain is about to get expensive. The top bid quickly gets to $20 and the next bidder has a tough choice; that is, pay $21 for a $20 bill or pay $19 and get nothing. The audience gets a big laugh when the bid hits $21. The seller of the $20 bill now stands to earn $21 ($20 + $21, minus the original $20). Because the losing bidder is losing so much more than the winner, you can easily see the bidding go past $30, and occasionally north of $100 for the mere $20 bill. The participants are no longer bidding to win, but only not to lose. Try it at home sometime….. Alright, so the deals are supposed to make up for deferred compensation, retention packages, the hassle of moving a book, the risk of moving a business, the risk that the firm might go out of business, the risk that the firm might get bought out, a year's worth of Starbucks, braces for the children, and maybe a big screen TV or two. And I know that it is very difficult to get the entire 300%, unless the Advisor grows his or her business dramatically over the length of the contract. And yes, this is the headhunter making fun of the whole process. And yes, I have always thought that firms would never give deals that they knew would lose money. But then I learned about the psychology of the Harvard University exercise. What a wonderful world.

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