Damien Grant: Irrational? You're more likely to be paid

Photo / Thinkstock
Photo / Thinkstock

I'm irrational. No secret, I guess.

Bees are likewise irrational. They sting, even at the cost of their own lives. There is no reasoning with a bee. You must either kill it, get stung or get out of its way.

A labrador, by contrast, can do far more damage to a human than a bee. Experience though teaches us that we can torment a labrador without consequence.

If we owe someone money it helps to know if they are, by nature, a bee or a labrador.

Equally, if someone owes you money you want them to think that you are a bee and that you will pursue them, regardless of the cost to yourself.

There is a wonderful economic experiment called the Ultimatum Game involving two players and a sum of money.

The first player gets to decide how the two players shall split the cash. The second player can decide to accept the allocation or reject it. If the offer is rejected, neither player gets any cash.

If people only cared about money, the second player would accept whatever pitiful sum of cash was offered; yet even when the stakes are relatively high, unfair deals are rejected.

Humans care about justice and we will "purchase" it, which was what those in the Ultimatum Game were doing when they rejected an unfair deal. Psychologists have shown that we get pleasure from getting even.

Retribution, however, often makes poor economic logic. After the shock of getting cheated we weigh up the cost of justice and make an economic decision to walk away.

So, there is value in convincing people that you value "getting even" more than most, that you spend $10 to chase $1. But it can be difficult to prove to the market you are willing to act irrationally in the short term to gain a long-term reputational advantage.

The easiest way firms do this is through commitment. A large firm, especially a bank, will set onerous credit policies that staff must follow, removing discretion from their front-line staff. This is why, when trying to negotiate debt with a bank or the IRD, they will act in a way that seems irrational, preferring to bankrupt the debtor rather than settle for a lower amount. They do not care about your debt as much as their reputation in the wider market.

Smaller firms like mine must seek other ways to signal their irrationality. My business does so by employing a team of young lawyers. We have committed to a large legal cost and revel in legal disputes. It is not a unique strategy but it is effective. Others do so by taking trade credit insurance that only pays out if the debtor goes bankrupt, or through the relentless pursuit by their credit department of outstanding debts.

It can pay to be irrational.

- Herald on Sunday

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