Consider the following case: Two travelers board the same flight. Both have checked-in antique artefacts – let´s say antique vases. These vases look very much the same, ie. they cannot be distinguished. As it sometimes happens in our industry, the vases are not properly handled, the flight is very bumpy and on delivery they arrive broken into pieces. Both travelers are clearly upset about the damage and ask for compensation.
Their claims are accepted as the mishandling is obvious. The only problem is to establish the value of these vases, as there is no refence book or online price finder that could indicate a price for these objects. Therefore, the airline manager, who has a knack for psychology and game theoretical approaches remembers a game (which was invented by the Indian economist Kaushik Basu) that could serve him well in this situation.
He asks both passengers to write down the value, ie. the purchasing price, of these vases in secret. It is assumed that the two travelers paid the same price for the vases, as they bought the vases at the same store. Therefore, it would be easy to establish their value. If both are honest, the written price will be the same and the airline manager will have no problem compensating them accordingly. But what if they are dishonest in their answers, sensing an opportunity for a bargain?
Therefore, the manager told them from the beginning, if they come up with different numbers, he will assume the lower price to be correct and the higher price an attempt to cheat. He will then honor the lower price in full. As a motivation the be honest, he promises to award a 10% premium for honesty which will be added to the lower price statement. To deter cheating he announces that for the traveler that writes down a higher price, he will get a 10% penalty deducted from the lower price.
Assume the true price was USD 70,--. Traveler A honestly writes down USD 70,--, whereas traveler B tries his luck and writes down US 100,--.
The compensation paid by the airline manager is USD 77,-- for traveler A and US 63,-- for traveler B.
But is it realistic to assume that traveler B is trying his luck by asking for USD 100,--? This problem comes up, if both assume that they paid different prices for the vases they bought.
Traveler B might think that he made a killing by bargaining hard and pressing the price to USD 70,--. The price tag in the window said USD 100,--. As he is used to ask for generous discounts whenever he is buying something, he thinks that USD 70,-- were a great bargain. He also considers the other traveler less smart. His judgement is that the other traveler paid the indicated price of USD 100,--. Therefore, he decides to write this price down. It does not occur to him that this judgment might be wrong and he does not think of the consequences. Not to say that his behavior is dishonest and unethical.
Traveler A meanwhile might think that he paid USD 70,-- (he got information from the travel guide that it is worthwhile to ask for discounts when buying anything in the shops, which he duly did) and therefore he asks for USD 70,--.
Put in an other way – traveler A gained USD 7,--, whereas traveler B lost USD 37,-- from the compensation they asked for, leaving out of considerations what they actually paid at the shop for the vases.
This example shows that honesty can pay off if the rules are set in the right way and if incentives are cleverly implemented. The passenger who asks for less compensation, will derive a greater benefit.
This game and the dilemma involved has many variations. What if both travelers paid different prices and both honestly asked for the actual price they paid? This would have a huge negative impact on traveler B, because he will lose not only USD 30,-- of the higher price he paid, if we assume that he paid a price of USD 100,--, but also USD 7,-- as a penalty for assumed dishonesty! To remedy any such injustice, it would be necessary to produce evidence about the purchase price, eg. the invoice. Without such proof, both travelers have to consider the consequences of the amount of compensation they claim.
Apart from the topic of honesty, what would be a good strategy to minimize losses? If we neglect the issue of the actual price paid, both travelers must first of all try to judge the behavior the other.
If traveler B tries to figure out, what he can do to avoid the problem of not recovering the full purchase price and incurring a penalty, he could try his luck by claiming USD 65,--. The result would be that he gets USD 71.50 instead of USD 63,--, USD 8.50 more. Traveler A (still honestly claiming USD 70,--, but now posting the higher price) will end up with USD 63,--.
Numerous considerations could be pondered. The lower the claim, the higher the likelihood to avoid a penalty, of course. Thus the traveler dilemma presents an illogical or irrational choice. The less you ask for the higher the likelihood of positive compensation!
It is paramount to decide, if one´s own decision is based on honesty or not. At the end of the day it is again essential to estimate if the other traveler paid the same price or more or less to come up with an educated guess for the compensation claimed.
I am pretty sure that these considerations and examples sound familiar to you with the upcoming challenges and decisions. Depending on the regulative framework, ones own attitude to business ethics and the assessment of the decisions of other market participants, each individual decision has to pass similar checks before they are finally made.
