Why would a starving man refuse a sandwich?

What business simulations can teach us about fairness, judgement and knowing what really matters

The team is in trouble, real trouble. They’re up to their borrowing limit and the bank won’t lend them any more money. They’re funding their business by not paying their suppliers. The suppliers haven’t been paid for five months and are now refusing to supply.

But wait. There’s a lifeline. The team’s biggest retail customer (never ones to waste a crisis), have offered a deal. They’ll buy all the product the company has in inventory for slightly less than cost. The company will lose a small amount of money on the deal, but it will release enough cash to pay off the suppliers in full.

So what do most teams do? I’ve seen this many, many times… and they turn down the deal. From the outside, it looks like a starving man turning down a cheese sandwich because it doesn't come with pickle.

But the behaviour is not as strange as it may first seem. It tells us something important about how people make decisions - and why apparently rational people sometimes reject an opportunity that would leave them better off.

This is one of the ideas explored by the Ultimatum Game, first studied experimentally by Werner Güth, Rolf Schmittberger and Bernd Schwarze in 1982. In the game, one person proposes how to divide a sum of money and the other can accept or reject the proposal. If it is rejected, both receive nothing. The experiments found that unequal offers could be rejected, even though accepting them would leave the recipient financially better off.

That doesn't mean people are simply irrational. Fairness matters. In a continuing commercial relationship, accepting every poor deal may simply encourage the other party to offer more of them. But context matters too. If cash is plentiful, rejecting an unattractive deal may be entirely sensible. If the business is running out of cash and suppliers are refusing to supply, the same deal looks very different.

The important question is no longer simply, 'Is this a good deal?' It becomes, 'Is this better than the alternatives available to us?'

That distinction sounds obvious. Under pressure, it often isn't. Teams become anchored to the margin they think they should make. They dislike seeing the retailer benefit disproportionately. The unfairness of the deal can become more important than the position the business is actually in.

They are evaluating the sandwich when they should be evaluating the hunger.

And that is part of commercial acumen. There is nothing inherently good about high sales, high margins, low inventory or large cash balances. What matters depends on the situation and, particularly, on what is constraining the business at that moment. The lesson isn't that the team should always accept the retailer's offer. There may be good commercial reasons to reject it. The point is to reject it for the right reasons.

The most revealing moments in a business simulation are often not when somebody gets a calculation wrong. They are when a perfectly intelligent group has all the information it needs and still makes a decision that, afterwards, seems difficult to explain. Those moments allow us to ask not only 'What happened?' but 'Why did we think that was the right thing to do?' That is where a simulation becomes more than a game. It becomes a way of exploring commercial judgement.

Sources and further reading

Güth, W., Schmittberger, R. & Schwarze, B. (1982). “An experimental analysis of ultimatum bargaining”, Journal of Economic Behavior & Organization, 3(4), 367–388.