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Losing While Winning

Losing While Winning

10 Mins
November 11, 2011

Fall 2011 -- Newsflash: it’s a competitive world out there! Some of us are winning and some are losing. It’s the game of live-and-let-live together.

When we deal with others by trade, we take part in relations that are fundamentally win-win. You shouldn’t trade love or money with someone unless you stand to benefit. And it isn’t trade if it’s forced on you against your will. So by simple logic, if we can deal with others by trade, we simply cannot be made worse off by the trade unless we choose it. And since human beings live by production, we can trade for the values we need in order to survive. The evidence of this is all around us, in the world’s burgeoning population and the explosion of wealth that has followed the rise of industrial capitalism.

In all this win-winning, some still win more and some win less. In the modern, industrialized world, where we expect per-person wealth to rise every year, this is often what we mean by “winning” and “losing.” You’re winning if you drive a Lexus and losing if you drive a Kia. Yet both types of cars get better and better year after year, and today’s economy cars have many features, such as power windows and locks and more powerful engines, that were luxuries in the past.

But there are trade deals that can leave you poorer in wealth and social ties when all is said and done. Does it matter that the logic of trade is win-win, when you’ve lost your shirt? Maybe you took a pay cut last year, but you chose to keep working: that didn’t feel like winning, did it? Maybe your lover has left you for someone else, and now where are you? It doesn’t feel like an integral part of your full-context flourishing. It’s a beautiful thing that free trade among millions of developers, builders, agents, and buyers makes it possible for you to get the lovely, cozy home you have. But maybe, like a lot of people, you’ve found your home isn’t worth as much as it was a few years ago.

That’s real enough money gone up in smoke. It’s no cause for a party. You feel like you’ve come up short. You’re losing while winning.


Plenty of people fail to benefit from trade because they are irrational and lazy. If you shack up with whoever happens to come your way, don’t be surprised if you don’t end up with a happy family. If you avoided getting flood insurance in order to make the payment on that beach house of your dreams, reality will wash away your illusions in the next big storm surge. The irrational may claim they were gypped, but, in fact, they are blind.

Nevertheless, trade deals can go bad even for the rational and productive. Just look at Francisco D’Anconia, the “check your premises” prophet in Atlas Shrugged. He never lost a game as a child, nor failed in a business venture when he wanted to succeed. But he lost the irreplaceable heart of the lovely and brilliant Dagny Taggart. Less handsome, less brilliant, less insightful, and less competent lovers often fail to connect with the one they desire, too. And every far-sighted real-estate investor knows that if any asset is not “as safe as houses,” it is, well, houses.

We make risky deals, and we aren’t omniscient. We have children when we don’t know quite how they’ll turn out. We start businesses despite the fact that most new businesses go bust in short order. We move to a marginal neighborhood, looking for the next trendy scene, but trends go their own way, not ours. We move to a hot neighborhood, but can find that we caught the peak of a bubble that’s now bursting.

So we can make a bad deal just by trying to live well and make the most of our lives. The best we can do is make sure we expect to benefit ex ante, at the time when we have to choose whether we are in or out. There is no point in making a deal if you can’t reasonably expect to gain from it. And to the degree that we are accepting risks, we have to recognize and deal with them by trying to minimize the risk, getting insurance if available, and planning for the possible downsides. We need the virtues of using reason, being objective, acting consistently, taking responsibility—all the policies that help us deal with reality and live well.

When we approach our chances clear-eyed, there’s no point in getting too disgruntled about risky deals that turn bad. After all, we should have known the risks when we played the game. It is in this sense that rational trade truly is always win-win.


But who wins how much? Any time you trade with another, from a handshake deal, to paying a fixed price, to deciding with friends where to eat out, there are two very different questions to ask about the trade:

First, are you better off participating than not? Don’t go along with everyone who wants to eat Thai if Tom Yum is Tom Yuck to you.

Second, how much better off are you for engaging in the trade? If you are out with friends, can you get the group to go to your favorite place? Score! Or are you putting up with so-so aspects of the night out because you prefer being with your friends to not? Bummer. If you are going to trade, are you winning little or winning big?

Most trades produce gains beyond the minimum it would take to get each person to participate. How are those gains being split up? Bargaining centers on this issue. Since most of us take growth, prosperity, and having friends for granted, we tend to notice when we consistently get the short end of the stick, or, conversely, breeze along easily getting our way. This combines in our culture with a moral rhetoric of warriors and sacrifices, drawn from a pre-industrial era (e.g. medieval Europe) when predation and conquest were the ways to gain any appreciable wealth or freedom. Today, companies want to “beat” the competition, and not “lose” in the marketplace by having the slowest profit growth. School kids (even some of the most educated in history) are taunted as “losers” and want to be “winners.”

The effect of winning big in bargaining can be significant. For reasons that aren’t fully clear, financiers in the investment industry started winning big in their deal-making, starting about 30 years ago. A typical investment strategy is the leveraged buyout. The idea is to borrow huge amounts of debt to take a public company private, then push on every financial variable possible—streamlining operations, delaying new equipment purchases, firing unneeded or expensive staff, renegotiating pay deals. The debt loads make many of these deals fail in the end: the companies get squeezed until the pips squeak, but sometimes the pips don’t squeak enough, and bankruptcy is the result.

The leveraged buyout is a powerful tool that enables investors to challenge the management and structure of even the largest corporations. Buyouts have liberated hidden value and pushed firms to reach amazing new levels of productivity. They have played an integral role in America’s continued world economic leadership. But they also involve a play across the frontiers between the regulated public stock market and the less regulated, private equity zone, an area of contractual freedom largely closed to those who cannot ante up the $250,000 minimum legal investment. We are seeing accounting standards stretched to their limit to create novel financing measures, some of which bring in funds, and some of which obscure financial legerdemain. And we have seen the rise of “the art of deal” (celebrated and symbolized by Donald Trump), where business is seen more as a game of poker than an opportunity to create a valuable benefit for customers.

This is all trade. Presumably, the lenders understand what they are exposing themselves to; they get a higher rate of interest this way (on average). The workers aren’t owed a living: they could start their own company, or they could look for other work. A contract renegotiated is still a trade. Nevertheless, the financiers often arrange things so that they come out all right if the businesses they have bought go bust. If the businesses do well, they make out like kings. They take a low-downside gamble to capture the free cash flow of the firm. This is how many in the buyout industry got richer than they otherwise would have been.

It takes talent and savvy to be a buyout star. If anyone could do the job, everyone would be doing it. And hedge funds and buyout firms aren’t simply wealthy: their own funds come through independent investors. They can’t keep those investors, and can’t keep landing the financing for their big deals, without being fairly steady winners. The buyout business has made corporate chieftains focus heavily on profitability, and, at bottom, its long-term health depends on finding opportunities to better create value.

After all, it must not be forgotten: it is trade. It is win-win. But over the last 30 years, many in the finance industry have cultivated the art of turning win-little into win-big on a consistent basis.


Because our lives are ends-in-themselves, life is not about keeping up with the Joneses. A life is successful or not on its own terms. At a basic level, one doesn’t necessarily need to be the best or have the most compared to others. For that very reason, we have to carefully pick when to take part in competitive trades, and when to just steer clear.

But we benefit so much from what others can offer us that avoiding trade is self-defeating. If we cut ourselves off from markets, we are cutting ourselves off from everything that can be manufactured, from plentiful food to smartphones and affordable, fashionable clothes. And there are social values, such as love and friendship, which we cannot have if we cut ourselves off from exchange with others. If one wants love, one cannot avoid the possibility of heartache or the chance that one might have to “settle.”

But if we are going to trade with others, do most of us have to resign ourselves to being outsmarted and outmaneuvered a lot of the time when it comes to apportioning the benefits? In order to win something, do we have to accept winning little?

Self-respect is the only way to deal with the situation. It means approaching one’s dealings with others from a sincere sense of one’s own worth.

To begin with, it consists in keeping one’s eye on the ball, that is, on the overall gains one gets from trade. If you’re getting richer and meeting interesting people and finding opportunities for your kids—in short, if you are attaining your values—you can just take that as evidence that you are winning enough. Because that is what really matters in the end.

But if others are consistently winning more, you need to ask why. Are they earning more? That’s one thing: in trade relationships, one earns by providing value to others. Or are they just playing the terms of personal trade better? Are they demanding more while providing less?

How are the terms of your trades set up? Is what is really valuable being rewarded? It takes self-respect and pride to resolve these issues. We have to resist bullying bargaining techniques. One way to resist bullying is to come to the deal with a clear idea in mind of what would count as a big win. The next time you buy a house or a car (purchases that always involve bargaining), know the price you’d be happy to get, and don’t shake hands unless you get it.

Many of us have a humble attitude that accepts the undervaluing of our talents. Perhaps we feel shy about putting ourselves forward. Perhaps we try too hard to be a team player. It takes pride to resist this. If we are “leaving money on the table,” to whom are we leaving it?

Honesty is vital, too. We have to be able to talk frankly about what we need from a work situation, or a social group we join, or a relationship we’re in. That same commitment to the truth will shield us against unmerited arrogance. After all, isn’t self-respect founded in a love of who we really are? We deserve respect for the appreciable values we bring to our dealings with others, not for the worth we merely imagine ourselves to possess.

The beauty of a competitive, free-market system is that every institution can be challenged by someone who thinks he can run it better, replace it, or restructure it. And it is not merely an issue of opinion or rhetoric: in the market, one has to prove that one can do the job. But a free market doesn’t guarantee us justice, or efficiency, or creativity, or happiness. These are values we gain by standing up for our own value and working for the long-term success of our projects and relationships, both when we work with others and when we go it alone. That’s the secret to winning at win-winning.

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Economics / Business / Finance
Values and Morals