When you interview for a job, one of the questions you likely dread is: “What salary are you looking for?”
You probably feel that the employer is taking advantage of you, but what are the economic principles underlying this practice?
To understand why, we can begin by noting this actually represents a violation of a general principle in economics known as “first-mover advantage”. In adversarial settings where the participants take turns to choose an action, in general, it is preferable to be the first person to act. A familiar example is the game of chess, where playing as white - and hence moving first - is advantageous.
The reason for the prevalence of first-mover advantage is that by moving first, you can usually ensure that the interaction goes in a direction that favours your interests, by eliminating certain options that are available to your adversary. Children see this in games of “X-O”, whereas adults experience it when a group of coworkers are negotiating over days off. First-mover advantage also reflects the fact that taking the initiative can force your opponent into a defensive posture, whereby they are always responding to your choices rather than exerting their own influence; sports such as tennis illustrate this clearly.
First-mover advantage is not a universal phenomenon, however, as in certain settings it is advantageous to let others act first. One of the key factors that leads to a breakdown in first-mover advantage is uncertainty among the adversaries about one another’s abilities or available moves; under these circumstances, the first-mover’s choices tacitly convey strategically valuable information to their opponents. Card games such as poker fall into this category: observing how other players play before you helps you deduce the cards that they are concealing and often this benefit outweighs the traditional benefits of moving first.
In the employer-employee negotiations, is it better to move first or second? One feature of human psychology that makes moving first more favourable in negotiations is anchoring bias: humans irrationally fixate on the first figure that is proposed, using it as a benchmark. This happens because the human brain has limits to its power and is designed to use shortcuts to economise on effort; fixating on recently related information, such as the first proposal in a negotiation, is one such shortcut and skilful negotiators who are aware of this flaw in the human brain can deploy that knowledge to their advantage, by making the first proposal.
Shrinking-pie negotiations - ones where the prize that the employer and employee are bargaining over shrinks the longer they take to reach an agreement - also tend to result in first-mover advantage, as the second-mover may favour accepting the first-mover’s offer rather than incurring the cost of delaying while they formulate their own counteroffer.
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Trade union members who go on strike illustrate this principle: during negotiations, as long as the strike is going on, both the employer and employee are losing money. Since making a proposal takes time, it costs money, too, and so whoever gets to make the first proposal may be able to get a better deal by exploiting the other side’s desire to avoid further delay.
Asking an interviewee for their salary expectations reflects a belief in the presence of a second-mover advantage; what underlies the violation of the general principle of first-mover advantage? Like card games, the key is the hidden, strategically valuable information that each side is trying to tease out of the other.
Employers have a maximum wage that they are willing to offer and they hope that the employee will accept something much lower. In contrast, employees have a minimum wage that they are willing to accept and they hope that the employer will accept something much higher. Each side wants to keep its own cut-off wage secret and wants to know the other side’s cut-off wage.
When either side makes a wage offer, it is forced to reveal something about its own cut-off. For example, we know that an employer will never offer more that its maximum, so whatever it offers, the employee can use as a minimum from which to ask for more. Knowing this, why doesn’t the employer simply make a really low offer? Because there is a risk of the employee breaking negotiations off if they are insulted.
If the employee had to move first, then they would be concerned about stating a figure that is too high because they are unaware of the employer’s cutoff and so they will tend to lower their demands. This is why employers prefer that you move first - it is a way of ensuring a lower wage.
Is there anything that you can do about this? Usually, employers can force you to move first, because labour markets tend to be skewed in their favour, especially when there is significant unemployment. That means your best option is gathering whatever information you can about the employer’s cutoff, such as by talking to current and former employees. This helps eliminate the second-mover advantage, so that you can get the best deal possible.
Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.
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Our legal columnist
Name: Yousef Al Bahar
Advocate at Al Bahar & Associate Advocates and Legal Consultants, established in 1994
Education: Mr Al Bahar was born in 1979 and graduated in 2008 from the Judicial Institute. He took after his father, who was one of the first Emirati lawyers
Fire and Fury
By Michael Wolff,
Henry Holt
Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
A MINECRAFT MOVIE
Director: Jared Hess
Starring: Jack Black, Jennifer Coolidge, Jason Momoa
Rating: 3/5
The National's picks
4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
9.30pm: Forever Young
The rules on fostering in the UAE
A foster couple or family must:
- be Muslim, Emirati and be residing in the UAE
- not be younger than 25 years old
- not have been convicted of offences or crimes involving moral turpitude
- be free of infectious diseases or psychological and mental disorders
- have the ability to support its members and the foster child financially
- undertake to treat and raise the child in a proper manner and take care of his or her health and well-being
- A single, divorced or widowed Muslim Emirati female, residing in the UAE may apply to foster a child if she is at least 30 years old and able to support the child financially
SPECS
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The specs
Engine: Four electric motors, one at each wheel
Power: 579hp
Torque: 859Nm
Transmission: Single-speed automatic
Price: From Dh825,900
On sale: Now
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Director: Laxman Utekar
Cast: Vicky Kaushal, Akshaye Khanna, Diana Penty, Vineet Kumar Singh, Rashmika Mandanna
Rating: 1/5
The specs
Price, base / as tested Dh1,100,000 (est)
Engine 5.2-litre V10
Gearbox seven-speed dual clutch
Power 630bhp @ 8,000rpm
Torque 600Nm @ 6,500rpm
Fuel economy, combined 15.7L / 100km (est)
Ms Yang's top tips for parents new to the UAE
- Join parent networks
- Look beyond school fees
- Keep an open mind
Skewed figures
In the village of Mevagissey in southwest England the housing stock has doubled in the last century while the number of residents is half the historic high. The village's Neighbourhood Development Plan states that 26% of homes are holiday retreats. Prices are high, averaging around £300,000, £50,000 more than the Cornish average of £250,000. The local average wage is £15,458.
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Sui Dhaaga: Made in India
Director: Sharat Katariya
Starring: Varun Dhawan, Anushka Sharma, Raghubir Yadav
3.5/5
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