Notes on Negotiation

Tips on getting what you want, and getting what everyone wants, in negotiations.

Tips on getting what you want, and getting what everyone wants, in negotiations.

When Eisenhower became President, Truman was rumored to have said, “Ike can’t just tell people what to do like he could in the Army. When you are president, you only get what you can negotiate.” Whether this story actually happened is irrelevant. In life, you only get what you negotiate.

Tactics

  1. Limited authority – “Sorry, I don’t have the authority to make that decision. Let me talk to my manager…”
  2. Missing person – “Sorry, the boss isn’t here right now, so I’ll have to get back to you and on what you want.
  3. Good cop, bad cop – One negotiator on the team is rude and demanding, while another on the same team buddies up to you.
  4. Reverse auction – Bargaining down, such as when a man goes to a car dealership with a rock bottom price advertisement from another dealership and says, “how close can you get to this?”
  5. Nibble at the end – One side is just about ready to sign a contract, and then they suddenly stop and say, “You know, if we could just have this last, small item (concession/whatever).”
  6. Take it or leave it – pushing for a final decision or concession in a negotiation. Walk away, but leave your card.
  7. Split the difference – perceived by most people as fair, this is how two-sided negotiations usually end up, more or less. However, this may not be fair if one party has a huge power or knowledge advantage over the other. For example, if a jewelry store is asking $1,000 for a necklace and the real price is $200, selling it for $600, a 200% markup, may not actually be fair.
  8. Funny money – using non-monetary inducements to seal a deal
  9. Garbage on the lawn – often used in real estate and used car negotiations, this entails finding anything and everything wrong about an item and disparaging it to try to get a better price.

Why do most people think that they are not good negotiators?

  1. They fear failure – they fear being taken advantage of.
  2. They have not prepared enough.
  3. They have no good BATNA – best alternative to a negotiated agreement

Motivation – Everyone is motivated by something and for something, but no one can entirely motivate someone else.

Positional Negotiation – avoid these

  1. Taking a position and holding to it doggedly until forced back.
  2. Paying more attention to the position than the people involved and even the issue being discussed.
  3. Identifying your ego, your personal value, with your position (“If I lose this position, I am a failure.”)
  4. Requiring a solution that will “save face.”
  5. This will sometimes result in a mechanical, “splitting the difference” solution rather than a creative, “everyone wins” solution.
  6. Arguing over positions threatens relationships, which are needed for long term stability of existing agreements and the possibility of future agreements.

Key behaviors in successful negotiation

  1. Listening without judging
  2. Knowledge of the subject
  3. Knowing how to expand the pie

Power in negotiations

  1. Each side is always aware of their own limitations far more than the other sides’. Even if they were equally aware, they would think more of their own.
  2. If you think you have no power, you don’t.
  3. You always have more power than you think.
  4. If you have power but aren’t aware of it, you don’t have power.
  5. 75-85% of outcomes in negotiations are determined before the negotiation begins. The military strategist Sun Tzu said the same thing about war.
  6. The first offer and the first concession determine the course of the rest of the negotiations. You can just about predict the final outcome from these.

BATNA – best alternative to a negotiated agreement

  1. Most negotiators have two facts in mind when they enter negotiations, the goal and the walk-away.
  2. Set your facts (goal and walk away) with facts (industry standards, market-based pricing, supply and demand), not guesses
  3. Having a good BATNA is like having a good Plan B – if you can’t get house A for a good price, you may still be able to get house B.

The Psychology of Negotiations

  1. Negotiations are messy, with verbal and emotional twists and turns that seem unnecessary and bizarre. German Prime Minister Otto Von Bismarck said, “Laws are like sausages, it is better not to see them being made.” Negotiations are the same way.
  2. Negotiations are not events, they are processes. Even those not immediately involved in the negotiation are part of the process.
  3. The feeling of participating in the process is one of most important factors in determining if a negotiator accepts a proposal. Book – Getting to Yes.
  4. Don’t offend. Years ago, I was watching a group of American tourists dickering with an Arab merchant over an item. They berated his merchandise (the “garbage on the lawn” strategy) that he became angry and chased them out of his shop. Both sides left grumpy.

Negotiation is about ego, expectation, and satisfaction – not about money, goods, and services.

  1. Ego – As Columbo always said in the police drama, “Looking smart is dumb, but looking a bit dumb is smart.” Try asking “Can you help me out here?”
  2. Expectations – Get the other side to reveal their needs and their deadlines. You don’t get credit for meeting unknown needs.
  3. Satisfaction – You must make the other side feel satisfied with the work they must do to meet your demands. Whenever Person A makes an offer and Person B immediately accepts it, Person A feels let down, like they left money on the table. Don’t let this happen. Even if you love the offer, don’t jump at it. Ask for a little more. Ask for and make concessions in a way that satisfies the other side.

Negotiations are a long-term relationship

  1. Important phrases, signs, and signals in negotiations
  2. That’s a good point – a sign that you are a good and fair-minded listener.
  3. You’re right about that – a signs that you can see other positions and ideas and are open to them.
  4. Please correct me if I am wrong – a sign of humility
  5. Quick negotiations are dangerous to one side. Skilled negotiators have an advantage.
  6. Beware telephone negotiations

Using time in negotiations

  1. “Push” theory of negotiations – if you use all the time available, you usually have a better chance of pushing the other side to the limit.
  2. Bargaining down – Each side will negotiate their side down naturally over time. This means that once a person makes Offer A, he immediately begins to think of why the other party won’t take it. In his mind he consequently thinks Offers B and C, less and less favorable to himself. Wanting to make the deal, he convinces himself to make Offers B or C if A is rejected.
  3. Use body language to pause.
  4. Negotiators will often push deadlines (the “11th hour agreement”) because it appears to their sponsors and other stakeholders that they have done all they can do.

Questions in Negotiation

  1. What do you want?
  2. What do they want?
  3. What could you trade?
  4. What will you trade?

Preparation checklist

  1. What do you want to happen?
  2. What are the negotiable issues?
  3. Rank each “want” in importance to you – high, medium, or low. Set a range for each want.
  4. Entry and exit (“walk away”) limits
  5. Plan how you will describe to the other side what you are seeking (general agreement, detailed agreement, fairness, etc.)
  6. Draft an MOU that you think will cover all of the pertinent points and expected outcomes. Modify this MOU to meet terms agreed upon during the negotiations.

Summarizing during negotiations

  1. Simplify complex issues
  2. Refocus wandering negotiations
  3. Reassures both sides that they are being taken seriously
  4. Gives you time to think

Ending negotiations

  1. Summarize
  2. Write a memorandum of understanding (MOU) that both sides sign

How to save money when shopping

  1. When to buy – end of day, week, month, or year
  2. Businesses have quarterly goals and quotas. Buy close to 31 March, 30 June, 30 September, and 31 December.
  3. If you don’t know what to pay
    1. Bid 40% of list price
    2. Pay up to 60% of list price.
  4. Shopping Discounts – always, always, always ask
  5. Repeat customer
  6. Pastor/Rabbi discount – fake, but funny. Can lighten things up with a store manager
  7. Bulk discount

Negotiation Planning Questions

1.     Issues (Why we are meeting) – Me/Other party

2.     Objectives (What is wanted) – Me/Other party

3.     Perceived Needs and Interests (Feelings) – Me/Other party

4.     Potential Concession (Things I am willing to give up) – Me/Other party

5.     Settlement Options (Possible to solutions to the issues) – Me/Other party

Externalities and Internalities

Gibbons grooming each other - small

A Christian look at unintended ways that our lives affect others, and what to do.

The Cat House Café at the Memphis Zoo sits beside the gibbon exhibit, where Ringo and Talulah entertain guests with their funny faces and their acrobatics. When we eat there, my family and I get a table as close as we can to the picture windows overlooking their home, and yesterday the closest table was next to some loud, rambunctious little boys. Valuing Ringo and Talulah more than a quiet table, knowing that it is senseless to expect little boys to be quiet at the zoo, and being loud sometimes ourselves, we sat down and enjoyed a cheeseburger, waffle fries, and chicken strips for lunch.

Being a business and economics-minded person, I could not help but think about how the various people in the café were affecting each other; the costs and benefits of each interaction. The direct and intentional interactions were between workers preparing and selling food and drinks, and customers eating and drinking. There were indirect and unintentional actions as well. These can be thought of as externalities, which Investopedia defines as “A consequence of an economic activity that is experienced by unrelated third parties.” Typically, the costs or benefits of the goods or services being bought and sold do not reflect the costs or benefits of the externality. A classic example of a negative externality is a factory generating air pollution that its workers and nearby residents breathe. A classic example of a positive externality is that same factory cleaning up its exhaust and planting a park for its employees. The surrounding neighborhood would also benefit.

Internalities are unintended effects that a person inflicts on their future selves. Smoking, alcohol, and drug use will have a negative future effect on the person who uses them. Second-hand smoke is an externality related to this internality. A healthy diet and exercise will have a positive effect on health and will be positive internalities.

The economic activity at the Cat House Café is the preparing, buying, selling, and consuming food and drink. Negative externalities may include noisy children, dirty tables, and waiting in long lines. Positive externalities may include watching Ringo and Talulah, or even interacting with them through the glass. Negative internalities may be eating unhealthy food, and positive internalities may be rehydrating on a hot day. No matter the setting or characters, every situation has intentional and unintentional causes and effects – both externalities and internalities. Externalities and internalities may be intended or unintended consequences.

Notes on Externalities and Internalities

Some externalities such as lung disease from air pollution are universally seen as negative, while others such as the calming effect of a beautiful seascape are universally seen as positive. The negativity or positivity of other externalities and internalities are in the eye of the beholder. Some adults may not like the noise that little boys make, but others may appreciate their unrestrained joy and unbounded energy. A cheeseburger, waffle fries, and chicken strips may be bad for one’s health if eaten in excess, but some people may enjoy the taste and eat them rarely enough to avoid obesity or heart disease. A café full of strangers may frighten or irritate some people, but others may see that same café as a place to have interesting interactions and make new friends.

Externalities can be economic as we discussed, but can be social and moral as well.

A Christian View

The Bible refers to externalities. The primary purpose of the stringent laws regarding cleanliness and uncleanliness (Leviticus 11-15) was to create a community set apart to God, but a secondary effect (positive externality) is to keep disease and injury from spreading among the people. Keeping the Sabbath as a day of rest is primarily for remembering the Lord and thanking Him for his goodness, but has the secondary effect of improving worker health and productivity. All other parts of the Law (Torah), such as that regarding social justice, follow this pattern. When Israel kept the Law as commanded, notably during the reign of David, they prospered spiritually and materially. Disease and injury were minimized, workers were healthier and more productive, and social justice was improved. When Israel did not keep the Law, they languished spiritually and materially. No wonder David said, “Oh how I love thy Law (Psalm 119:97).” The Church is not required to keep the ancient Hebrew Law, but must follow the principles that underlie it.

The Bible also refers to internalities. Proverbs 23:29-35 warns people not to linger over wine, not to spend a lot of time trying drinks, and to beware the effects of too much drink. Ephesians 5:18 repeats and reinforces the Old Testament admonition. Proverbs 7 discusses another internality – the danger of adultery.

Like all people, Christians have the freedom to interpret events positively or negatively. We have the power to transform a negative externality into a positive one. We can choose to see noisy boys as a nuisance or as a source of joy. We can let ourselves be bothered by a crying girl or we can reach out to comfort her. The Apostles praised God that they were judged worthy to suffer as Christ suffered and for His sake (Acts 5:41). Paul and Silas were beaten and thrown in jail. They responded not with despair at their pain and anger at the injustice, but with prayer and songs. A positive externality occurred – the jailer and the other prisoners heard the Gospel and some followed Jesus (Acts 16:22-31).

One of the most important principles for Christians to remember in considering externalities is to avoid causing others to stumble. Our lives are not our own, and we live for God, not for ourselves. Therefore, we must limit our freedom for the benefit of others (Romans 14, 1 Corinthians 8).

Neither drinking nor gambling is forbidden by Scriptures. But when a Christian drinks or gambles, even if he or she does not drink or gamble in excess or suffer any bad personal effect, he or she runs the risk of encouraging others to do the same. If one or more of those people become alcoholics, or suffer a loss of family, job, or something else, the person who set a bad example shares part of the blame (Mark 9:42-43). Extramarital sexual intercourse is forbidden by the Bible (Galatians 5:19-21, Hebrews 13:4). When followers of Christ have extramarital sex, they bear the burden for their own sin, and the burden of the externality…encouraging others to do the same by their example. The same is true of every other sin; there is guilt and shame in intentionally or unintentionally encouraging others to commit sin whether or not a person does it him or herself.

Conclusion

Our thoughts, our words, our actions, and our lives affect others in ways that we know and in ways that we do not. Intentionally and unintentionally, we impact our world. Christians should be cognizant of both how we affect others and how they affect us. We must control our thoughts, interpreting externalities and internalities in ways that glorify God. Then we must modify our actions to generate externalities and internalities that exalt our Lord.

Using 2X2 Tables to Choose Between Two Alternatives

There are hundreds of ways to evaluate programs and other initiatives. Many are subjective and do not provide hard, actionable data. Others are objective but so complicated that data analysts and statistics specialists are required to use them. 2X2 tables are easy to learn and use and very effective at producing understandable yet quantifiable results from a data set. This article details how to use them.

Using 2X2 Tables to Choose Between Two Alternatives

ACES Framework of Organizational Development

A useful organizational developmental framework derived from military sources and adapted to business needs. 

From being the Commander of a small US Army clinic in Schweinfurt, Germany, to being the Chief Medical Officer for all of military medicine in the National Capital Region at the JTF Cap Med, I have led organizations. To train my colleagues, I have developed the ACES Framework of Organizational Development. It is based on the military model.

I have posted it here because some have found it useful in the past and others find it useful in the future. Happy reading!

ACES Framework of Organizational Development

Values-Aligned Investing

Investments should make money, but they should also reflect a person’s values. Money invested in a country or company helps them accomplish their mission, and their mission may not the same as yours. Investors should be aware of the moral underpinnings and ambitions of companies, countries, and individuals in which they may invest or with which they may do business.

Companies that promote societal stability, individual initiative, and personal responsibility generally do better in the long run, both for their stakeholders and their nation. Therefore, investing in companies that promote family-friendly values provides the greatest chance for a reasonable long term return on investment. Long term growth, not “getting rich quick”, is the goal.

Countries that promote these same things, and allow religious freedom, also prosper compared to their more dictatorial counterparts. As a result, investing in companies and sovereign debt in these countries may be prudent. No nation is completely consistent. Germany, for example, is terrific on religious freedom but not as good on family values and personal responsibility.

Individual action also matters. No business is more than the sum of the people who work there, and company leaders sometimes support bad causes in their work, as well in as their personal lives. No real conservative would argue that they don’t have the right to do what they want with their own money, because conservatives believe in private property and individual liberty. However, we all have a right to know where the rich and famous are putting their money, and then decide whether or not to support them and their causes.

The information below can help you make the best investment and purchasing decisions.

Companies 1. Political bias – Review websites including political donations, public statements, etc. The Center for Responsive Politics has very good information, including an organization donor site.

2. Personal Experiences (good, neutral, bad)

3. Recent events

Countries 1. Religious freedom – US State Department International Religious Freedom Report 

2. Personal Experiences (good, neutral, bad)

3. Recent events

Individuals 1.      Political bias (conservative vs. liberal) – review of websites including political donations, public statements, etc. The Center for Responsive Politics has very good information, including an individual donor site.

2.      Personal Experiences (good, neutral, bad)

3.      Recent events

Presidential Campaign Bloomberg News – Presidential Money Map 2015

2nd Vote has a mobile device application that ranks companies on their support of conservative or liberal causes. Companies in green such as Hobby Lobby and Chick-fil-A support family friendly issues, while companies in red such as Starbucks and the United Way do not. These guidelines are hard to follow when it comes to shopping. If you wish to buy a computer, for example, all of the manufacturers support anti-family causes, so conservatives are forced to pick the least bad company. Investing is more flexible.

No man’s life is merely about money; it is about contribution to causes greater than himself. Investing is as much a moral decision as a financial one. As people weigh priorities about where to invest (and to shop), they would do well to consider all of the factors, not only the monetary ones.

Useful Quotations on Money, Poverty and Wealth

Pithy Prose for Politicians, Preachers, Professors, Pundits, and Public Speakers.

Mark 10:29 – Jesus said, “Truly I say to you, there is no one who has left house or brothers or sisters or mother or father or children or farms, for My sake and for the gospel’s sake,

30 – but that he shall receive a hundred times as much now in the present age, houses and brothers and sisters and mothers and children and farms, along with persecutions; and in the age to come, eternal life.

31 – “But many who are first, will be last; and the last, first.”

 

“I’m living so far beyond my income that we may almost be said to be living apart.” E E Cummings (1894-1962)

“There are people in the world so hungry, that God cannot appear to them except in the form of bread.” Mahatma Gandhi (1869-1948)

“If you can count your money, you don’t have a billion dollars.” J. Paul Getty (1892-1976)

“Let not him who is houseless pull down the house of another, but let him work diligently and build one for himself, thus by example assuring that his own shall be safe from violence when built.” Abraham Lincoln (1809-65), U.S. president. Speech, 21 March 1864, in reply to committee from the New York Workingmen’s Association.

“Probably the greatest harm done by vast wealth is the harm that we of moderate means do ourselves when we let the vices of envy and hatred enter deep into our own natures.” Theodore Roosevelt (1858-1919), U.S. Republican (later Progressive) politician, president. Speech, 23 Aug. 1902, Providence, R.I.

“The forgotten man at the bottom of the economic pyramid.” Franklin D. Roosevelt (1882-1945), U.S. Democratic politician, president. Radio broadcast, 7 April 1932.

The Year in Business, Educational and Financial History

7 Jan – The first commercial bank in the United States, the Bank of North America, opened for business (1782).

16 Jan – The Pope appointed the Medici family as the official bankers of the Papacy (1412).

8 Feb – The NASDAQ, originally the National Association of Securities Dealers Automated Quotations, started business (1971).

23 Feb – The first US mill converting cotton to cloth was founded in Waltham, MA, inaugurating the expansion of the US textile industry (1813).

8 Mar – The New York Stock Exchange was founded (1817).

25 Mar – Member states West Germany, France, Italy, Belgium, Netherlands and Luxembourg formed the European Economic Community (1957).

1 May – The Wedgwood Pottery Company, one of the most famous firms in British history, was founded by Josiah Wedgwood (1759).

2 May – English King Charles II approved the Charter of the Hudson Bay Company, opening up exploration, trade and settlement in the region (1670).

3 May – The oldest institution of higher education in modern Greece, the University of Athens, was founded in Athens, Greece (1837).

4 May – During a labor demonstration in Haymarket Square, Chicago, an unknown assailant threw dynamite at police, killing seven police officers and four civilians and injuring scores more (1886).

16 Jun – The Ford Motor Company under founder Henry Ford was incorporated (1903).

23 Jul – The Ford Motor Company sold its first car (1903).

8 Sep – Harvard College, originally called the College at New Town, was established by vote of the Great and General Court of the Massachusetts Bay Colony (1636).

19 Oct – On Black Monday, stock markets beginning in Hong Kong, spreading through Europe and into the United States, plummeted (1987). The US Dow Jones industrial average (DJIA) dropped almost 23%.

24 Oct – On Black Thursday, the US stock market collapsed, spreading financial instability worldwide and initiating the Great Depression (1929).

11 Nov – The Virginia Military Institute was founded in Lexington, Virginia (1839).

28 Nov – After closing for the opening months of World War I, the New York Stock Exchange reopened (1914).

29 Nov – The Atari company released Pong, the first commercially successful video game (1972).

3 Dec – The German Customs Union established the first periodic census in Germany (1834).

27 Dec – 29 nations signed the agreement creating the World Bank and the International Monetary Fund (1945).

What to do with Tradition

Last week I was on a mission trip to Chicago with the youth choir from our church, and one of my favorite parts was the chance to talk with the kids. I have been going for several years and have seen youth born since 1993 on these journeys. Also for the past three weeks, my family and I have hosted three women in their early to mid-20s working in Washington DC as part of a journalism internship for World Magazine. These groups represent the last half of the generation that demographers call the Millennials, roughly defined as people born between 1980 and 2000.

As we talked, one theme that arose was a tendency among some to dislike tradition. This theme is at odds with some data indicating that Millennials seek tradition, but the difference may be in semantics. Since in the course of normal conversation few people clearly define their terms, and we didn’t either, it is not certain what each person in my non-scientific sample meant. However it was apparent that each speaker had a slightly different definition, many relating the word “tradition” to the phrase “we’ve always done it this way.” Since authors from Tom Peters (born 1942) to Colin Powell (born 1937) have warned readers not to blindly adopt traditional ways of doing things, it is worth asking ourselves“What should we do with tradition?”

As with any discussion, the first priority is to define tradition. Merriam Webster online defines it as “a way of thinking, behaving, or doing something that has been used by the people in a particular group, family, society, etc., for a long time (http://www.merriam-webster.com/dictionary/tradition).” Using this definition, disliking tradition is similar to disliking air, because tradition permeates everything we are and do. The languages we speak, the places we live and the food we eat are heavily influenced by tradition. Not all traditions are so fundamental, however.

Advantages of Traditions

Traditions arise and endure because they meet a need of the people who developed them. Women have traditionally worn dresses or skirts because anatomical requirements for urination, menstruation, pregnancy and childbirth make such clothing more practical. Men have traditionally worn trousers because they do not have the same physical needs and because running, jumping and riding horses, activities common in hunting and in battle, are easier in pants.

An estimated 70-90% of people worldwide are right hand dominant. When marching or riding on roads in antiquity, soldiers and travelers preferred to stay on the left so that they had more space to defend themselves with their sword, held in the right hand, if attacked from the road. Since most traffic was on the left hand side, cities and empires codified reality with law. To this day members of the former British Commonwealth nations drive on the left hand side of the road. However in America people drive their cars on the right hand side of the road, probably because early wagons had no driver’s seat, so wagon drivers sat on the left rear horse of the team and wielded the whip in their right hand. This tradition also met a need.

Traditions serve to communicate. The marathon has been a popular long distance race for at least 100 years. Its name refers to the Greek victory at the Battle of Marathon (490 BC) and its distance is roughly the distance run by the Greek messenger Pheidippides to announce the victory to the city of Athens. When someone today mentions a marathon, listeners immediately know that he or she is referring to a running race of 26.2 miles with its origins in ancient Greek tradition. In another example, the Battle of the Alamo was a siege and massacre of Texan defenders by Mexican troops under General Santa Anna in 1836. The phrase “Remember the Alamo” became shorthand for strength, honor and sacrifice in American military parlance. People and groups with shared traditions find it easier to communicate than those without, even if they speak the same language.

Traditions also serve to unite. Family traditions at Christmas, Easter, birthdays, and other holidays help form the glue that holds families together through good and bad times. The traditional wedding ceremony is an often expensive and public commitment made by bride and groom, and by their families and friends, to make this marriage work. Naval traditions, such as the ringing of a bell at retirement ceremonies, reminiscent of ringing when a senior officer arrived at and departed his ship, help change individual recruits from varied backgrounds into united sailors.

Despite our human tendency to think that our ancestors were inferior to us, in reality they lived their lives and adapted to their environment at least as well as we do. Traditions have advantages.

Disadvantages of Traditions

Traditions may cease to work. For centuries the United States had rules and laws relating to horse drawn carriages. Drivers, builders, passengers, law makers and law enforcers had roles to play in the enterprise. Then within a few short years in the early 20th century, the industry vanished, superseded by “horse-less carriages”. Swiss watchmakers were the world leaders in watch technology in the 1960s, but with the advent of the quartz watch in the 1970s, Japanese watchmakers such as Casio and Seiko dominated the market. The mechanical watch on which the Swiss had built their industry for centuries was overshadowed in the blink of an eye. In both cases, the environment changed radically and the old traditions, their “way of doing business”, could no longer compete.

While traditions admit some, they exclude others. While “Remember the Alamo” was a rallying cry for Americans, helping them to be united and to communicate better, it ostracized Mexicans. This Us-Them mentality ultimately harms both us and them, as it is generally better to get along with everyone if possible.

Some traditional beliefs are simply wrong. Before 1903 many were convinced that man could never fly, and before 1969 the idea of a man walking on the moon was ludicrous. Women were believed to be irrational due to their hormones; two women were found innocent of murder charges in England in 1851 due to temporary insanity from menstruation. People from races other than the majority have frequently been seen as inferior, such as blacks in the American South. These traditions have been disregarded, and rightfully so.

What do we do with traditions?

Some traditions are a matter of personal preference and will endure as long as people enjoy them. Whether a church sings hymns or choruses is largely dependent on its congregation. In general, however, there are three things that any individual or group can do with each of their identified traditions.

1. Eliminate it without replacement.
2. Replace it.
3. Keep it – either unchanged or modified.

Some traditions are no longer functional and hold no value for communication or unity. Procedures for using carbon paper to make duplicate copies of typewritten documents fall into this category. Some traditions are outdated and need to be replaced to address new realities. Lamps powered by gas or kerosene have been largely replaced by electric lights, but many still exist. Still other traditions need to stay the way they are; British will drive on the left and Americans on the right for the foreseeable future.

Practically speaking, what do we do when our company has a problem and an old timer says “we have always done it this way.”
1. Ignore the guy, because times are different now and we need to change our previous traditions.
2. Laud the guy, because we need to stick with what worked in the past and brought us the success we’ve seen so far.
3. Take the guy’s recommendations, add it to the list of possible courses of action, evaluate it just as rigorously as we do with all other potential courses of action in light of the changing conditions, and select whatever fits best.
Perhaps the third option is, almost always, the right way to go.

Conclusion

Wrong traditions should be discarded, just like all errors, but most traditions endure because they work, or worked. Many new ideas, no matter how good they sound, have not and will not work. Each individual and each organization must decide what they will do with each tradition they encounter, but they should not take that decision lightly. In the past 6,000 years of human history, only technology has really changed. Relative to technology, the natural world, human physiology, and human nature have not. Therefore to reject tradition simply because it is old is foolish. New ideas are indispensable, but time-proven remedies still hold great promise for the future.

Christians and Payday Lending

I recently attended a conference in which there was a debate on payday lending, a hot button issue. One side argues that payday lending violates Biblical restrictions on rates of interest and oppresses the poor. The other side contends that payday lending provides small, short term albeit expensive loans that provide financial flexibility for people without credit cards or bank accounts, and that ultimately such flexibility helps borrowers. At the conference, payday lending was defined as follows:

“The practice of lending small amounts of money, usually $350 or less, to individuals for two week periods (i.e. until the next pay day), potentially trapping borrowers in an endless cycle of two week loans, often at an annual interest rate up to or exceeding 360%.”

This definition is clearly biased against payday lending, and with such a definition, it is no surprise that the majority of those involved in the debate were solidly against the practice. Definitions always shape the argument, and the surest way to convince yourself of the maleficence of your opponent is to define an issue in a way unacceptable to him. The surest way to achieve nothing is to fail to define terms at all. A better definition of payday lending, excluding the inflammatory commentary, would have been as follows:

“The practice of lending small amounts of money, usually $350 or less, to individuals for two week periods (i.e. until the next pay day). Rates charged often markedly exceed the annual percentage rates charged on credit cards or larger, more conventional loans.”

Opponents of payday lending often speak in personal and moral terms; that people who are involved in payday lending are evil. They frequently use the Bible to support their case. Defenders of payday lending typically speak in more impersonal and practical terms; that payday lending is good business for the borrower and for the lender alike.

What does the Bible say about loaning at interest?

We must first investigate the basic Biblical testimony on this matter. Following is a summary of the primary use of the word “Interest” (נֶשֶׁךְ neshek) which refers to making and taking loans in the Bible.

References

Exodus 22:25 – States that if anyone lends to a poor Israelite, he should not collect interest

Leviticus 25:36-37 – Specifies that a man lending to a poor Israelite should neither take interest nor any kind of increase.

Deuteronomy 23:19-20 – Suggests that a man lending to a poor Israelite should not take any kind of increase on anything lent. However, it was OK to charge interest (take an increase) to a person who was not an Israelite. Perhaps this was a concession due to the hardness of the peoples’ hearts like divorce (Matthew 19:7-8), but God allowed Israel to charge the stranger but not his fellow countryman, something explicitly forbidden elsewhere (Leviticus 19:33-34, Numbers 15:15, Deuteronomy 10:17-19, 27:19).

Nehemiah 5:7-10 – Condemnation of the nobles and rulers of Israel for exacting usury (taking interest) from fellow Israelites.

Psalm 15:5 – The man who does not loan his money at interest or for gain will not be moved.

Proverbs 28:8 – Those who charge interest and have other unjust gain will accumulate money that God will give to those who do not.

Isaiah 24:2 – In the judgment, the land of Israel will be emptied of all people, including those who deal in interest.

Jeremiah 15:10 – Jeremiah neither lent nor borrowed at interest; therefore why did others curse him?

Ezekiel 18:8,13,17, 22:12 – In these verses, the writer mentioned usury and increase separately. This could mean that he saw them as two different things, with usury being excessive interest and increase being non-excessive interest. The problem with that interpretation is that Ezekiel condemns them both.

Matthew 25:27 – The master told his servant that he should have at least invested his money so that he would have received interest.

Luke 19:23 – The master told his servant that he should have at least invested his money so that he would have received interest.

Though many modern Christians commonly understand the word usury as high interest, the Bible never provides any indication of what rates would be considered reasonable and which would be considered high. In reality, the Old Testament generally forbids any lending at any interest rate among Israelites. To say that usury only refers to excessively high interest rates, whatever those are, is not supported by the Biblical testimony. If we are going to use the Old Testament to oppose lending at interest, we must oppose it all, regardless of rates.

The New Testament takes a different track. The parable of the talents speaks without censure of lending at a profit (Matthew 25:14-30). Jesus does not condemn the money changers in the Temple for changing money, which inevitably involved a high fee. Rather, he condemned them for changing money in the Temple. It was the location, not the activity, that he condemned. The New Testament directly condemns neither lending at interest nor lending at high interest, although there are passages that rebuke the rich for oppressing the poor (James 5:1-6).

The Virtue of Interest

Economically, prohibiting the collection of interest chills the desire to lend as well as the desire to save. Except for the most virtuous, wealthy Jews would have been far more likely to lend to foreigners and see a profit than lend to their countrymen and see nothing. If there is no return on money saved, such as interest bearing savings accounts, why save at all? Expensive projects become difficult because no individual has the resources to foot the bill, and no one else will loan to them. As long as one’s basic needs are met, conspicuous consumption makes more sense. Lending is therefore a productive economic activity, as God knew long before man did.

Payday lending

Many people in the United States live paycheck to paycheck, earning only enough to meet what they consider to be their routine obligations and not having extra money to cover life’s contingencies such as car repairs, medical bills, or other unforeseen troubles. People who have no ready cash often cannot wait for a formal bank loan at 6-9% so they might use a credit card at 12-18%. Commonly they can’t get either because they aren’t financially qualified. Banks usually will not loan less than $1000 because fees are too high and risk usually too great for their business model. Some may have friends or family who can provide cash, but many do not. In these cases, the neighborhood payday loan place becomes their lender of last resort. People use payday loans for regular expenses, auto repairs, medical bills, gifts, and a host of other short term needs.

When a person in need of cash goes to a payday loan place, he or she typically has to prove only that they have a job. Payday loans are unsecured by tangible assets and therefore the lender stands to lose his entire investment if the borrower fails to return and pay. Payday lenders often do no other background check, further increasing their risk. The real interest rate on any loan is calculated as follows:

US Treasury Rate of Return + Rate of Inflation + Risk Premium.

If the US Treasury Rate of Return is 3% and inflation is 3%, the minimum rate that a lender can charge to break even is 6% plus the costs of providing the loan, which may be 2%, for a total rate that the borrower pays of 8%. However, lenders know that a certain percentage of their loans will not be repaid and so they charge a risk premium to cover these losses. If they lend to a population in which on average 5% of loans go unpaid, they can charge less interest than if they lend to a population in which on average 20% of loans go unpaid. People who use payday loan services tend to be more likely to default than people with bank loans or those who use credit cards, so payday lenders tend to charge much higher interest rates than banks.

Suppose a single mother needs $100 for unexpected car repairs and does not have a bank account, a credit card, or enough cash on hand to cover the bill. She is unable to get help from family or friends. This single mother may take out a payday loan for $100 with the understanding that in two weeks (when she gets paid) she will repay the $100 and add a $15 fee. The fee represents a 15% interest rate on the loan over two weeks, but depending upon how it is calculated, more than a 400% interest rate over one year. The poor are more likely to use payday loans, and people trying to advocate for them get sticker shock when they consider that a bank loan may cost 10% and a credit card may cost 20%. Well-meaning but often misguided, they characterize payday loans as predatory. Since people who use such services tend to be female, minority, divorced, and less educated, critics also contend that payday loans are racist, sexist, etc. (Payday Lending in America: Who Borrows, Where They Borrow, and Why Jul 18, 2012). Payday loan storefronts are illegal in 15 states and payday loans are highly regulated in many others, decreasing competition.

There is another side to the story, however. If a payday lender loans $100 but it takes one employee 20 minutes (with wages and benefits of $15 per hour) to process the transaction, the cost in employee time alone is $5.00. That leaves $10.00 to cover facilities, equipment, supplies, insurance, and other overhead associated with this loan. Further, it does not include any extra profit to make up the difference in case this borrower, or another borrower, defaults. From that perspective the $15 fee, the effective interest rate, does not seem unreasonable if the lender is to stay in business.

The problem therefore is not the interest rate but the ratio of loan size to fee charged. Small loans can take almost as much time and money to approve as medium sized ones. Using simple interest rather than compound interest to illustrate, someone who lends $100 at 400% interest might make $400 on the loan after one year, but someone who lends $10,000 at 8% interest will make $800 after one year. The first lender is condemned while the second is respected.

A study done by the New York Federal Reserve Bank in January 2007 found that while “debt traps” can be defined as tempting households into “overborrowing and delinquency”, payday lending did not fit the definition of predatory. Specifically it noted “in states with higher payday loan limits, less educated households and households with uncertain income are less likely to be denied credit, but are not more likely to miss a debt payment. Absent higher delinquency, the extra credit from payday lenders does not fit our definition of predatory (Morgan D, Defining and Detecting Predatory Lending January 2007 Number 273).” In fact, states with greater availability of payday loans had a lower cost per loan, probably because competition decreases costs.

Dr. Adair Morse did a study evaluating whether payday loans exacerbate or diminish financial distress in the context of natural disasters. He found that rates of foreclosure and larceny were less in areas better served by payday lenders than in areas that were not (Payday Lenders: Heroes or Villains? Adair Morse, University of Chicago School of Business, January 2009).”

None of these studies tell the whole story, and there are undoubtedly people caught in a debt trap of predatory lending, but on the whole the evidence suggests that payday and other short term lending does more good than harm. The book Infiltrated by Jay Richards speaks at greater length on this issue, concluding that payday lending has a valid role in our economic system.

Alternatives

If payday lending were made illegal, there would be fewer ways for people who need short term cash to get it. If the single mother mentioned above did not have access to a payday loan, she could sell possessions at a pawn shop, or take out a title loan with her car as collateral. In the first case, she would be selling items at a fraction of their value; things that she may need later and will likely be unable to replace. In the second case, the single mother may be risking her ability to get to work and generate any income at all. It is not clear that either alternative is better for the borrower than payday loans.

Conclusion

Payday lending is an expensive way to get short term cash, but it meets an important need for many people. The Old Testament restricts lending, the New Testament accepts it, and neither specifies which interest rates are acceptable and which are not. Rather both Old and New Testament tell the rich to assist the poor in taking care of themselves. The wealthy landowner Boaz was commanded to leave unharvested grain at the edges of his fields so that the poor, such as Naomi and Ruth, could harvest some for themselves (Leviticus 23:22, Deuteronomy 24:19-22, Ruth 2). Boaz was not commanded to harvest everything, make hot bread and then pass it out to whoever happened by.

In the modern context, churches can help the poor through financial management classes, voluntary charity closets, and other local initiatives. Christians can devise other sources of short term, small dollar funding that replaces payday lending with loans at lower interest rates. But to condemn the practice of payday lending and to villainize the people in the industry is to harm the poor and harm the Body of Christ.