In investing circles, a common problem is something known as the “hold-up problem”. The hold-up problem is a situation where two parties may be able to work most efficiently by cooperating but refrain from doing so because of concerns that they may give the other party increased bargaining power and thus reduce their own profits.

These concerns around fairness can often result in underinvestment and general inefficiency in the investment process. Research from Cambridge Judge Business School highlights how it needn’t be this way. The study highlights that fairness concerns can also create a hold-up problem and it’s not just the outcome of self-interest.

Sense of fairness

Essentially, our general sense of fairness often focuses on a precise moment rather than the broader history of the situation. This sense of fairness can then prompt us to react in ways that aren’t in our self-interest. As such, there is a potential conflict between our desire for fairness and also for positive reciprocity.

The researchers use an example of an employer holding back on crucial tech investment because they’re worried that employees might want a stake in the increased value of the firm. Or the propensity for less developed nations to be reluctant investors in green technologies because they fear developed nations would look for distributional fairness when sharing out any costs associated with carbon offsetting.

The authors highlight that when it comes to assessing fairness, we often look only at the immediate moment rather than looking at the matter over the course of history. For instance, they suggest that a well-trained employee might forget the investment their employer has made when it comes to changing jobs or negotiating a salary.

What’s more, when we perceive that the situation is unfair in some way, we can often retaliate in a way that is detrimental to ourselves as much as the other party. This has implications for managers, as it’s important that we’re able to look at the bigger picture when examining a relationship and avoid this short-term perspective. This way we’re more likely to find win-win outcomes.