Why You Should Never Do Business With Friends
Money has a strange effect upon our perceptions. It can radically change our thinking and behaviors and this especially happens when social norms give way to market norms.
Social norms apply to the things that we do for people without a consideration of monetary worth. We are often openly generous to our family and friends and we give our time and apply our skills and capabilities to help our inner circle (and sometimes our outer circle) with scant regard for the time and effort given. We do these things because we also get pleasure from doing them. It feels good to do things on a volunteer basis. Under this condition, we remain in control of what we are willing to do and what we are not willing to do. In addition, we generally only volunteer to do things that we have the full competence to do and so we can do things cheerfully and confidently. We feel good from fulfilling a useful need. We usually only volunteer on a limited basis, which means that we can commit to helping someone fully. If we get out of our depth, then it’s easier to back off and say that we don’t want to go any further. Reasonable people will not ask more of us and will feel grateful for the effort given. Volunteering feels good when we have a large measure of control over what we will do and what we won’t do, when we do things that we are competent at, and when we can easily escape if things get difficult.
Volunteering efforts for our inner circle often implies inherent, but unspoken, reciprocity. We help each other out because we hope (or expect) that the other persons will do something for us. It doesn’t have to be immediate and it doesn’t have to involve an equal amount of effort, but we do expect that people will feel grateful and reciprocate in some form, at some point. We tend to get along best with people who return favors and who equally match our commitment to a relationship. It’s a vague state of affairs and people have different interpretations of fair returns, but by and large, we are content to remain with those people who match us. Those who don’t are perceived as takers, who don’t play fair and will eventually end up excluded, if they continue in that way.
Volunteering efforts for our outer circle are usually done just for the feeling of satisfaction that comes from helping other people. The relationships involved are not expected to be reciprocal. We are usually content just to be treated with gratitude and respect for our efforts.
Market norms apply to the things that we do for people with a consideration of monetary worth. We enter into an agreement (sometimes unspoken) whereby we exchange time and ability for a financial return. This places an absolute value upon our worth and, for unique transactions, it cuts off the expectation of reciprocity and added returns or rewards over and above the monetary value of the transaction. Working for money creates obligation, it reduces the control that the worker has, and it makes it difficult for the worker to evade difficulties.
Working for money places a definite value on a person’s time and ability and if it’s low, then it’s disappointing. If it’s high, then it can feel good for a while, but we always know that more money could be paid, if the other person was more generous.
In the book, ‘Predictably Irrational’ by Dan Ariely, details are given of experiments carried out to test how people behave when working for money, how they behave when they volunteer to do work and als how people respond to gifts. The tests involved carrying out a simple exercise on a computer where participants were asked to drag a circle from one side of the screen into a box on the other side of the screen. When completed successfully, the circle disappeared and a new one appeared. The participants were given five minutes to do this as many times as possible and to give a measure of their productivity.
One group was paid 5o cents, one group was paid $5 and one group was paid nothing, but asked to volunteer. The group that was paid $5 was over 50% more productive than the group paid 50 cents - that’s not so surprising, but the volunteer group was almost 70% more productive than the lowest paid group and 6% more productive than the highest paid group! This is a powerful example of what happens when social norms are replaced by market norms. Those paid 50 cents did not feel valued and so did not perform very well.
The experiment was then repeated using gifts instead of money. A 50 cent chocolate bar, a $5 box of chocolates and no gift at all were used and this time the productivity results were all at the highest level previously seen from the volunteers (within a couple of percentage points). This shows how gifts keep things in the domain of social norms and people respond accordingly.
Next the experiment was repeated only this time the participants were told the value of the gifts. This time the productivity levels matched the original experiment. The 50 cent chocolate bar was considered of low worth and productivity dropped right off again. Mentioning the monetary value brought market norms back into the frame. It seems that people will work for a fair wage and people will work for free (if it’s a short-term activity) but no one wants to work for low pay.
As Dan Ariely writes, “We live in two worlds: one characterized by social exchanges and the other characterized by market exchanges. And we apply different norms to these two kinds of relationships. Moreover, introducing market norms into social norms hurts the relationship. Once this type of mistake has been committed, recovering a social relationship is difficult. ”
I experienced this very thing quite recently. I had recently developed a friendship with a guy and we seemed to have a lot in common. He invited me to join him at his very pleasant holiday home and I went there for a few days. He hasn’t worked for a while and has been living off of savings so I knew he was hard up for cash. Consequently, I made sure from the outset that we agreed on what I should contribute to running costs and expenses. We had a good time and got along well. We even talked about business and how he might be able to use some of his specialist skills to help me. In the end, I didn’t spend as much as I had budgeted for and so I gave him a generous gift of some money. Having read Dan Ariely’s book, I can now see that this is where things started to go wrong. The use of money introduced market norms to the relationship.
A few days after my return, I asked him to help me out with a technical problem on my server. I considered it a minor problem but I didn’t have the expertise to do it. I asked my friend to help out. He came back saying what he would do and what his hourly rate would be. I asked him to check what the problem was first and to define clearly what the solution would entail. He bristled at this because it implied that I didn’t trust him. I explained that I didn’t want to get into an open arrangement of paying an hourly rate as I did not know what I would be letting myself in for and that was just plain good sense and not an issue of trust.
In the end, he checked the problem and couldn’t fix it. He said that it took him twenty minutes to do this. I had previously stated that if it took him less than an hour to fix it then I would pay him a full hour’s rate. Although he didn’t fix the problem, I offered the fee again. To be honest, in view of the fact that I had given him a cash gift equivalent to 10 times his hourly rate and that he had only spent twenty minutes and not solved the problem, I expected him to waive the fee. He didn’t and so I paid it and I was disappointed. I didn’t know it but market, norms had now come into full play and the implied reciprocity of social norms that accrued in the beginning of our friendship now faded away.
Things got worse when he recently demanded ‘a loan’ five times what I had previously given him as a gift. He claimed that he was desperate and had no one else to turn to but I very much doubted that. I told him that I didn’t have that kind of cash to spare. Later he came to me again, with another demand disguised as a desperate plea. Again I refused him and he then asked me to find someone to lend money to me, in order that I lend it to him. This was pretty bizarre behavior and the element of money involved meant that I totally discounted the social norms that had previously existed and now viewed the relationship almost entirely from market norms. I considered the value of money involved, the element of risk involved with lending money to someone with no income, the hassle and work that I would have to do on his behalf and the fact that I would receive no financial benefit from this transaction at all. The market norms made it clear that this was a ‘no dice’ situation. Another friendship bites the dust.
Now that I know about social and market norms, I will be very careful about ever considering to do business with good friends, and also about introducing monetary worth into anything that I do with friends. I’ll be generous with gifts, but I’ll remain very reluctant to ever give money.
What’s your experience with mixing social and market norms, either with your inner circle, or at work?
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#1 - Permalink Mirko June 3rd, 2008 at 5:14 amI’ve had mixed experiences when working with friends, most of them went fine, but some turned out horrible. Now I am very careful when doing anything involving money with friends or family members, clarifying everything before starting to do any work.
The experiment you are citing is extremely interesting regarding how money is motivating us… or not. However it doesn’t take into account the relationship between the people who are working together so I am not sure it really applies to your case.
Another interesting point is that I never had any problem when becoming friend with someone I had a work relationship with. Why is there one way working better than the other?
#2 - Permalink admin June 3rd, 2008 at 5:51 amYour final point is a very interesting one and I’ve heard it said before that it’s not good to do business with friends but that good friendships can develop between people who do business together.
I would put it down to the fact that when you work with someone the market norms create conditions and a framework within which the relationship first works. The monetary worth is established beforehand and is accepted. It sets up clearly defined positions relative to one another.
From there, social norms can be applied, and if mutual trust and reciprocation occurs then a friendship can be established. If that doesn’t occur, or goes awry, then we can revert back to the initial framework that was established.
As with everything in life, the more defined and specific things are, the easier it is to deal with them. Social norms, and the expectations created, are very vague and hence harder to handle (but, despite this, still much more preferable to have!).
#3 - Permalink branderson June 3rd, 2008 at 6:20 amThat example with that friend was a bit confusing for me. He owns a “very pleasant holiday home” but is hard up for cash? That’s some sort of personal finances!
Is it not a question of vetting potential “friends” to begin with?
#4 - Permalink admin June 3rd, 2008 at 7:38 amJust a typical example of someone who is asset rich, but income poor.
Of course, you have to tread with caution when making friends, but through mutual interests, shared experiences and reciprocity, you start to fathom out whether this person will make a good friend or not. Unfortunately, we all ‘project’ or imagine what a person ’should be like’ based on just a few indicators or possible trends. Sometimes those indicators are wrong and so we interpret things wrongly. New information comes along and we can choose whether to reassess things accordingly.
The friendship mentioned might well have continued merrily along, if market norms had not entered the situation. When they did, the nature of the friendship and the interpretation of actions and responses changed significantly.
#5 - Permalink pamela murno June 3rd, 2008 at 6:02 pmHere in artistic Hollywood these values clash with each other all the time - and there are many instances where personal “friendships” are phoney and created only to exploit the reciprocity which they have no intention of returning! One has to be extremely cautious not to be sucked dry - but on the other hand, if you handle the delicate line between business and friendship you can create win/win situations for all. Remember not all exchanges are monetary. Value of other kinds can be exchanged as well. I keep that in mind and how I can give the other what they want, while fulfilling my needs as well. That can be done. I wouldn’t consider the person you visited who then wanted to charge you for his minor services and even pressed you for a loan as even much of a colleague. His reactions were on the irrational side - and it is not a person I would cultivate. You can always tell a person’s true nature under stress - and what came out isn’t very positive!
#6 - Permalink admin June 4th, 2008 at 11:53 pmPamela, thanks for your comment! You are certainly right that a person’s true nature comes out under stress. On top of that, it’s interesting to see how a person led his or herself into such a predicament in the first place. Sometimes people get desperate because of uncontrollable disasters, but more often than not, they simply end up in dire straits out of their own making. Such trends are not easily reversed and getting involved in helping such people is often a long-haul and difficult pursuit.
You can read further on my views with this kind of situation here: http://www.nickpagan.com/blog/.....unishment/
#7 - Permalink Lise June 6th, 2008 at 1:02 pmI think the study on dragging circles to boxes shows more about cognitive dissonance than it does intrinsic rewards. The volunteer group probably was most productive because they said to themselves, “Hey, I’m wasting my time doing this study for free, there must be something good about it, because I’m not stupid or wasteful.”
But otherwise I agree with your article. I considered buying a house with a friend for a while, but it didn’t take me long to realize how that had the potential to go very, very wrong.
#8 - Permalink admin June 8th, 2008 at 1:55 amI had to look this one up, but it looks like an interesting topic, so I’ll be pondering over it. Thanks for the lead!
http://en.wikipedia.org/wiki/Cognitive_dissonance
#9 - Permalink Vali August 27th, 2008 at 10:55 amI am Vali from Dubai.
To be honest i am suffering now for giving money to friends and for doing business with friends. there are some reasons that i think we should not give money to frined or if we giving we should either get a cheq or forget about it!!
Reason = if they are close frineds we shame to ask about it and if they are not that close, why to give if there is no guarantee?!
we should be very carefull for doing business with close friends or family, because if they are successfull at the end they think that THEY HAVE DONE IT and if there is a lose, its YOU that recomended. DO NOT DO BUSINESS WITH FRIENDS / FAMILY
cheers, , VALI
#10 - Permalink admin August 27th, 2008 at 4:17 pmGreetings Vali,
I quite agree with you.
I often find that if you give someone a benefit the receiver does not appreciate its worth because they have not gone through the difficulty of getting it in the first place.
Ask for some security and show them what they will lose if they don’t keep their promises. They will think twice about taking the money or engaging in foolish risks when it’s definitely at their expense and not yours.
You can also involve a third party to moderate the deal and to make it very public knowledge. The embarrassment and shame of having other people know of their failure, foolishness, or untrustworthiness can also have a powerful effect on making sure that people keep their word.
#11 - Permalink Caz October 17th, 2008 at 4:59 amStrange I should read this the day after a friend’s husband had asked me to do some work for their business. I’ve always had a good, recipricol friendship with them, both of us making the effort to help out, especially where our kids are concerned. Then, out of the blue, my friend’s husband asks me to do some work for them. I’m a freelance journalist and work for national publications, which is well paid and usually challenging work. I often deal with very demanding Editors, but I never take it personally, because of the financial remuneration.
My friend’s husband wanted me to produce various Press Releases to promote their business and to contact Editors on their behalf to try and get them some free editorial publicity. I half-considered helping them out until he mentioned what he genuinely thought was a generous fee for my work. Now, taking into consideration I can make up to £500 per day plus for my skills, my friend’s husband offered me £50 for work that would take days and days of my time, to achieve what he wanted. I was immediately insulted by the low value he attached to my skill base and our relationship basis was, in a blink of an eye, irrevocably altered. I refused. He pressed me to help them out. I absolutely refused.
This morning, my friend was very cool with me, obviously having spoken with her husband about the incident. Our friendship has shifted, and having read your article, I now see why. I agree with you, mixing friendship and business is a real malakoff cocktail.
#12 - Permalink Caz October 17th, 2008 at 5:04 am…and with all the typos I made in my last posting, I think my friends should consider they’ve had a lucky escape! God bless Sub Editors.
#13 - Permalink admin October 17th, 2008 at 5:11 amThanks for that interesting story, Caz.
If this has only happened just recently, then you might be able to recover things by saying that you were shocked by the fee offered, because it totally underestimated the amount of time and skill involved and totally undervalued your time and abilities.
Your friends probably didn’t want to insult you. They are probably just very ignorant about what it really takes to do what they have asked you to do. A gentle explanation as a reason for your refusal might go a long way to resetting the balance of things.
That said, it’s still a good idea not to do business with them. Maybe refer them to someone else if you can do so.
#14 - Permalink Mitsy October 12th, 2009 at 3:33 pmInteresting topic. I have been friends with this younger couple for about 8 years. If I could have adopted this couple as my own kids, I would have. I went to some church activities and knew some of their other family members. The guy was in the heating/cooling business and had worked for various companies in our area for the last 8 years or so. His dream was to own his own business as he had had some bad luck with some of the places he’d worked for (some apparently mismanaged the business & didn’t pay employees, some didn’t have enough work for him, etc.). He had been currently employed for a local place who did installation of furnaces/cooling, plumbing, etc. He wasn’t real satisfied with his job but had in mind to start his own company. While he was still working for this place, he agreed to install a new furnace for me at a much reduced labor cost. I needed the furnace and he needed the side jobs in order to bring in a bit more money. He was going to do this on his off time. That was in April of this year. Within a month of him buying and bringing my furnace to my house, he quit his job with the company & also buys a house for him & his family. He appears to have a lot going on. The furnace sat there for a couple months before he ever took it out of the crate & got rid of my old one. I had mentioned to him that I had relatives coming to town Sept. 30. He vowed to have it done by then as our weather can get quite chilly before Sept. is over. He seemed to put off doing anything further w/my furnace. At one point, he mentioned waiting on his business license & said that was one reason he was dragging his feet on doing my furnace. I didn’t care myself & I wasn’t going to tell a competitor that he was doing this for me. It seemed like an excuse. Around September 21, I called him to inquire about the furnace as I was starting to use heaters at night. He would show up & work on it but had to get the pipes fitted, etc. I knew he was taking on other jobs while putting mine off but I kept my mouth shut. He said he would be back on Fri. (day before my company is to be at my place). He didn’t show up–didn’t call. I was getting kind of ticked by now. Mon. I call him & ask him if he was coming to work on it & he said he was on his way. When I inquired what happend last Fri., he said he got a job out of town. I’m thinking why the hell didn’t he call? I told him at that point if he could not be there to please let me know. He got the part that needed to be used to start up my furnace and it was defective so 2 more days of waiting. This furnace was not completely done until October 9 (a full SIX months after giving him $ to buy the furnace). When I questioned him about some of the charges for the piping, he got a bit arrogant. I saw a side to him I’d never seen before. In the end, his bill was right & I was not overcharged, but it would have been much easier if he had been forthcoming all the time instead of putting me off. As you can imagine, I can’t recommend him to others now.
#15 - Permalink admin October 13th, 2009 at 12:47 pmWhat a story, but not uncommon, I suspect. I think that many of us talk ourselves up a bit more that perhaps we really can perform at. When you deal with strangers and people that you don’t see often, then it’s easier to get away with it and it becomes a habit. But close friends know the truth and so the stress builds to keep promises and to perform at levels where we might be overreaching ourselves. Either that, or one out of every five people is an idiot. I’m still making my mind up on that one
#16 - Permalink Mitsy October 13th, 2009 at 2:13 pmTo further clarify, I would have felt horrible if I had gone to a competitor and bought the furnace and been charged the going rate for the installation of it. I would have been out even more money but I would also have felt bad that I didn’t let this guy have my business. The root of the problem was not the money–it was his lack of keeping his word. I don’t know which is the better trade-off here…the fact that I got a furnace installed for much less than the going rate or the fact that I got it for less at the cost of losing a LOT of respect for this guy as a friend and a businessman in the process.
#17 - Permalink Michael Espinoza January 9th, 2010 at 10:10 pmHere is my story, as I put my own business, a close friend and roomate wanted me to give him work in my painting company. Some days he wouldnt show up to work, he would sleep in my truck while I would drive to the site, and eventually he would even work so slow that my costumers would complain about him, to the point where I lost a multimillion dollar costumer because of this friend. Today I find myself jobless because of his work ethic, and he blames me for him not wanting to go to work because originally I promised to make this business with him together and I decided not to for obivious reasons.