Gresham’s Law: “Bad Money Drives Out Good”

We recently assisted a client in mediation hoping to resolve a difficult business dispute among two owners. We engaged an experienced mediator and committed an entire day to the effort. We spent weeks in careful preparation, developing several approaches we believed would create an opportunity to develop win-win solutions. After all, the business was generating significant profits and the on-going dispute could compromise its continued viability.

Unfortunately, the other side showed up with only its original winner-take-all demand, and throughout the day they hardly moved from their one-sided solution. Obviously, we were unsuccessful in settling the dispute and the parties left with nothing to show for their efforts other than expensive lawyer and mediator fees.  It was a total waste, and the dispute still rages on, no closer to a solution.

An excellent article by Arthur C. Brooks published in The Wall Street Journal, “Reflections on a Decade of Leading a Think Tank” (Mar. 14, 2018), references the economic principle called “Gresham’s law” (named for Sir Thomas Gresham (1519-1579), an English financier during the Tudor dynasty).

Gresham’s law holds that “bad money drives out good.” If one form of currency is inherently more valuable than another in circulation, the better one will be hoarded and thus disappear. Brooks applies this principle to the current environment of political discourse, suggesting that extreme views tailored to a polarized public can have the effect of drowning out rational thought, civil dialog and the opportunity to develop sustainable solutions.

Our experience suggests that Gresham’s law applies also to business negotiations. If one side uses a zero-sum, winner-take-all strategy, then that position has a tendency to dominate all the negotiations and the likely result is either a bad deal or no deal at all, just like in our client’s mediation. We believe successful deal negotiations require each party to understand what the other party really needs from the deal, and then to find a way to get that result for the other party while also accomplishing its own objectives. That win-win strategy can actually expand the pie.

Gresham’s law restated: a bad deal strategy drives out the possibility for a good deal.