Teaching Pareto Optimality In a Way That Sticks

An Easy Classroom Activity in 7 Steps

Over the years, I have struggled to teach negotiation students about the concept of Pareto Optimality in a way that they find persuasive.  For the unfamiliar, Pareto Optimality posits that there is a limit to the allocation of resources, beyond which it is impossible to make one party better off without making the other worse off.  However, before the Pareto limit is reached, opportunities for value creation remain available.

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Students already buy into the idea that there is a limit to value creation, but they frequently remain skeptical that their own agreements might be Pareto suboptimal.  Value creation, they believe, is an idea that exists only in the candyland universe of negotiation theory.

They do, however, buy into the notion when illustrated in graph form, using their own data, in class.  Here’s how:

1.  Draw an empty graph on the board, with a scale of 0 – 20 for the x and y coordinates, respectively.  You could also draw a theorized pareto curve on your graph (although it probably won’t match the eventual data).

2.  Select a handful of agreements from your students’ recent negotiations.  (It should be a variety of agreements, some of which you suspect are more Pareto Optimal than others.)  Distribute these agreements to the students in the class.

3.  Instruct the students to rate the agreements on a scale from 1 – 20 from the perspective of their own client.

4.  Have them record their ratings for each agreement in columns on the board.  (You can also have them submit their ratings to you electronically, and you can do the calculations outside of class.)  There should be a separate column for each party and agreement (e.g. Column 1 – agt 1, party X, Column 2 – Agt 1, party Y, etc.)

5.  Assign students to calculate the average for each column.  This should produce an average rating for each agreement from the perspective of each party (avg. score party X, avg. score party Y).

6.  Use the scores (x, y) as coordinates to graph each agreement on your graph from Step 1.  (The students can be assigned to populate the graph.)  The data point for each agreement should show the Agreement number, for ease of discussion.

7.  Voila!  Your graph should show which agreements were the most and least Pareto Optimal.  Find the least Pareto Optimal agreement on the graph and ask students to identify which other agreement(s) would make both parties better off without making any parties worse off.  Even the most math-anxious students can do this readily after having walked through the steps of constructing the graph.

At this stage, you can also return to the agreements themselves and explore with the students which trade offs were the most value-creating.

Professor Liz Tippett's research focuses on how individuals and corporations respond (or fail to respond) to information about risk in a variety of contexts.  Her study on the risks of disparate impact litigation and the likelihood of future litigation following Dukes v. Wal-Mart was cited in two opinions from the United States Court of Appeals and by the Iowa Supreme Court. 

Her most recent work measured how companies in "sharing economy" businesses used certain form contract provisions to mitigate independent contractor misclassification risks.  She also published a study examining how employers in child care and educational settings end up in expensive disputes over employee misconduct involving children.