Latest / The Innovation Show / Split the Pie: Barry Nalebuff on Fair Negotiation, Game Theory, and Better Deals

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Split the Pie: Barry Nalebuff on Fair Negotiation, Game Theory, and Better Deals · The Innovation Show

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Before we start, I want to thank our sponsor Kyndryl, who runs
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Negotiations are incredibly stressful and can bring out the worst in people.
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Wouldn't it be better if there were a principled way to negotiate?
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Wouldn't it be better if there were a way to treat people fairly and
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get treated fairly in a negotiation?
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Today's book offers a new negotiation strategy that does both these things.
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A field tested method that reframes how negotiations play out.
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Our guest helps identify what is really at stake in a
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negotiation, what he calls the pie.
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We will share how it helped reframe a high stakes negotiation when Coca-Cola
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purchased Honest Tea, a company our guest co-founded with a former student.
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We'll also introduce the PIE framework and how it works for everyday negotiations.
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It is an honor to welcome serial entrepreneur, serial author, and professor
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at Yale University, author of Split the Pie, A radical new way to negotiate.
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Barry Nalebuff, welcome to the show.
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Thanks for inviting me.
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It's great to have you, man, on the show, and I thought before we
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lose people, as you see across your statistics on a YouTube channel,
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Yeah.
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I thought we'd get the big idea of the book out first and then dive
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into a little bit about how to use the framework and what it is.
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But maybe we start with the big idea.
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As you said, I teach at Yale.
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My students at Yale are smart.
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They're empathetic, they're great problem solvers until they start negotiating.
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And then some malady takes over and they think they have to act
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like a jerk in order to succeed.
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And what I want to do is share a principled approach to negotiation that
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shows how to succeed without being a jerk.
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And so that's probably what I should have called the book,
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negotiating Without Being a Jerk.
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And the trick is, if you bring your whole self, your empathy, your problem
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solving skills, people are afraid of being taken advantage of because
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the other side might be a jerk.
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Or they might actually just be like you, but don't know a better way to negotiate.
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And so how do you bring your whole self, the tools that have allowed you to be
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successful in everything else you've done also be successful in negotiation?
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And the answer to that, in my view, is to understand what the negotiation is about
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and to insist on getting half the pie.
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It's clear that you can't have a successful negotiation if both
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sides want to get more than half.
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Because if I want 60%, you want 60%.
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That just doesn't work.
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And there's no reason for me to take less than half the pie.
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So I want you to be as ambitious as you can and still get a deal.
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And the most ambitious you can be is to say, I want to get at least half the pie.
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Now, if the negotiation were super simple, if I said, you and I have
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to figure out how to divide up.
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A dollar bill and if we can't agree on how to divide it up, we both get zero.
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I don't think the answer here is hard.
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Right.
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What would you do?
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I'd probably go for 50 50.
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Try for a moment, going for more than 50,
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I'll go 75 'cause I did more work.
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and part of the answer which we're seeing here is there aren't any good reasons
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for why you should get more than half.
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You can try and make stuff up, but at the end of the day all you're
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really doing is just wasting time.
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And essentially in the end, we're gonna get back to 50 50.
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In the meantime, I'll think you took away a couple minutes of my
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life that I can ever get back.
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I won't necessarily trust you, I won't wanna work with you the same way.
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So if life is simple in that all we're doing is negotiating over how to divide
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up a hundred dollars, we know how to do it, we're gonna split it 50 50.
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And my job is to help people see what the dollar bill is in the negotiation.
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once they can recognize that, then they know what to do, which
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is to divide it up equally.
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So let's share straight away your idea of the pie as this additional
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value that's created through an agreement to work together.
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And as you say in the book, when the stakes are correctly understood,
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it is far easier to reach an agreement in the first place.
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absolutely.
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So people are confused what the negotiation's about, a result,
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they make arguments about fairness that really don't make any sense.
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But if you can.
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Convert the negotiation into a data exercise use that to measure what
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the pie is, then actually things become a whole lot more clear.
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So I'll give you an example based on a negotiation my mother was involved in.
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She was a renter in Sarasota, Florida.
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Florida.
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And this was during the pandemic.
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And her laKyndrylord thought that would be a good time to sell the house that she
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was renting because a lot of people were moving to Florida during the pandemic.
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And he said to her Marcia, 'cause that's her name.
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I I'm putting the house up for the market for sale, and you've been a good tenant.
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I'm happy to sell it to you at a little discount.
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I think the market price is 800,000.
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But for you, I'll sell it at seven 90.
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My mom liked the house.
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She was happy to buy it at the market price.
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and so what is the pie in this negotiation?
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be my professor type and ask you questions.
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Oh man, you put me on the spot.
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So the, the pie is what he saves from going to the market and all the costs
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I love it.
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You're doing great.
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and what she saves from having to go to the market.
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How to move out,
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Exactly.
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Okay.
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So you are, you are just acing this here.
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I read the book, man.
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I read the book.
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but this example is not in the book.
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So, 'cause I think this happened after the book was written.
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Yeah.
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Well, the, the pie framework helps me understand that,
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where I wouldn't have before.
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right?
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The pie framework is in the book, but not this example.
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So this is great.
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So what are his costs associated with going to the market?
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He'd probably have to spend $10,000 putting in new carpets and new appliances.
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And he'd probably have to spend 5% on a real estate agent commission.
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So you're talking about 5% of 800,000.
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That's 40,000, plus 10.
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And my mom would have to go and move, which hiring a
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moving truck is sort of a pain.
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This cost associated with that, let's call that 10,000.
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So I would say the pie is $60,000 and all that.
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60. My mom is kind of automatically getting 10 because she doesn't pay
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the moving costs and he's getting 10 'cause he doesn't have to
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do the fix up costs.
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And so she comes back and says, look, if we work together, we can save an extra
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$40,000 beyond what we'd save individually in terms of the real estate agent.
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And I'm prepared to split that with you half and half.
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So I'm happy to pay the market price for this house.
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Minus 20,000, and he comes back and says, Marcia, I don't think you understand.
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It's a hot market and that's why I should get three quarters of the 40.
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why I'm giving you 10 and I keep 30.
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Okay.
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Should I try one more time to see how you'd respond to that?
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Yeah, so the pie, if the pie is, you said 60 K,
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Right.
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then it
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that in some sense, they have to argue over
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Yeah, the extra,
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the
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yeah.
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and 10 were already being allocated to them equally in
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Oh, gotcha, gotcha.
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Yeah.
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reallocate that amount.
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So the 40 K extra should go 20/20 because that's what they create together.
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Yes.
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But he's saying, I want to get 30 and you can have 10 because it's a hot market,
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so I should get more than half the pie.
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Which is the power play You talk about, he believes he's in the power position.
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Yeah.
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So how do you respond to that?
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Well, you'd say, well you, you have to be willing as your, you mentioned the great
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Herb Cohen who was a guest on the show.
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You have to not be emotionally involved and be willing to walk away.
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well, herb would say you have to care, really care, but not that much.
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Yeah.
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so I think not only do you have to show people what the pie framework
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is, but you also have to show them why their arguments are wrong.
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And answer here is, look, fact that it's a hot market is why the market
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price is 800,000, not 700,000.
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But it has nothing to do with how we're gonna split up this 40.
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That if you sell the house to anyone else besides my mom, are
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only gonna collect seven 60.
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And if my mom wants to buy this house, buy a similar house from anybody
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else, she's gonna have to pay 800.
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So the only way that the two of you.
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gonna be able to get this extra 40 is if my mom is the buyer and you are the seller
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As you say, there's no, extra work there is incredibly say
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you haven't even valued that.
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There's no extra work.
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There's, well that's the part of the 10,000 he's saving in terms of no
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fix up the carpets, no leaving the house empty for a month or two while
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he's trying to find another buyer.
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so that's already baked in and he gets it.
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And so we agree that my mom will buy the house for two and a half
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percent less than the market price that we'll split the 5% commission.
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And it turns out there were five different houses on that same
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street that it sold in the last six months 'cause it's a development.
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And so we did some adjustments for square footage, lot size and so on.
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And I think we came up with a number, like 786,000 and some change.
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And then split the agent fee.
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And he really got it because he said, you know, why are we hiring
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two two lawyers to do this contract?
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Why don't we just hire one lawyer, the extra lawyer fee, and split the savings?
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And we did that too.
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Amazing man, and I'm sure you were behind it.
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It wasn't your mom.
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Just read the book.
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Yeah.
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I think there's some truth to that, my friend.
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So be before we come to the brilliant examples, there's, there's such
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practical examples in this book.
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If you're a landlord, if you're renting a house, what do you do if
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you break the lease, if you're an entrepreneur and you wanna sell your
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business, if you wanna buy a business.
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All these kind of things.
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If you want to invest m and a, if you're a judge, if you're a lawyer.
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So many great things in here, but I thought we'd share the origin here
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because one of the things I thought about is sometimes you have maybe a
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narcissist and you're dealing with a narcissist, and there'll be a pyrrhic
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victory where it's like going, I don't care who wins, as long as you don't.
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Yeah.
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some, some people.
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But you mentioned the origin of the pie, which dates right back to the
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2000 year old Babylonian Talmud.
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Yeah.
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So it's this notion of the principle of the divided cloth.
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I wonder if I can even come up with a cloth.
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I think I can.
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Let's see.
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Yep.
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I found a, something here will work as a cloth.
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So basically the idea is that one party here's our, our cloth, it's a little,
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maybe it's a little bit too long to put on the screen, so we'll make it half size.
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One party is asking for some amount, let's say, from here to here, and the other
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party starts at the other end, a little hard for me to do with just by myself.
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And they go from here to there.
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And the notion is that the first party has conceded from
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this amount to the end to me.
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And I've conceded from this amount to the end, to the other side.
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And what's really in dispute is the part that we're both claiming.
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And the Talmud says that's what you should divide.
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And that notion of figuring out what's in dispute really the
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insight behind what's in the pie.
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And I said right in the beginning of this cast, what's confusing to people is they
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don't know what they're negotiating over.
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And so in the case of my mom and the house, they think, oh, we're
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negotiating over the price of the house.
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Well, there's kind of a market price for that, and there's
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not a whole lot of dispute.
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I mean, maybe there's a $5,000 range in terms of what the price
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per square foot could be and how you do the right, comparable and so on.
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But the real source of this negotiation is how are we gonna save that $60,000?
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That's much bigger than anything else.
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And that's the.
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Real source of what these two parties, this is why these two parties should do
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the deal and why it makes sense for them to do the deal compared to anybody else.
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And once you see that, then it just changes everything in
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terms of how you negotiate.
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it's such a brilliant framework, and when you get it, you get it.
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It took, took me a while.
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I have to admit with the numbers because the examples you're giving
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and the variables you give and the tables in the book, but it's
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really, really highly worth reading.
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It's a brilliant skill to have and a, a new lens through which to see
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agreement, but also opportunity.
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I think that's the thing you, you see opportunity.
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Yeah,
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of the ways you saw opportunity, which was brilliantly done, was
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with bottling and you, you brought your inefficiencies to the table.
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Maybe we'll share this one.
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yeah.
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So you mentioned earlier that I started a company called Honest Tea.
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I did that with one of my former students, Seth Goldman.
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after doing this for 10 years, Coca-Cola came to us.
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And talked about how we could work together.
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And one of the opportunities we had to work together was we were paying 19
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cents a bottle for the glass bottles that we were using, and Coke could
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buy those exact same bottles at 11 cents, and there were about a hundred
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million bottles we were buying.
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So 8 cents on a hundred million is $8 million.
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And the question is, how would you divide up that 8 million
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between Koch and honesty?
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Well, if you took the standard approach, your proportional
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division, Koch sales were 40 billion, honesty sales, 20 million.
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So that's 2000 to one ratio, which means Coke would get 7,996,000 and
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honest would get 4,000, which, you know, you're, you're shaking your head.
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It's like that just.
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That's ridiculous.
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And even they saw that was ridiculous.
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And it shows you that proportional can't really be right because
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nobody would accept that.
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And so they said 7 million for them and 1 million for me, for us.
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And I come back and say four and four.
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I say, well, Barry, that's, that's cute.
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But you know we are bringing all of our buying power to the table.
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What are you bringing to the table?
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And sarcastic answer is our inefficiencies, in the sense that
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your buying power isn't worth anything without the fact that we're
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spending too much on these bottles.
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Coke has already applied their buying power to their 40 billion in sales.
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So if they want to apply it to our a hundred million bottles, what they
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need is the group of consumers who think this organic, not too sweet.
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Alexa.
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an overpriced bottle is a great thing.
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need our customers, they need our product, and they need the fact
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that we're overpaying for bottles in order to create this pie.
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And they said, oh, Barry, that that, that's a pretty good argument.
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I, I can see that, but I think you're missing something, you know,
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which is, look for Honest Tea, a million dollars is a lot of money,
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life-changing amount of money.
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Whereas for Coke, it's not even a rounding error on a rounding error.
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It's not material.
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So we should get seven and you get one.
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My response is, well, you just told me you don't care about money.
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Why don't we get seven?
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You get one.
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And once you're in PY land, any argument that somebody makes can be turned around
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and therefore there is no justification of anything but four and four.
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So also, let me give your listeners the epilogue here because a
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story didn't end there, which is.
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in the end they decided it made sense for them to buy the company, and that is any
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entrepreneur's dream to sell to Coca-Cola.
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Coke is really good at bringing companies from a hundred million to a billion,
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and they're also pretty good at bringing companies from 50 million to zero.
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And so they wanted to wait a few years before they bought
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us because we were too small.
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And so they agreed.
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We agreed that they would buy us in three years, and during those
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three years before they bought us, they'd help us with production,
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with purchasing, with distribution.
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But there was a problem.
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And the problem is they didn't want to be penalized and have to pay more for all
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the things they were doing to help us.
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Okay.
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how do you respond when they say, that seems like a pretty good argument, right?
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Yeah, exactly.
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then have to pay more.
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Well, I, I know the logic of this, so I don't wanna spoiler for audience.
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I want you to think about it.
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give 'em away so you can, let's see how you, let's see how you're doing on this.
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Yeah.
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So you, you, well, I know what you did.
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You, where you go.
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Okay, well let, let's,
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You say not what I did.
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Just what's the argument against that when they say they don't want to be
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penalized for having to pay more for all the things they're doing to help.
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without me being there, there's no, there's no, there's no
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pie to create between us.
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That's true.
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So what you're doing, and you're absolutely right, is what I'll call
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the high level argument is if we don't reach an agreement, there is no pie.
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And that but you also wanna show them what's wrong with their argument, not just
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what the right argument is.
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And so the answer is that you shouldn't have to pay full price for all the
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things you're doing to help us.
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But you should pay half price because yes, we need you to help us, but you
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need us as the vehicle to be helped that without us being here, there is nobody for
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you to help to create this extra value.
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So only by coming together do we create this extra pie.
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And so the right solution is what you should do is pay full
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price on sales up to the level we could achieve without your help.
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And to the extent we go above that, then you pay half price.
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so in that sense, you are going to be rewarded for all the things
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you're doing to help us, you're gonna be awarded at half level.
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'cause we're gonna get half those rewards too.
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And we agreed on that framework in the first hour.
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And then the hard part of the negotiation was, well, what is full
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price what is the level that we could achieve without your help?
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And what I'd say is that's the data exercise.
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And so I'm trying to convert negotiation into a data exercise.
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And the other thing is that we can agree upfront that what
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we're gonna do is split the pie.
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Then we gotten over the hard, the contentious part, and now we can focus our
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efforts on how do we make the pie bigger?
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And you saw that with my mom's case.
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We agreed that we were gonna split any savings.
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And so now he can say, well, let's make the pie bigger by
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hiring one lawyer rather than two.
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Absolutely brilliant.
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And the, I just wanted to bring it a little bit further because the, the
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examples you give are so relatable and you can re easily slot yourself in
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there as one of the characters at play.
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Hopefully for many of our listeners can slow.
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Into the success that you had with selling the business as you did.
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But I want to just highlight as well that that was your first time
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actually using it in the field.
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Absolutely.
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So I'd been teaching this course at Yale and developing the PI
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framework, and thinking it was gonna be useful, but actually, who knew?
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And then this opportunity came and said that we weren't allowed
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to hire investment bankers.
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'cause they didn't wanna turn this into an auction.
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And so I found myself in the uncomfortable position of having to
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negotiate the sale of this company.
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And as going back to Herb Cohen he says, you know, the, you're the worst
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negotiator when you're negotiating for yourself 'cause you care too much.
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And boy did I care a lot.
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This was gonna be a life-changing, event.
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But the trick is to apply the principles of the pie and basically
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think about the logic of negotiation.
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And that helps bring down the emotional temperature.
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Let's give another example.
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'cause there's so many brilliant ones in the book.
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So this is something most of our audience will have experienced is buying a
22:10
domain name, but sometimes you go to buy your domain name and somebody's
22:15
already taken it, but it's not active.
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What happens in those cases?
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Well, this is a, a little variation of that.
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This was a case where I wasn't as smart as I thought I was.
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so I decided for one of the companies that I created maker Oats that I
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wouldn't hire a lawyer to do a trademark.
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You don't need a lawyer.
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You can go to uspto.gov and file your own trademark and save a thousand dollars.
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But what I forgot was the fact that when you file a trademark, the
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U-S-P-T-O publishes the, the, trademarks because they have to 'cause otherwise.
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trademark, people wouldn't know who to object to.
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Oh, you're infringing on my trademark.
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And the day that the trademark was published a, a troll a jerk who who I'll
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call Edward Kahn, 'cause that's his name.
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And he went and bought the domain name associated with the the trademark.
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He bought maker roads.com.
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And he writes to me saying that he'd sell it back to me for $2,500.
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So I'm kind of annoyed here maybe extremely annoyed.
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Learned my lesson about not hiring a, a law firm.
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And I'm not also as dumb as I sound having made this mistake.
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I did some research and discovered that what he had done is called
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registration in bad faith.
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That you're not allowed to do what he did.
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And ICANN, which is the international something of names and numbers has a
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dispute resolution process, which when people do this registration in bad faith
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will bring the domain name back to me.
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They they will restore it to its rightful owner.
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The only problem is that that process costs $1,300.
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So it's quick.
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And I did some research and it turns out Edward has gone in
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front of I can on many occasions, and he's lost every single time.
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And it's not surprising he loses 'cause what he's doing is, is wrong.
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Moreover, he doesn't even protest when somebody fi makes his claim.
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And, you know, why does he not protest?
24:52
Because he has nothing to, no, nothing to stand on.
24:55
He has nothing to stand on and why spend the effort?
24:57
'cause he knows he's gonna lose.
24:59
Yeah.
24:59
So I'm really confident that I'm gonna win this thing.
25:02
I mean, you know, a hundred percent confident, basically.
25:06
So there's no way I'm gonna pay him 2,500 when I can get it from, ICANN for 1300 it.
25:12
So I write back to him and tell him that, and I offer him 500
25:15
bucks and he comes back at 1100.
25:18
So now it's time to bring out the pie.
25:22
And so who's in a stronger negotiating position?
25:25
Myself or Edward?
25:27
You're 1300 down regardless here.
25:30
Well, not regardless, but regardless of if you can make a deal with Edward,
25:33
Yeah.
25:33
So what is the pie in this negotiation?
25:37
I mean, I, I value this trademark at $40,000.
25:41
Let see if that helps.
25:44
But the pie is 1300.
25:47
You're absolutely right.
25:48
I can't trick you.
25:51
yeah.
25:53
so that doesn't, people can read it and still, you know, my students
25:56
don't always get this right.
25:59
so if I win the case, I'm gonna get the trademark.
26:05
And so if I reach a deal with Edward, I'm gonna get the trademark.
26:08
And if I don't reach a deal with Edward, I'm gonna get the trademark.
26:10
I'm getting the trademark no matter what happens.
26:13
the only question is whether we waste $1,300 at, ICANN.
26:18
In order to do that, needs me to say yes, and I need him to say yes.
26:23
So the pie is this, $1,300 we can save by doing a deal.
26:28
I tell him that and I say, look, you know, your 1100 number is really unfair.
26:33
Because you'd be up 1100 and I'd only be up 200.
26:37
I'm only risking $200 by saying no to you here.
26:41
So forget that.
26:44
But I'll pay you 650 and if I do that, you're a 650 ahead of no deal.
26:48
And I'm 650 ahead of no deal.
26:50
And that's as far as I'll go.
26:52
And he comes back and says, look, I made these giant moves so far.
26:57
I'll go down to 900, but I've moved a whole lot more than you have.
27:02
Was that really right?
27:03
Has he moved more than I have?
27:06
So he's pretending he's moved from 2,500 all the way down to 900.
27:12
So he thinks he's moved 1600.
27:14
And he says, well, I'm only going from 500 to 650, but in my view
27:19
of the world, we weren't even negotiating till he gets to 1300.
27:23
And so I think he's moved from 1300 to nine and I've moved from zero to 650.
27:30
So people will say BS like, I've moved more than you.
27:33
And they're trying to get reciprocity in that, they'll also just make stuff up.
27:39
And so
27:42
when he's at 900 and I'm at 650, you know, my job is at that point to hold firm.
27:49
And I don't even respond to his letter.
27:52
a week later he says, yes.
27:55
So, what's going on here?
27:57
Because look, Edward doesn't care about the pie.
28:00
He doesn't care about fairness.
28:01
He's a jerk.
28:04
So how did I get him to care about the pie?
28:06
Well, I don't, in the end, have to convince him to care about the pie.
28:10
All I have to do is convince him that I care about the pie
28:14
and I don't do unfair deals.
28:17
And therefore he can either do a fair deal or we can do no deal.
28:23
So what's the problem with asking for 700?
28:26
Going up from
28:31
apart from he wins.
28:32
Yeah.
28:33
Okay.
28:33
That's
28:34
It's unfair.
28:35
It's unfair.
28:36
Not Me, but there's something else that I think is another
28:38
real problem with doing that.
28:41
I didn't, I didn't get that one from the book.
28:43
No, you may not.
28:44
Well, here's the thing.
28:45
I'm giving up my principle.
28:47
Okay.
28:48
If my
28:48
So.
28:49
is that we split the pie, 700 is arbitrary, and now I'm playing
28:55
his game rather than my game.
28:57
And so if you have principles, you have to stick to them.
29:01
I important thing is something that came out in the book is that
29:05
also you have to be willing to walk away given those principles
29:10
Yeah.
29:10
and your ethics.
29:11
Absolutely.
29:12
And so
29:12
I gave this presentation at West Point and you know, this is what they live by.
29:16
It's like, yeah.
29:17
You know, sometimes we risk our lives give, sacrifice our lives over principles.
29:22
And so my principle is I don't do unfair deals.
29:26
I'm not asking you to do unfair deal either, by the way.
29:30
offered you something that's fair.
29:32
And what most people do is they just throw spaghetti on the wall and see what sticks.
29:37
Well, can I get you at 12 2500?
29:39
Can I get you at 1100?
29:41
Can I get you at 900?
29:43
But they have no particular reason to pick one number over another where, and so
29:48
they can say, it's an ultimatum, it's my last move, but why should I believe that?
29:54
And so I have this view that principles beat arbitrary.
29:59
And the other thing you had on your side was time.
30:02
I think that's an important thing
30:04
I think the bigger thing is that I had a reason for what I was doing
30:07
that it, we saw right at the beginning of the a hundred dollars bill, you
30:11
know, we was gonna split it 50 50.
30:13
And once you see that it's $1,300 and each of us is needed, there's no
30:20
reason to do anything other than 650-
30:21
650. So, and any argument he makes can be turned around.
30:28
And I'm not offering him, I'm not asking to do something that's unfair for him.
30:32
I'm not saying I'll give you 200, 'cause two hundred's better than zero.
30:36
let's share the epilogue
30:37
well actually the epilogue is spend 1250 and buy the damn domain name
30:41
before you file the trademark.
30:42
Let's, let's get that right.
30:45
I didn't do my groundwork of sharing what I was talking about, which was you
30:48
sold up business two to Quaker Maker
30:51
Correct.
30:52
for you.
30:53
That, that, that's why I valued the trademark so much.
30:56
Maybe we will build on this because there's a brilliant example you give
30:59
again, and and this one really helped you understand the idea of working together.
31:04
And this was a brother and sister Bharat and an Anju who
31:07
wisely took your class in Yale
31:09
Yeah.
31:09
and benefited from it.
31:11
Maybe she didn't quite pay for her fees, but she got a little bit towards them.
31:15
Yeah.
31:17
So this is a case where easy for people to be confused about what the pie is,
31:24
and it's a little hard to do as a, a video because there are numbers involved.
31:30
But let, let's give it a try.
31:32
I, can share them if you like.
31:34
I, I, lemme see if,
31:35
That'll, I think
31:36
I think I'm,
31:36
people can see a video.
31:38
I have let me see.
31:39
Lemme see.
31:41
Can you see that?
31:41
at that.
31:41
It's perfect.
31:42
There you go.
31:43
I think somebody was planning on doing this.
31:46
Well, I'm always prepared, man.
31:47
I'm always prepared.
31:48
I'd say so.
31:49
So this, now we can really do it with people following along and at home.
31:54
So we have Anju and Bharat who have different amounts of money to invest.
32:00
And Anju has $5,000 to invest, which at 1% will give you 50 bucks.
32:05
And Bharat has 20,000 to invest, which at 2% will give you 400.
32:11
But if you can combine their funds, banks will pay higher interest rates
32:15
when you have a larger amount on deposit.
32:18
so they can get 3% on 2,500, is 750.
32:22
And the question is, how will the two of them divide the seven 50?
32:26
If they can figure out how to do it, then split the 750, but they
32:32
can only do it if they can figure out what's a way they can agree on.
32:38
And the vast majority of people who have not read this book who just come to
32:43
this straight in life would say, well.
32:46
Bharat is putting in four times as much money as anju.
32:50
So Bharat should get four times as much of the interest.
32:54
That would be 600 to one 50.
32:58
And note that in that case, both of them are getting 3% interest.
33:03
3% on 5,000 is 150, on 20,000 is 600.
33:09
And people make this argument all the time that proportional is fair.
33:14
This is what Aristotle would say, that proportionate is what's just,
33:18
and the just is what is proportional.
33:21
But as I said right at the beginning of this podcast, look, are confused
33:28
about what the negotiation is over.
33:30
in my view, it's not over the $750 because Anju and Bharat are coming
33:36
into this with 450 between them, 50 for Anju and 400 for Bharat.
33:41
Why are they coming together?
33:43
To go from 450 to 750.
33:47
And so in my view, this negotiation, the pie is over.
33:51
The extra $300 they can create by coming together.
33:55
And Anju and Bharat are equally needed to make that happen.
34:00
so you should split that 300, 150 150.
34:05
People understand correctly this notion of equality.
34:09
And they try and split the seven 50 equally.
34:12
375, 375, but that doesn't work because barot would never take 375.
34:18
He can get 400 on his own.
34:19
And so yes, equality is right, but you have to apply it to the right thing,
34:26
which is the pie, the extra 300.
34:29
It's why the two parties are coming together.
34:32
And once you see that, it just changes your whole perspective.
34:36
And we've run experiments where don't tell people about the pie and a majority
34:42
of them pick their proportional.
34:44
And then when we tell Anjus about the pie, it changes people's behavior
34:49
and the number of people who go from the 150 solution to the 200 solution
34:54
just about doubles, by the way, when we tell Bharats about the pie, but
34:59
not Anjus, doesn't have much impact.
35:02
So basically the Bharats are happy to take more than half the pie in
35:07
the proportional solution, so long as the Anjus are unaware of it.
35:11
But once Anjus have the argument and make it Bharats don't have a good counter.
35:16
you do call that out as well in a chapter about the CEMA, the, the house, the
35:22
house sale, and that, that, again, it just shows when somebody is doing it
35:28
and don't share their upside and the unfairness of that if it gets revealed.
35:33
Yep.
35:35
So the, one of the issues you have is what do you do?
35:41
well, you can get more than half the pie you are doing this proportional
35:47
solution.
35:49
and then Anju later on figures out, oh my gosh, the pie was 300 and I
35:54
wasn't getting anywhere near half.
35:57
And you knew that, and you were taking advantage of me in that regard.
36:01
And so this is an interesting question.
36:04
That is, if you are in the traditionally more powerful position, you know,
36:09
should you take advantage of that if the other side doesn't know about the pie?
36:13
And
36:15
I think one of the challenges is, is the Anjus of this world always have the
36:20
vocabulary to come back and tell you why they think they're being treated
36:24
unfairly, but they know it in their bones.
36:28
And as a result, they're gonna be a whole lot less cooperative with you.
36:33
And may not work together to find opportunities to expand the pie.
36:38
And so, you might decide that you are able to get more than half the pie.
36:44
And, you know, it also depends a little bit on who you're negotiating with.
36:48
I'm negotiating with somebody who is really inexperienced and I do I
36:54
want to take advantage of them, when a cashier gives me too much money
36:59
in the supermarket, I correct them and give them back the extra change.
37:04
I'm not trying to, to do that.
37:07
on the other hand, if I'm negotiating with an m and a lawyer and they're willing to
37:11
gimme more than half the pie, well, you know, they're supposed to know better.
37:17
So I don't feel as much an obligation to correct them in that case.
37:23
There's a really important aspect here that I thought we should share.
37:26
So firstly, your deep research.
37:29
I originally, when I got in touch with Barry, I was talking about his
37:32
brilliant research on co-opetition.
37:34
Mm-hmm.
37:34
this goes back years you're been building and incrementally building and compounding
37:40
this knowledge, including game theory.
37:42
And maybe we should say a word on game theory because obviously
37:45
it's a foundational part of this.
37:47
Yeah.
37:48
Well everything I do is built on game theory.
37:51
In particular, this is based on cooperative game theory, which
37:56
people don't always talk about as much, but it is something that Lloyd
38:02
Chaley won the Nobel Prize for.
38:04
And it was also one of John Nash, another Nobel Prize winners main contributions.
38:11
And so, really thinking about how value is created and divided up.
38:18
And this notion that I've been talking about in terms of the pie is.
38:23
Remarkably the way economists see the world.
38:27
and it may actually be the distinguishing feature between
38:29
economists and everybody else.
38:32
And so economists are all about marginal analysis.
38:36
What's the incremental gain that's created?
38:39
And so helping people think about marginal analysis, what is the gain that's created
38:45
through this agreement is, was really the insight that led me to this that is,
38:52
I'm pretty different from most folks who you'll see talk about negotiation because
38:58
they'll all be about the interpersonal aspects really let's bond over football
39:04
or drinks or, I wanna make sure I'm treating your customs correctly in terms
39:11
of who I speak to first in the room.
39:13
And I think those things are all useful, but I also think they're wildly.
39:18
Overblown.
39:19
So when people buy houses, they write letters to the sellers
39:23
explaining why they would be the perfect person to own this house.
39:26
And do I really think somebody's gonna give me $20,000 less because
39:30
I've written a nice letter?
39:33
You know, maybe they'll give me $200 or something like that.
39:39
So the reason I think people are all focused on that is because they don't
39:44
have the logical component to add.
39:47
And
39:50
now you're old enough to know about Star Trek.
39:54
So what I'm trying to do is bring, some of Mr. Spock's logical
39:59
perspectives into negotiation.
40:02
And if you can combine that with Captain Kirk's emotional intelligence
40:06
you've really got it made.
40:08
And one of the things there I thought about so much was in innovation,
40:13
for example, I'm, I'm the innovator.
40:16
I'm the, I see the world very differently than those people running the company
40:20
because they're about the logic and the exploitation of the current advantage.
40:25
While I'm exploring future Advantage, and I thought about what you said
40:29
there about economists, that they see the world in a particular way.
40:33
And what I love about the book is that it, it's about a common language
40:38
really, that get people onto the same page, talking about the same thing,
40:42
and then you can make progress.
40:44
absolutely.
40:45
That's, and that's the problem is that most people come into negotiation
40:49
with conflicting views of fairness.
40:52
And my view is that when you think about fairness people say, oh, there
40:57
is no such thing as objective fairness.
41:00
I disagree with that, which I go to John Rawles and the notion of
41:05
this veil of ignorance that if you didn't know which party you were.
41:12
You say, well, what's the fair outcome in this case?
41:15
That's how you figure out what's fair.
41:17
You cannot take your side.
41:20
And if you go back to Anju and Bharat, you say, well, look, if I was Bharat,
41:26
I'd like the proportional solution.
41:28
Okay, I, I get that.
41:29
But if you didn't know you were barratt ahead of time and you thought these
41:34
two people can come together and create $300 extra, I think if you didn't
41:38
know your, which side, you'd go and say, yeah, we split that 1 50, 1 50.
41:43
And so notion of being a mediator, an outside person I don't know my
41:50
role, that's how you have to think about what fairness is in negotiation.
41:55
And by the way, it's not just fairness, let's be clear.
41:57
It's also power in the sense that myself and Edward Kahn, or Anju and
42:03
Barad or Coke and on tea, sides or equally needed to make this deal happen.
42:09
One of the great studies, and this is also my own biases, I did
42:13
French in college, so I did le
42:15
Le Mythe de Sisyphe, The Myth of Sisyphus, and I'm also, I love, love
42:23
the old the, the old classics as well.
42:26
And your story of Sisyphus really to me was like, what if somebody
42:32
does something apparently tiny that nudges the deal for you?
42:38
And is that, should that be treated with fairness?
42:42
Okay.
42:42
So let, let's do one that's not in the book that will really test
42:47
your Sisyphean applications here.
42:52
Okay.
42:53
So I teach a group of educators at Yale.
42:58
And they brought to me the following problem that there was a grant.
43:04
That would give teachers a pair of teachers, a math teacher and a physics
43:07
teacher, $5,000 if they would overhaul their curriculum working together.
43:14
But they could only get this grant they could, agree to work together.
43:20
And the school principal could allocate the 5,000 between the two of them.
43:25
But decided he really didn't wanna do that because basically he wanted
43:30
the parties to reach agreement on their own to both be happy with it.
43:36
And the challenge is that this program really required a whole
43:41
lot more effort from the physics teacher than the math teacher.
43:45
So it was gonna require about 40 hours of work, the physics teacher
43:49
was gonna have to do about 36 hours.
43:51
And the math teacher only four.
43:54
So that was a little bit like the Sisyphus, like that last little bit.
43:56
There was a small amount of work, relatively speaking, the math teacher had
43:59
to do relative to the physics teacher.
44:02
And if they could agree on how to split up to 5,000, then they could,
44:08
they could make this project happen.
44:10
So what do you think?
44:11
How should we split it up?
44:13
Well, knowing this Sisyphus story, which we, we probably should
44:17
share by the way, to leave, not leave our audience out of it, but
44:20
it'll become clear as part of
44:21
Yeah.
44:22
so,
44:22
Without the other person's piece of expertise, no matter how
44:27
small it is, there is no 5,000,
44:29
Right.
44:29
So
44:29
to work about.
44:30
what are you gonna do?
44:32
So you have to split the pie
44:33
That's
44:34
because the pie,
44:35
I'm
44:35
pie won't exist.
44:36
I agree with that.
44:37
So, okay, so now what?
44:39
So may maybe amidst themselves, they, they might come up with some
44:44
type of, well, what can, what?
44:47
A per hourly rate or a, a pro ratta rate.
44:50
And then, and,
44:51
So.
44:52
and then together the difference that they would achieve together that they agree.
44:56
What slice of the what, what is the, so that, that would be pro ratta and then
45:00
the extra is the pie that they share.
45:02
50 50.
45:03
That's fabulous.
45:04
So that's, you are, you have gotten this, so, so let's
45:06
start with some wrong answers.
45:08
So digging the 5,000 dividing at 2500, 2500 can't be right.
45:14
And one way of knowing that is, would you care which part you are?
45:19
Remember our veil of ignorance story?
45:21
So if you didn't know you were the math or the physics teacher,
45:23
which would you rather be?
45:25
If we just split a 2500, 2500
45:28
The one doing less?
45:29
Yeah.
45:30
teacher, right?
45:30
So therefore this can't be fair.
45:33
Okay?
45:34
other idea is simply straight pro rata.
45:37
The physics teacher is doing nine times as much work, so
45:39
should get nine times as much.
45:42
That would be a division 4,500 to 500.
45:45
And that's the classic proportional solution that's basically paying each side
45:51
$125 an hour for their, for their work.
45:56
And if I asked you, which teacher would you rather be there, what's your answer?
46:02
The other guy, not the maths guy,
46:04
The physics teacher.
46:05
the physics guy.
46:06
And the reason is, is 'cause teachers don't get $125 an hour.
46:11
And so if you're paying me $125 an hour, I'd like to get as much work as possible.
46:17
And so that can't be fair.
46:19
So it sounded fair because everyone was getting the same
46:24
hourly rate, but not really.
46:28
So let's because we're on a podcast and numbers are hard.
46:33
Let's pick an easy number, like $50 an hour.
46:36
I think it's fair to say that teachers get paid something like $50 an hour.
46:42
And so, if the whole amount of money to go around $200, then
46:50
they shouldn't do the project.
46:50
There's no pie because it requires 40 hours of work 200 bucks not enough, but
46:57
40 hours of work at $50 an hour is $2,000.
47:02
And so the math teacher should be compensated four
47:05
hours at 50, which is 200.
47:07
physics teacher should be compensated 36 hours at 50,
47:11
which is 1800, and that's 2000.
47:15
And the extra 3000, the pie, and that's what gets split.
47:20
1500. 1500. And so the pie has to include the cost of baking it.
47:28
so it's not 5,000, it's the extra amount of money that the two
47:32
sides are getting the cost of effort that's required to bake it.
47:38
And so now if we think about Sisyphus, you know, bringing that rock up the
47:43
hill, there's some reward for doing it.
47:48
You should split that, but you should also take away the effort cost of
47:53
bringing the rock most of the way up.
47:55
And so to the extent the reward is more than that cost of effort, then that
48:01
extra part, is what Sisyphus and the helper would get for finishing the job.
48:09
And so it is not that if the reward is 5,000, it's split 2,500.
48:14
2,500. You first reward people for their effort that was needed to create this pie.
48:21
Absolutely brilliant, man.
48:23
It's brilliant.
48:23
Well, you are brilliant.
48:24
'cause 'cause you got it man.
48:26
You were right there.
48:27
And I, and this was not in the book, so you are applying it left and right.
48:32
Merci, merci, bien joué.
48:32
Oh
48:38
de rien, de rien
48:46
okay, back to breaking the lease.
48:50
So this is a story.
48:52
This one was actually, this took a bit more bandwidth for me to get
48:55
this one, to get the numbers on this one, but it was a brilliant one and.
49:00
I'd love, I'd love to share this.
49:02
We're not gonna share all the stories in the book.
49:03
And by the way, there's tons and we, I have even got to part through part one
49:07
of the book of five parts of the book.
49:10
It's, it's so much in it and you can see how much I learned in
49:14
the in, in, in the book as well.
49:16
So I'd love to share this one.
49:18
yeah.
49:18
I think just in, in general, it's a question of
49:25
what is gonna be lost?
49:27
If you don't reach an agreement.
49:31
So how long would the laKyndrylord end up finding the apartment unrented.
49:40
and what is it you could do to help the laKyndrylord get the apartment
49:46
rented or re-rented quicker.
49:48
And so at one level imagine that my breaking the lease you
49:55
know, I, I am responsible for an extra six months of rent.
49:59
Okay?
50:01
So that's kind of bad.
50:05
And I'm outta the country, so there's nothing I could do.
50:08
Okay?
50:10
Imagine.
50:11
But some ways I have the ability to prevent the laKyndrylord from leasing
50:17
it to anybody else because it's still my apartment, even though I, I'm not there.
50:22
I'm paying the rent for it.
50:25
But if the laKyndrylord could re-rent it to somebody else,
50:28
that's pretty good for me.
50:31
And I can't just ask the person to do that out of the kindness of their heart
50:36
look, they're already getting the money.
50:38
and so I say, well, look, if you can re-rent it to somebody else, know,
50:43
I'm happy to split that with you essentially that is creating a pie.
50:51
And therefore we'll reduce the cost of my, having been
50:58
need to go elsewhere.
50:59
Now, sometimes the laws in my favor and says, look, the laKyndrylord has
51:04
some obligation to do this, so maybe that I would only be on the hook for
51:10
four months of rent rather than six.
51:13
Okay, so now the pie is those four months and say, well, you
51:18
know, if you worked extra hard
51:22
then you could avoid those four months.
51:24
So now, should we split those extra four months?
51:26
Well, not entirely because just like the physics teacher, or Sisyphus, you
51:30
know, that person has to do some work.
51:32
So I should compensate them for the amount of time and effort they have
51:35
to do to find the other tenant.
51:38
And then to the extent we're above that, that's the pie and that's
51:42
what we should end up splitting.
51:44
so the pie is working together to avoid losses which is really
51:51
like a gain as opposed to just thinking about how we create value
51:59
out of nothing by coming together.
52:01
And just to say if you're a legal team out there, Barry coaches,
52:05
teams like that, M&A teams as well.
52:07
And you can see how maybe buying a company that has debt coming
52:12
together, and again, you start to see.
52:14
You these pies that, well, we can only actually win if we bring the debt together
52:17
so this is an example of basically two companies that are coming
52:20
together and one has a tax carry forward or losses that it can't use.
52:26
And so it actually is a recent merger where they had agreed on all the terms
52:30
then afterwards the company was being acquired, basically said We have $50
52:35
million of tax losses and we should, we should get them 'cause there are losses.
52:41
And the, the buying company, CEO is ready to say yes to that.
52:45
But fortunately the lawyer in that case was somebody I had trained and
52:50
said you know, time out, hold on.
52:53
it's true that we couldn't get those tax advantages without your losses, but you
52:58
need our profits to offset those losses.
53:02
And only by coming together can your losses and our gains create this value.
53:07
So just like the real Estate Commission, let's split that 50 50 and they did.
53:12
I think
53:16
don't really understand this notion of equality, and that leads
53:22
to many of our society's ills.
53:25
So there's a very famous law professor Richard Epstein who teaches NYU now,
53:36
he talked about going gay society coming together and going from a
53:41
small circle to a much larger circle.
53:44
And so there's this outer ring that's created by people coming and working
53:48
together, and he talks about the limit on the distribution of that outer ring
53:55
is that it should be proportional to how people were dividing up the inner circle.
54:01
And so somebody got a big slice of the small circle, gets a
54:05
big slice of the outer ring.
54:07
And somebody who's getting a little slice of the initial circle gets
54:12
only a small slice of the outer ring.
54:15
And you could disagree with me or not about proportional versus equality,
54:20
but what's interesting to me is that he had no discussion at all.
54:23
There was another alternative, and this idea that we should just be dividing
54:28
things up proportionately, that that's fair, I think is leading to much of
54:33
our ills in society today because the people are just getting the proportional
54:39
amounts of this small gains that are created that they're needed to
54:43
make happen, they feel they're being treated unfairly and they're right.
54:49
They don't have the vocabulary to explain it.
54:50
And that's leading to so much social turmoil that's leading to people who are
54:56
anti-government and burn it all down.
55:01
I think it's also connected to a lot of what we've seen.
55:04
In terms of movements for equity and inclusion, which is there, people who
55:12
have been historically discriminated against whether it be women, minorities,
55:18
who have not historically gotten an equal share of the pie when they negotiate,
55:26
and none of what I am doing will help redress these historical inequities.
55:32
I got that.
55:33
But if these groups are able to see the pie able to split the pie equally
55:41
and recognize their power, I can at least prevent those historical
55:45
inequities from being perpetuated.
55:49
And that's a big step.
55:52
And so helping people realize the power they have in negotiation that they may
55:57
not have understood, and that they can exercise that power without being a jerk.
56:03
And that they can bring their whole self to a negotiation, right?
56:06
Nothing we've talked about today had any bits of posturing of jerkiness.
56:10
It's all about talking about principles and generally hate negotiation
56:17
because they don't see how to behave in a negotiation the way they behave
56:21
everywhere else in their life.
56:23
And that's what I want to do in terms of helping people negotiate.
56:28
Beautiful man, and it seems that that underlying ethics is at the
56:33
heart of the businesses you run.
56:34
You write about this when you write about your businesses as well,
56:37
and obviously at the heart of your teaching as well, Barry, for people.
56:41
People who wanna find you, where's the best place for them to reach out?
56:45
Well, split the pie.
56:46
book.com is one place you can find that.
56:50
Of course Amazon has got a good place and Yale has a simple rule for email.
56:57
First name, do last name.
56:59
At yale.edu.
57:00
So I read all my emails, whether I respond to all of them, it's another
57:05
story, but I certainly read them all.
57:08
Brilliant.
57:09
thank you.
57:09
Maybe not from a cyber squatter.
57:11
Not anymore.
57:12
Because you won't do that again.
57:14
Won't do it a second time.
57:15
Barry, it's been an absolute pleasure.
57:17
You can see I learned so much from you in the, the short time today,
57:21
but also from reading the book.
57:22
Highly, highly recommended.
57:24
The book is Split the Pie.
57:25
The author is Barry Nalebuff.
57:27
Thank you for joining us.
57:28
Thank you.
57:29
As always, thank you to our sponsor Kyndryl, who runs and reimagines the
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technology systems that drive advantage for the world's leading businesses.
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With a unique blend of AI powered consulting, built on unmatched managed
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smarter decisions, faster innovation on a lasting competitive edge.
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You can find Kyndryl and a host of brilliant thinkers at the Ry
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Institute at K-Y-N-D-R-Y l.com, or the Institute forward slash Institute.
58:02
See you next week.