Barry Nalebuff
Appearances
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Most people, it's strange to say, don't appreciate what it is they're really negotiating over. They think it's over some total amount as opposed to what would be lost if the two parties don't reach a deal.
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That is, they don't understand the actual negotiation pie, and therefore the arguments they make are really not over the right numbers, which leads people to be confused about power and fairness, and negotiations end up going south.
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The pie is how much value is created by an agreement compared to what the parties would get if they end up working on their own or doing something with other folks.
Something You Should Know
Scams You Might Easily Fall For & Mastering The Art of Deal-Making
I made a rookie error. I filed for a trademark and didn't realize that trademarks are public the moment you file for them. As a result, some troll, and I'll call him Edward because that's his name, ended up buying the URL, the domain name associated with my trademark. And he offered to sell it back to me for $2,500. Now, Edward doesn't care about fairness. He's a jerk.
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From him, it's a zero-sum mindset. It's like, how much money can he get? And I pointed out to Edward that there's an organization called ICANN, which is the domain registry. And for $1,300, they have a dispute resolution process. And what Edward had done is called registration in bad faith. And so I was guaranteed to get that domain name back if I paid ICANN $1,300.
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So Edward, look, I'm going to get the domain name either because we reach an agreement or because I go to ICANN. So the only question from my perspective is do I pay them $1,300 or do I pay you something? And there's no way I'm paying you $2,500 when I can get it for $1,300 from ICANN. And sure enough, he comes right down to $1,100. But from my perspective now,
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$1,100 is better than I can, but I'm only up $200 and he's up $1,100. And so I say, there's a $1,300 pie. That's what I can save by doing a deal with you and I'm prepared to split it $650, $650. At which point he comes down to $900, kind of halfway between my $650 and his $1,100. And he's saying, that's the lowest I'll go. I won't move anymore. And my point is,
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I've made you a fair offer if you can tell me why we do something different okay but you know what you're proposing is giving you more of the benefit than it is to me and I don't see why we should do it that way and so I stuck at 650 he was at 900 and the end of the day I had a principal he was arbitrary and he came and said yes to my 650 so he didn't care about fairness but he recognized that I do
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And therefore, if you want to do a deal with me, you have to accept the fair outcome.
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I didn't because if I did that, he's up $1,200. I'm only $100 better than I can. Now, fight fire with fire would be I go back to Edward and say, I'll give you $100. And then I'm up $1,200.
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But in fact, I say, look, for the same reason that I wouldn't expect you to accept $200 offer, leaving me $1,100 ahead, you shouldn't expect me to accept your proposal of $1,100, which leaves you $1,100 ahead and me only $200 ahead. It's true that I need you to save this $1,300, but you also need me. We need each other. And that's why we should split it $650, $650. And you got them. And he got me.
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And we got each other and we saved the $1,300 and I was $650 ahead and he's $650 ahead. So yes he's a jerk, yes he's a troll, but he also understood the logic of what I was saying and he didn't have any countervailing logic. So my view is principles beat arbitrary.
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The reason for a negotiation is to do better than what they would get without an agreement. And the question is, how do you measure that? So let me give you a real world example. My mother had the opportunity to buy the house that she was renting from the person who she was renting it from. And if she did the transaction with him, there would be no real estate agent involved.
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And therefore they could save a 5% real estate commission, which in this case was around $40,000. So the question is, how much of the $40,000 should my mother get and how much of it should the seller get? The seller could say, well, if you buy this kind of house from anybody else, you'd end up having to pay $800,000. So I should get the full $40,000 or you can pay $799,000.
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And my mother could say in response, if you sell this house to anybody else, after the real estate commission, you're only going to get $760,000. So I'll give you $761,000 and I'll keep almost all of the $40,000. My view is that the negotiation here is over saving the $40,000 real estate commission. Each of them are equally powerful, equally necessary. And so they should split it $20,000, $20,000.
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And so what happened? He agreed to that at the end of the day. Essentially, he said, well, it's a hot market. And so therefore, you know, I should be getting more of it. And the answer is the hot market is what determines the price from which we subtract the $20,000, not how it is that we divide up the $40,000.
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I like even more the idea of starting off with the rules for how we'll negotiate. To say to the other side, can we agree?
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that our objective is to create a large pie together and split it equally and understand is this the person who's going to be a jerk and says no my view is I want to engage in a zero-sum negotiation where I get as much as possible take advantage of you and the process shrink the pie or are they say yes great let's figure out how to make a big pie together that we can split and equally benefit from
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It's true that a lot of people find emotions to be dominant when they're doing a negotiation. So I'm a little bit like Spock in the sense that I'm trying to bring some logic back into negotiations. And if you can combine Spock logic with Captain Kirk's emotional intelligence, you've really got it made.
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So I appreciate that you should be empathetic and curious about what the other side's interests and positions are. In fact, one of the things I like people to do is to make the other side's arguments for them. You see, we can't always win on every point, but we can always be understood.
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And a great way to demonstrate that you understand the other side's perspective is to make their arguments for them.
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What I'm trying to do is figure out what it is that they want. Because my goal in negotiation is actually to give them what they want. The reason is, if they get what they want, then I can get what it is that I want.
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That's a long list. So one classic mistake is that they try and anchor with a low ball offer or a super high ask, and they try and soften up the other side. But the problem with doing that is that you make yourself untrustworthy. If I'm selling something that's worth $1,000 and you offer me $200 for it, are you trying to take advantage of me? Do you not know what this item is worth?
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If I were to say yes to that deal, what kind of person are you? And then you have to come up, say, from $200 to $600 to $750 to $900. And next thing you know, you've demonstrated that you are just like Gumby. You're totally flexible, that you have no principles in terms of the way in which you're negotiating.
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And so by starting at a point that's unreasonably far away from an appropriate number, causes all sorts of troubles in negotiation thereafter.
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Absolutely. So I'm not saying you start off with $1,000, but I also don't want you to start off with $200. I want you to start off with a number that you can justify. If they ask you how you came up with that number, a good answer isn't, yeah, I tried to pick this low number because I read in a book somewhere that's a good way of softening you up and that I can anchor you with that number.
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Instead, it's, look, when I see prices on eBay for this, the price is $847. And I know that you might be able to find somebody who will perhaps overpay. They're really desperate for it. But I'm prepared to give you the same price as I could find it on eBay. would be one way of doing it.
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So providing some other possibility, giving them a reference, giving them an argument and a reason for why you're making the number you're making. What else do people do wrong? One thing people tend to do is fight fire with fire. But as Smokey the Bear will tell you, you want to fight fire with water so that when somebody does something that's escalating, that is inappropriate,
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Don't respond the same way. Find a way to put out the fire. In one of my negotiations, I once asked for a price that was way too high. And the person on the other side, the buyer, looks at me, says, great, where do I sign? And then watching my smile grow on my face says, just kidding. If you really think that's what is needed, I'm afraid we don't actually, it's not going to work out.
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And it was the nicest possible way of letting me know that what I had done was just not really appropriate. As opposed to coming back and making a lowball offer in response. So that's one example of how not to respond in kind. When somebody makes an ultimatum, don't make an ultimatum in response. Figure out how to walk them off the ledge. When somebody acts like a jerk,
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say, look, here are my principles. I'm prepared to split the pie with you. I'm not prepared to do a deal that's unfavorable, that's unfair to me. So if you can give me a principle in response to show me why my argument's wrong, I'm flexible on that account. Or,
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somebody will lie to you uh and that doesn't mean that you should be lying in response so there's a lot of fight fire with fire as opposed to figure out ways to put out the fire do you think it's a good idea when you're negotiating something with someone else
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So imagine a person is selling their family business and it's a gas station. And the reason they're selling it is because they want to go on a sailing trip around the world. Should they reveal that or not? Well, you could say it's a frivolous reason. And so let's keep it hidden. Let's just say I'm planning to retire and spend more time with my grandkids.
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But when it comes down to it, there are good reasons and bad reasons for selling. The buyer knows that you've got a for sale sign, so they're wondering, why are you selling? Is it that there's a leak in one of the storage tanks and the gas station is about to become a Superfund cleanup site? Is the highway exit ramp about to close so there will be no more cars coming this way?
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In fact, the idea that you want to take a trip around the world is a good reason Not a bad reason from the buyer's perspective. And so, yes, go ahead and let them know why it is you are selling the station.
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That's true. So that's a great case. That's like I said. When the seller values it less than the buyer does, there's a pie, and that's the time to do the transaction. So you valued it near zero, the buyer values it at $1,000, great.
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Now it turns out if there are lots of buyers, and one values it at 800, one values it at 900, and one values it at 1,000, then you want to sell it to the $1,000 person, and I think the right price there is more like 950. because your alternative is I can sell it to the $900 person. And so that's really my fallback. The reason I'm selling it to you is to beat the 900. I can't beat 900 without you.
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You can't get this value, this extra value without me. And so we have an extra 100 to split. And that's why I think it should be 50-50.
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They miss the opportunity to have creative solutions come into play. So if I go back to my couple selling the gas station, turns out that when they come back from their trip, they don't have a job. And as a result, they needed a big reserve fund to help tide them over until they find work. But the person buying the station thinks they're great managers and they're always short on good managers.
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So it would be delighted to have them come back and work at the station as a station manager upon their return. So offer them a job and now the person really wants to sell the station to you rather than to sell it to somebody else. So figure out what the person really wants and give it to them. Or when you're buying a house, how likely is the closing to happen? Is the person getting a mortgage?
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Is there a mortgage contingency? Is there an inspection contingency? What are you going to do with the furniture that's in the house? Does the buyer want it? Does the seller want it? is the closing date. Do you want it to be soon or do you want to delay it to help the person have a little bit time to move? So look for things that can create value that are besides money.
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Well, let's try to at least work that not to my disadvantage because I am in the challenging position. One of the things I like to do there is make what's called a contingent agreement. So imagine the art dealer comes in and sees this painting that I inherited from my father and says, all right, I'll give you $1,000 for it. And I have no idea if this painting is worth $2,000, $10,000, $100,000.
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And the problem is it could cost me $2,000 to get it appraised, which could be more than this painting is worth. So what do I do? I could come back and just say $2,000 or $5,000, pick some arbitrary number, which could lose me the deal if it's really only worth $1,000. Or, perhaps I'll get $2,000 but the painting is still worth $50 and I've missed the big opportunity.
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Instead, I prefer saying things like, here's what I'm prepared to do. I'll sell it to you for $1,000, but any money you make above $10,000, we split evenly. So now, if the painting is worth somewhere between $1,000 and $10,000, okay, fine, they can make some money on this. But if this thing is really a hidden masterpiece, Now I've protected myself.
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So if you don't know what something is worth, make a deal where you get some share of the upside, if it turns out to be worth a lot.
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The problem with doing that is that you make yourself untrustworthy. If I'm selling something that's worth $1,000 and you offer me $200 for it, are you trying to take advantage of me? Do you not know what this item is worth? What kind of person are you?