Professor Barry Nalebuff, Milton Steinbach Professor at the Yale School of Management, is the founder of Honest Tea, Kombrewcha, and Real Made Foods; the co-author of seven books; and has taught negotiation, innovation, strategy, and game theory at Yale for thirty years. His latest book, Split the Pie: A Radical New Way to Negotiate, brings together lessons learned from his experience negotiating the sale of his company, Honest Tea, to Coca-Cola, with the radical new theoretical approach to negotiations that he has developed.
Nalebuff joined his colleague Daylian Cain, Senior Lecturer in Negotiations, Leadership, and Ethics at the Yale School of Management, for a session of the Yale Center for Customer Insights’ Learning from Leaders webinar series to discuss his approach. Cain’s research focuses on judgement and decision-making and he also has a unique insight into Nalebuff’s thinking, having collaborated with him on the development of a negotiations course for MBAs that they co-teach at Yale School of Management. The result: a fascinating conversation around how to approach business and day-to-day negotiations from a rational point of view.
Nalebuff aims to correct a fundamental error in negotiation that pushes things off track, which is that many parties, surprisingly, are confused on how the object of the negotiation is defined. Because of this confusion, we end up making arguments that are biased in our favor and result in irrational ad-hoc views of what is fair. In short, the negotiation becomes emotional. Nalebuff’s wager is that if the two parties can identify what it is they are negotiating over, then there is a much better shot that they can come to a fair and desirable outcome.
So, how do two parties define the object of the negotiation? For Nalebuff, it is the value that is created from two parties coming together to make a deal. Without both parties’ participation, that value would not be created so that is the portion that is being negotiated and should be split evenly.
Let’s take Nalebuff’s theoretical example: Alice and Bob are negotiating over a 12-slice pizza. If they don’t make a deal, Alice gets 4 slices and Bob gets 2. If they do make a deal, they get to split all twelve slices however they see fit. How should they split the pie? Does Alice get a number of slices that is proportional to her power in the deal? Should Alice and Bob split the entire pie equally? Neither, says Nalebuff. The ability to make a deal to acquire an extra six slices depends on both Alice and Bob equally. Therefore, they should split those six slices equally. In the end, Alice has seven slices and Bob has five.
In order to make this negotiation strategy work, Nalebuff recommends that you first negotiate the process up front. Rather than beginning from arbitrary anchoring points and discussing cost, he recommends that the two parties come to an agreement that they will negotiate the pie, so to speak, rather than the market value or other costs directly. Those other costs, up to the final value of the deal, can then be data-driven and determined by comparables.
In Nalebuff’s negotiation strategy, rationality wins. He recommends taking a principled stand, i.e., sticking to an offer that is half of the shared value generated by the deal. As Nalebuff puts it, “Principle beats arbitrary.” This does not mean that your negotiation partner needs to accept the pie theory, or necessarily know about Nalebuff’s theory at all. If you accept the pie theory and lay out your thought process, your partner in negotiations will realize they have no other option.
This negotiation strategy avoids a number of common mistakes, namely arbitrary anchoring, fighting fire with fire, and relying on “Miranda rights” – i.e., listening more than you talk. When negotiations start with an arbitrary anchor, it can appear as though you are trying to steal something from someone if you bid too low. Arbitrary anchoring also immediately creates the fire versus fire effect in which an irrationally high bid is countered by an irrationally low one. Not only does this tend to lead to emotionally-heated disputes, but you may need to make some big concessions which suggests that you have more big movements to come. Keeping your cards close to your chest is not a solution either: knowing what the other party wants is an integral part in getting them to do the deal.
Nalebuff’s theory of negotiation is built on a foundation of open communication and equitable principles. For many, this does not sound like negotiations of which they have been a part. Nor does it appeal to the typical tips for negotiation which rely on trickery. This radical new theory of negotiation allows for negotiators to leverage their natural predisposition to empathy and curiosity. By identifying the value created by the deal – a value that could only be created by the unique combination of the two parties at hand – and then splitting that evenly, Nalebuff’s theory promises to lead to more equitable deals with happier parties on both sides, as well as more deals closed.
Catch the full interview with many enlightening anecdotes from Professor Barry Nalebuff here.