Barry Nalebuff: The Only Negotiation Guide You’ll Ever Need

Guy Kawasaki:
I'm Guy Kawasaki and this is Remarkable People. We are on a mission to make you remarkable.
Today's remarkable guest is Barry Nalebuff. He has taught at the Yale School of Management for over thirty years.
He specializes in negotiation, innovation, strategy, and game theory.
Barry is also a serial entrepreneur. His ventures include Honest Tea, Kombucha, and Choose Health.
He is a graduate of MIT, a Rhodes scholar, a Junior Fellow at the Harvard Society of Fellows. And he earned his doctorate at Oxford University.
Barry is the author of Thinking Strategically, The Art of Strategy, and Mission in a Bottle.
He has a new book, Split the Pie: A Radical New Way to Negotiate.
In it, he evangelizes concepts that are very different from other books about negotiation.
For example, give the other side what it wants. Fight fire with water. Make the other side's case. I guarantee you that you will be a better negotiator after you've listened to this episode.
I'm Guy Kawasaki. This is Remarkable People. And now here's the remarkable negotiator, Barry Nalebuff.
How do you define success in a negotiation?
Barry Nalebuff:
I could define success as reaching an agreement that's fair and an agreement that creates the biggest possible pie for the two parties.
Guy Kawasaki:
Is there a parameter of time like short-term pie versus long-term pie?
Barry Nalebuff:
It depends on what the people are looking at. Some agreements don't really have a long timeframe to go with them. Others depend on the parties working together in the long run.
Guy Kawasaki:
Is there really such a thing as a short term pie? Let's say you're just buying a car or let's say you're buying a domain, sounds pretty short term, but who knows that person may have another domain or you may buy more cars from that dealer.
So isn't it better to assume every pie is a long-term pie?
Barry Nalebuff:
If you're referring to the case where I ended up buying a domain name from a troll, that was going to be a one-time deal. I was never going to talk to that person again.
So I think there are some negotiations which are completely one-off and that's fine. That doesn't mean you don't create a bigger pie in that negotiation.
So I think it was a wise man who said something like, "Raise the tide, life is not a zero-sum game. Your loss is not somebody else's gain. A rising tide lifts all boats. So do what you can to fill the ocean, lake, pod, pool, or bathtub." And the fact is that even zero-sum negotiations aren't, because if you don't reach an agreement, you both get zero and that's a zero-zero outcome.
Guy Kawasaki:
Point taken. Point taken.
Please explain your breakthrough definition of pies and splitting the pies.
Barry Nalebuff:
Happy to. What's confusing to most people is what they're negotiating about. They end up focusing on the total, if you'd like, as opposed to the incremental gains that is created by the parties reaching agreement. And the silly example I use just to illustrate this, is Alice and Bob are negotiating over a pizza division.
And if they can agree on how to divide up the pizza, they'll get nine slices. If they can't reach an agreement, Alice will get one slice and Bob will get two.
So a lot of people think the negotiation is over the nine slices. One thing they say is just divide it four and a half, four and a half. Other people say, "Bob has twice the power of Alice because Bob will get twice as many slices as Alice if they don't reach an agreement."
And my view is the negotiation is not over the nine slices. It's over the six extra slices they'd get by reaching agreement.
To get those extra six slices, Alice and Bob are equally essential, so therefore you should divide them three and three.
Guy Kawasaki:
This is easy to understand and I love the concept, but in the real world, isn't it really difficult to determine the size of the pie?
Barry Nalebuff:
So sometimes the answer is yes, sometimes the answer is, "We don't know what it is now, but we can figure it out as it happens. And we can agree to divide the pie when the pie materializes."
So let me, if you'd like, give you a bit of a quiz question here and turn the interview tables around.
My mom is living in Sarasota. She'd been renting a house for the last ten years and her landlord says, "Putting this house up for the market and I'm going to be asking $800,000 for it, but for you, special price, since I like you, $790,000." So what is the pie in this negotiation?
Guy Kawasaki:
I'm going to think about this. So if both of you come to terms, it'll sell for $790,000-
Barry Nalebuff:
She hasn't agreed to pay $790,000 and the $790,000 would be an issue of how you divide the pie. Why should the two of them be doing this deal? Why is the value they can create that nobody else can create?
And the answer is, they can avoid a real estate agent commission and that's 5 percent. So that's roughly in this particular case, $40,000. My mom can avoid having to move out and pay a mover's cost and sidekick costs associated with moving. He can avoid having to repaint the house, to fix up the carpet, to put in new appliances.
So I come back and say, "Look, we're prepared to pay market price, but there's a $40,000 savings you can have by not hiring an agent. And we want to split that with you twenty/twenty."
And he comes back and says, "I don't think you get it, Barry. It's a hot market. So that's why we should get more of the pie." And my response is, "It's a hot market implies the price is high. The market price is high. But not that we should divide the $40,000 any differently.
That essentially if you sell the house to anybody else at $800,000, you clear $760,000. If my mom buys an equivalent house from anybody else, she has to pay $800,000. So that gap from $760,000 to $800,000 is only available if the two of you reach a deal.
You need her just as much as she needs you. That's why you split it twenty/twenty."
And so that was the case, I think, where the pie is pretty clear. And then just going back to your first comment about how do we make the pie bigger? It's a one-shot transaction.
He got into the spirit of it. And I said, "Maybe we can actually make the pie bigger by both sides using the same lawyer." It was a simple cash transaction. And so rather than hiring two lawyers, we hired one lawyer to represent both sides and saves another $2,000.
Guy Kawasaki:
In your domain case in the book, where central to the discussion was the fact that you could go to an icon dispute resolution process, which would cost you $1,300, which you could save if you didn't have to do this.
But what if the seller's logic was, "Well, listen, I like your pie theory. So if I sell you this domain, which is a great domain and perfect for your use, you'll create a successful website and company, so that's your upside-"
Barry Nalebuff:
So it's worth $40,000 to me, let's say, it's a huge value to me, that value of the domain name. I agree with that. It was worth a lot of money. That's what you're saying?
Guy Kawasaki:
Yes. So your example was about saving the icon dispute resolution and stuff, but it wasn't about splitting the upside of him selling you a domain that will make you richer.
Barry Nalebuff:
It's hard to understand what the pie is, but let's look at this particular case.
So for our listeners, there was an idiot who filed for a trademark without first buying the domain name. And as a result, there was a troll, who I'll call Edward, because that's his name, who bought the URL associated with the trademark as soon as the trademark filing became public. Now that idiot was me.
And so I had a problem because I wanted to launch this business and I had the domain name that I needed, and I had to buy it from this troll. I valued it a lot of money, but fortunately, while I was an idiot, I wasn't completely stupid because I realized that ICANN has a domain conflict resolution process that costs $1,300.
And what Edward had done is called registration in bad faith, which meant at the end of the day I was going to end up with a domain name.
So I could value that domain name at a $100,000. But whether we reached an agreement with Edward or not, I had the domain name, because either if we do reach an agreement, he's going to sell it to me.
If we don't reach an agreement, ICANN will give it to me for $1,300. So therefore the value of the domain name is not relevant because I'm getting it no matter what. The only question, the only reason we're having this negotiation is to save the $1,300 ICANN fee.
Guy Kawasaki:
But let me change this hypothetical a little bit. So I used to have a company called Garage.com And let's say-
Barry Nalebuff:
I remember it. I remember it.
Guy Kawasaki:
Okay. And let's say that even though the company is gone, I still own the domain. So this is not going to be an icon dispute resolution issue. I own that domain.
There's no issue with the ethics for me owning that domain. I didn't jump on it because somebody filed a trademark. So now if someone says, "Oh, I am the largest chain of-
Barry Nalebuff:
Garage doors.
Guy Kawasaki:
... a garage repair stores in the country and I want to buy Garage.com." Well, how do I define the pie if I'm the seller?
Barry Nalebuff:
Yeah, it is the value that is created by having the name Garage.com, compared to having garages.com, or Grge.com, or Thegarage.com. So there's going to be some alternative name that the person would pick. How much more valuable is Garage.com compared to that other name? And that's the pie.
Now how you actually measure that in practice is going to be tricky. I have no doubt about that. The good news is you now at least have the right question to ask. Let's go back to a case where it was hard to measure, but we tried anyway.
As along with being a professor as my day job, I founded Honest Tea with one of my students, Seth Goldman, and we had a chance to sell the company to Coca-Cola, but we had a problem.
And the problem was we were just too small at the time. And so we could get lost in the Coke system and therefore everyone agreed that it made more sense for Coke to buy the company in three years, rather than right now. At the time our sales were twenty-three million and Coke said, "During those three years, we're going to help you with marketing. We're going to help you with production. We're going to help you with purchasing. And then we're going to buy you in three years."
And we agreed, "Yes, we'll sell it to you in three years."
But there was a problem. And the problem was, they said, "We're helping you, but we don't want to pay more because we're helping you. Right, that's unfair." And I had to agree with that. And so my response was, "Look, what's the pie here? The reason we're doing this deal is we think we can get to a better place with you than without you. So therefore you should pay full price on sales up to X and half price on sales thereafter.
So to the extent we could have got to fifty million without you, then basically we should get the full value of those fifty million sales. To the extent we beat fifty million and we could only have done that with your help, it's true we needed you, but you needed us as the vehicle to help.
So therefore only by coming together do we get those extra sales. So you're going to make half on that and we'll make half on that."
Now we didn't know what X was. And so there was a data question, if you'd like. And one of the things I like to do is turn negotiation into a data exercise. We're going to estimate what are our same store sale increases? What are the new markets we can go into? What are the new products we're launching?
And so we made an estimate of what we thought X could be and we weren't necessarily right. And we'll never know because we couldn't run that experiment, but we agreed in the first hour of our negotiation that what we do is create a big pie and split it.
Guy Kawasaki:
I just love that line of thinking. I've never heard of this before. So kudos to you, man. This is really a great concept.
And as you point out, I think one of the most beneficial things that comes out of embracing this pie theory, is that for the person who "has less power," it gives them a real basis to stand tall and ask for something that's fair and stick with it. It's not just gut. It's not just macho.
There's a real reason. Both of us are necessary. Both of us will do better, we should split that down the middle.
Barry Nalebuff:
Absolutely. People all the time throw around the F-word, the fair word, but the problem is they never define it or they define it based on the nine slice pizza. They think, "Okay, four and a half, four and a half." Or two to one based on our different fallbacks.
And as a result, they pick notions of fairness, which are based on their position. So when you correctly understand what the pie is, you also realize that both sides are equally valuable, equally essential, equally powerful. And so my students who are always scared about getting screwed in negotiation, now recognize the power they have.
Guy Kawasaki:
But does it take a particularly enlightened other party who realizes... On the Coke side or on the large conglomerate buying the little company, can you imagine a board of director saying, "You know what? We need this little company, we should split the pie."
Or is it, "We are a fricking forty billion dollars conglomerate and we can do whatever we want. There's twenty other tea companies we can buy."
Barry Nalebuff:
Think about it this way. What Coke is really good at doing, is taking companies from a 100 million to a billion. They're not so good at taking companies from zero to seventy. And so they're actually going to get all that value that's created from a 100 million to a billion, if you'd like, and they want the company that has the best chance of doing that.
And there were other things that we were bringing besides just sales in terms of bringing the first organic beverage to their portfolio, bringing a product that is low in calories, that is healthy for kids, that can be put in McDonald's Happy Meals, and in terms of Honest Kids.
We think we created more pie with them than anyone else out there.
Now you talk about this notion of, what about if the other side doesn't care about the pie? So let's go back to my friend, Edward, the troll, right? Edward does not care about pie.
He's a jerk. He just wants to make as much money as he can. And Edward is out there saying, "My best offer is $900." Giving me an ultimatum. You got to take it. Either that or we have no deal. And I'm saying, "Look, Edward, there's $1,300 that we can split. And essentially you are offering me $900, puts me $400 ahead and you $900 ahead. That's not fair." Compared to $1,300 at paying to ICANN, if I pay him $900, I'm only gaining $400. Whereas this domain name is worth nothing to him if he doesn't sell it to me, so he's $900 ahead.
So I have no understanding of why I should agree to that. I've proposed something that's fair and I'm willing to stick to it. Meanwhile, he started out at $2,500 and then $1,100 and $900, he's like jelly. He has no backbone. He has no principle.
And so my view as principle beats arbitrary, and he doesn't have to care about the pie so long as he understands I care about it, and I've made a principled argument and I'm we willing to stick to it.
Guy Kawasaki:
I'm going to remember that, Barry. Principal beats arbitrary. That's my new mantra. Now can we go into the mundane? So let's say I have a friend and he really loves-
Barry Nalebuff:
I have this friend?
Guy Kawasaki:
Yeah. I have this friend and he really loves 911 Porsches. And right now, if you want it a 911 and you specced it the way you want it, it would take two years to get. So Porsche has a site where you can look at all the 911s available in the United States.
And let's say there's a dozen but each one, there's a manufacturer's suggested retail, which I don't know, let's say it's a $100,000. But every dealer is charging $30,000 over that suggested retail price.
Now, is there anything in your book that my friend could apply in negotiating this, knowing that there's only ten of these Porsches available, he wants $130,000 for a $100,000 Porsche and he's probably going to sell it to somebody else?
Barry Nalebuff:
Unless you have a used Porsche that he could trade in, give the dealer something else to make money on, it seems to me essentially you, as the buyer, are a commodity. If you can be replaced by another buyer, and therefore you don't create any pie and therefore there's no pie to split.
So that's why in this particular case, the dealer, essentially, will get all of the pie because the pie is no smaller, if you'd like, there's nothing lost if the dealer does a transaction with somebody other than your friend. Maybe your friend could commit to buying another Porsche later on from this dealer at a time when production is not so limited.
Guy Kawasaki:
Well, so that would take an enlightened Porsche dealer. But anyway, so just FYI, my friend paid over list anyway.
Barry Nalebuff:
No. Well, I mean, and there's a reason for that.
Guy Kawasaki:
My friend will feel vindicated.
Now let's say that Zelenskyy is listening to this podcast, and then he goes and he buys your book. And maybe he's waiting for Pelosi's tank to get to his secret headquarters and he's reading this book and listening to this podcast.
Now, if he calls you up and says, "Barry, I'm about to meet with Putin. We got the big table all set. You got any advice for the area? Is there a pie to be had between me and Putin?"
Barry Nalebuff:
I think there is. Look what Putin has is a huge ability to destroy pie and not destroying pie is therefore creating pie. The challenge, if you'd like, is that, one, do we want to punish people who act the way he has done?
War criminals who've caused just massive destruction in the world, in terms of the famines that will be caused by the increase in fertilizer costs, in the destruction of crops, in the mass destruction of life.
But that doesn't mean you can't both negotiate and engage in war at the same time, because at some point this is going to end. And one of the challenges is how do you allow Putin to find some type of victory speech here?
This is aligned from Will Ury, how do you give your opponents to have a victory speech? If we go back to the Cuban Missile Crisis, Khrushchev had a victory. He wanted the United States to get its nuclear missiles out of Turkey and we agreed to that in secret, in return for Russia taking its missiles out of Cuba.
But because it was done in secret, it looked like to the world and to the Russian populace that Russia, that Khrushchev had lost. And that was one of the things that led to his being deposed.
And so it's true that Putin controls the media better than Khrushchev did but how in the world does Putin spin this as how many lives lost? How manage destruction of our military? For what? To get more of the Donbas region? Was that worth it? I don't think so.
And so it's a challenge to understand how Putin manages to describe what happens as a victory. It seems to me that a sensible answer would include Ukraine not being part of NATO. I got that, but I think that could have happened without going to war, if you'd like. And of course the irony is, he says, "I don't want to have NATO on my border." If you take over Ukraine, you have Poland on your border, which is a NATO state. So that argument really made no sense to begin with.
Guy Kawasaki:
And I know this is going even more farfetched, but how does Putin write Zelenskyy's victory speech?
Barry Nalebuff:
I think the answer there is, "We're going to rebuild the economy. We're going to provide you some type of stability and autonomy going forward." Those two victory speeches somehow seem to be contradictory.
So that's what actually makes me so worried and so nervous about this outcome is, it doesn't seem like there's a potential for the negotiated resolution, which means the war continues until one side ultimately gets deposed and that's unhappy. I mean that just more misery, more loss, just incredible waste of loss of life, of loss of resources, that could all be spent much better ways.
Guy Kawasaki:
Enough about politics. So there were a bunch of things that I found just absolutely counterintuitive and contradictory to what I thought I knew. One of the outcomes of reading your book is I feel like I'm a shitty negotiator, but I digress.
So I wanted to discuss each of these things because I think it's the opposite of what most people would say. So the first one is, why does it make sense to give the other side what it wants?
Barry Nalebuff:
Great. I'm going to give that side what they want not because I like them, not because I'm a pushover, but because if the other side gets what they want, they want to do a deal with me and therefore I can get what it is that I want.
So that means I have to be curious. I have to ask questions. I have to understand what the other side wants, so I can give it to them.
Maybe an example here might help. A couple is selling a gas station and their goal is to travel around the world on a sailboat trip. Now I could think, as the buyer, that's frivolous and I don't know, I get seasick, I don't like boat trips.
But at the end of the day, if the couple takes that boat trip, then I get to buy the station. And so my goal is to get them on the boat. And they may think that what they need, a lot of money, but it turns out one of the things they also need is a job when they come back, is they're not planning to retire.
And so essentially if I can discover what it is they're doing and why they're doing it, and what are their problems associated with it, then I can help solve those problems.
So I'm not just going to give them more of what they want in terms of money, that's not my goal. My goal is to help solve their problems. People think that negotiation is like being read your Miranda Rights, "Anything you say can and will be used against you."
And so they don't answer questions, and as a result, we never learn what the side wants, so we can't give it to them.
Guy Kawasaki:
And are you saying that it takes an especially empathetic perceptive person, or you just go out and just say, "Hey, what do you want?"
Barry Nalebuff:
Let's take a step back. My students at Yale are incredibly empathetic and when they start negotiating, they start acting like jerks because they think that's what you have to do. And they turn off their empathy because they think they're going to just get taken advantage of.
So what I want is you to let your empathy shine and even if you're not empathetic, pretend to be empathetic or be curious, and start the negotiation not with prices, but discussion of, "What are you hoping to achieve? What are your goals in this?"
So, "Oh, yeah. I want to take a trip around the world."
"Wow. A boat trip. That's exciting. Are you planning to retire?"
"No, no. I want to do this while I'm still young enough to enjoy it. And then I'm going to come back and figure out what I'll do next."
"Wow. You're really good at being a station manager. Do you think you could be interested in doing that?"
"Hmm. Well, I don't know if I want to do that the rest of my life, but yeah, knowing that I could do that when I come back means I've got a job, so I don't have to worry about being unemployed."
And then you say, "What else? Let's see what other problems could this person have? All their money's going to be tied up in a boat. So when you come back, are you going to be selling your boat?"
"Yeah, actually I was a little worried about that. I don't want to have a fire sale."
"Oh, look, I don't want to... Do you want to buy my boat?"
"No, I don't want to buy your boat. I'm not in the boat business, but if I lent you $30,000 against the boat when you come back, would that give you more time to sell it?"
And so essentially, I just want to ask questions about what are the person's problems and how could I solve them?
Guy Kawasaki:
Next counterintuitive recommendation, as opposed to fighting fire with fire, you fight fire with water. Why is that?
Barry Nalebuff:
Let's be clear. That's not counterintuitive, that's Smokey the Bear, "Only you can prevent forest fires." I think it goes against people's natural instinct that when somebody goes and makes a ultimatum, you make an ultimatum.
When somebody makes an extreme offer, you go and make an extreme offer. And the end result is, people are mad at each other. Those folks who are naturally empathetic, respond to jerks by acting like jerks. And your job is to help the person not act like a jerk, because the chances are that they're actually a lot like you and they just are misbehaving, and thinking that they should have their jerk side show.
So how do you respond in kind? So let me go back a little bit to the case of my negotiation with Edward over the domain name. He initially asks for $2,500. That's just a crazy high number. So I don't go and say, "Look, I'll pay you twenty-five cents."
I point out to him that there's an ICANN fee of $1,300 and I'd rather pay $1,300 to ICANN than $2,500 to him. So he comes back and says, "$1,100." Now I don't go back to him and say, "You're offering me $1,100. I'll offer you $200."
That's really the same deal. Because essentially he's saying my paying $1,100 means he's up $1,100, I'm up $200, right? Compared to the $1,300 ICANN fee. If I said, "I'll pay you $200, then I'm up $1,100 and he's up $200."
So basically, I'm flipping the offer. I'm doing a fire with fire. Instead, I say, "Look, you're asking $1,100 is like my offering you $200. And I wouldn't expect you to accept that. I think that's unreasonable. And I expect you'd be insulted if I offered you $200. And for the very same reason that I wouldn't expect you to accept $200, you shouldn't expect me to accept $1,100."
And so essentially, I'm trying to put out the fire and talk about why this is not a good strategy, as opposed to just play the same game.
Guy Kawasaki:
I'm just dying to try some of these. Why in the world should I try to make the other side's case?
Barry Nalebuff:
Ah, all right. So here's the thing. In life, we can't always get our way but we can always be understood. And people think that they are failing to get what they want in negotiation, because you just haven't understood their perspective.
But if I can convince you that I understand where you're coming from, then you'll understand that the reason you haven't gotten everything you've asked for, is not because I didn't appreciate your perspective, it's because there was something else that was even more important.
And I know you're a parent, so let's go back to when your kid was small, and the kid's five years old, they're in a swimming pool and they don't want to leave the pool.
And the fact is, those kids, they're just not good at verbalizing. They don't have the same vocabulary that we have.
And so you're say, "Come out of the pool," and they think if they could only explain to you how great the pool was, you would go along with what they're thinking and let them stay longer.
And so they start crying because they feel that they're not getting their way, because they're being misunderstood.
So instead you say to the kid, "Look in your shoes, I would want to stay in the pool forever. I could do somersaults. I could float. It's amazing, but here's the thing. My partner is going to be coming home from work and they're going to be hungry, and we have to make dinner and you're going to be hungry. And if we keep on staying in the pool much longer, then we're going to have a problem down the road. And so as much as I'd love to stay there and I understand how great it is, we have this other thing that has to happen too."
Guy Kawasaki:
I'm going to try that with my son today. I'll let you know how that works out.
Barry Nalebuff:
Let's be clear. It's scary because you're acknowledging they have some legitimate points and if you don't have a counter to it, then you're going to have to give them exactly what they've asked for.
So you would better have some other perspective in terms of why what you're asking for is more important.
Guy Kawasaki:
Okay. Next question is, maybe it's related to the kid at the pool, so why should we lead with what the other person wants as opposed to what we want?
Barry Nalebuff:
I hope I didn't say that. I think we should lead with, how it is we are going to create a big pie? Because it's not about what I want. It's not about what you want. It's what about the two of us can create by coming together.
And so if you want something more than I do, then you should get it and pay me for it. And if I want something more than you do, I should get it and pay you for it.
I think what you're referring to, is when I'm presenting an argument to the other side. I should present it in the vocabulary emphasizing what's good about the deal from their side.
So let me give you the example that I think we're talking about here.
There's a case where it's a entrepreneur who thinks they have a great chance of success, and so there's a question of how much I'm going to pay them? If you're like upfront for their company and how much I want to pay on the backend if things turn out the way they think?
Guy Kawasaki:
This is the Zinc example?
Barry Nalebuff:
This is the Zincate case, exactly. But I'm just broadening it to, from a pattern to just... There's a buyer and a seller, and the seller is super optimistic about the potential of this business. And so the right strategy here is to give the person a small upfront payment and a big bonus, because they value the bonus for success a lot because they think it's going to happen.
From my side, it's relatively cheap for me to give that and I'm going to save money on the upfront number.
Guy Kawasaki:
And I don't know if it was in the same example, but you made the case that if you're going to do something that you lead with, there could be a seventy-five-million-dollar bonus, as opposed to you got to take a cut to get the bonus.
Barry Nalebuff:
So the wrong strategy is to say, "I'm going to offer you nothing upfront for your business and a seventy-five-million-dollar bonus if we hit these targets."
And the reason it doesn't work is because after I say nothing upfront, they won't hear another word I say. Their ears are going to be plugged. And the reason I led with it is because the zero is the part I like.
And instead I'm trying to sell this to them and so I should leave with the part they like, "I'm going to pay you a giant bonus if we're able to achieve the outcomes that you think can happen."
"How big a bonus?"
"How do you think about seventy-five-million-dollars?"
"Yeah. seventy-five-million-dollars. That's amazing."
"I know. It's worth a lot of money to you."
"Okay. Well, what's the catch?"
"Yeah, the catch is we have to have a smaller upfront number because I'm justifying the big bonus."
Guy Kawasaki:
And so would this also work with this hypothetical book publisher where you say, "Listen, I know it costs $75,000 to finish a book. So I will pay for the $75,000, but in exchange I want to higher royalty rate." Same concept?
Barry Nalebuff:
Absolutely. And so what you've pointed out is one of my great failures in life, which is when I wrote my first book with W.W. Norton, they offered me a 15 percent royalty and I thought this book was going to really sell.
And so I said, how about a 30 percent royalty? And it's like, "Well, Barry, you haven't written any books before. And this game theory thing, I don't know. I don't know how good a book you're going to write. How popular it's going to be. And I have my salary cost, my overhead, printing, manufacturing, production, copy editing. So if I gave you a 30 percent royalty, I'm going to lose money."
And so as you suggest, follow up and turns out that his production costs are $75,000. And so I said, "If I pay you the $75,000 upfront, would you give me the 30 percent royalty?"
And so let's be clear. This is just like that case with the entrepreneur. I'm saying, "I want the really big backend. And not only am I going for the zero upfront, I'm actually going for the negative upfront, I'm paying money."
And I have a co-author and my co-author has also never had a book that had a big commercial success and says, "I don't know, this is just too risky."
So he says no and this co-author had been my professor at MIT, and so I look up to him, and so I say no as well. I could have just paid half of the $75,000, $37,500, to get my half of the extra royalty.
I could have paid the full $75,000 for both of us and in the end, the book sold over 500,000 copies. And that extra royalty would've been worth over a million dollars to me. But-
Guy Kawasaki:
That's a high quality problem still.
Barry Nalebuff:
Well, it was Norton who got all the money. Michael Lewis gets it right. He uses the same publisher and he has a deal with W.W. Norton, where he splits the profits in all of his books, instead of getting in advance.
And essentially, he's willing to bet that his books will sell. Moreover, it also changes the incentives. Because if the publishers give me all the money upfront, if my book isn't great, okay, I don't make quite as much money, but now if I'm getting 30 percent royalty. Boy, do I want to make that these books are great.
Guy Kawasaki:
If I ever write another book, I'm going to do this. Okay. Now-
Barry Nalebuff:
And you are going to write another book. We know it.
Guy Kawasaki:
My most favorite insight of the book was, "Yes, if, is better than no, unless."
Barry Nalebuff:
Absolutely.
Guy Kawasaki:
So give us the gospel according to Barry.
Barry Nalebuff:
Yeah. One of the things I note from listening to your podcast is, it is like jazz. There's a lot of improv in there and you are each playing off the other with the "yes, and."
So "yes, if" is a variation on that. Rather than saying no to the other side, now look, you should say no if what they're asking for is illegal or unethical. Okay, so let's put that aside. If you were planning to say no, instead let them know what it would take in order for you to say yes.
My own personal version of this is, I was negotiating with my daughter to get her to join the math team in high school. And among her 100 favorite activities to do, being on the math team was not one of them.
But she didn't just say no to me. She said, "Yes, if we can get a dog." And we got a dog. Now it's not the world's greatest contract because the math team lasted one year and the dog thirteen, but it was a great dog. And so in life-
Guy Kawasaki:
I may have to cut this from my podcast because my daughter listens to my podcast.
Barry Nalebuff:
You have to think about what it is that you really want from her. We go back to the list interview in terms of extrinsic and intrinsic incentives. It's the good old "yes, if."
There was one time somebody asked me to give a talk in Korea and it turns out, giving my teaching schedule at Yale, I would have to fly to Seoul, be there for eight hours and fly back, so I could teach on Monday and Wednesday.
Which does not sound like a lot of fun. But instead of saying no, I said, "Yes, if you pay me this amount of money," which by the way I don't think I'm worth, I'm not even going to try and defend, but it's not my job to say no, it's your job. If you want me to come, that's what it'll take. And I discovered that you fly around the world but you're only there for eight hours, you don't get jet lag.
So it wasn't quite as bad as I thought it was going to be.
Guy Kawasaki:
I hope you were in first class, lie flat, the whole shooting match, right?
Barry Nalebuff:
Yeah, exactly. And let me explain why this is so important to people when they are applying for a job or negotiating for a raise. That folks out there on the other side, this is understanding the other side's perspective. Let's talk about giving them what they want.
What does the HR person want? They want to hire you. That's why they've offered you a job.
And so giving them the yes is what they're looking for. What they don't want to do is go to their boss, make an exception, do something that would then lead you to say, "Okay, either now I'm going to ask for something more," which drives them crazy or “I'm going to use that to negotiate a higher salary somewhere else.”
And so they want to know that if they go out on a limb, make an exception, they will succeed and allowing them to have that "yes, if" will allow them to make the extra effort so that you can get what you want as well.
Guy Kawasaki:
In the category of, "I have been doing this wrong my whole life," what is wrong with anchoring?
Barry Nalebuff:
Yeah. So we can go back and think about a extreme version of anchoring. President Trump was negotiating with Mexican President Nieto over who was going to pay for the wall. And before they met, he says, "Mexico's going to pay a 100 percent for the wall."
So take the extreme anchor and the end result is the Mexican president cancels the whole trip to the United States, and the negotiation never gets started. If you go back to my negotiation with Edward over the domain name, he starts out by asking for $2,500.
And then I point out to him that I can get it at ICANN at $1,300. So he comes down to $1,100 and then I explain to him to the pie and I'm at $650, $650.
And he says, "Okay, you're at $650. I'm at $1,100, let's go halfway, $900."
So what happens when he's anchored at $2,500? He's forced to make these giant movements and therefore he looks ridiculous, right? Because essentially $2,500, $1,100, $900, it's like what? You're just throwing spaghetti on the wall, see what will stick?
Or think of it the other way. Let's say somebody's trying to buy your business or my mom buying the house. And she offers the seller $600,000 when the market price is somewhere in the $700,000s. It's like, "What? Do you think I'm an idiot, I don't know what my house is worth? Are you trying to steal this from me?"
So I don't want to do business with somebody who is... And if I say, "How do you justify that?" And their justification is, "Well, I read in a book that anchoring was a good idea because you soften up the other side." That's not a very good answer.
So the behavioral economics, literature, and anchoring, is based on things like how many African countries do you think there are in the United nations? Is it above or below twelve? Is it above or below eighty? Okay? Nobody's insulted when you ask them the question, "How many African countries are there?"
That's fine, whatever. But if I try and anchor with somebody on a low price for a house, or for a car, or for a job, I'm offended by that. And I realize now you are not the person I want to negotiate with because what would happen if I had said yes, you would've just screwed me.
You would've taken advantage of me. And what I think you should do is start a negotiation a completely different way. Instead of talking about price, talk about how it is you going to negotiate, "Can we agree that what we're going to do is create a giant pie and split it?"
And if we can agree to do that, then we're done because now we can focus on what you like to talk about. The rising tide that lifts all boats, that essentially we've now solved the hard part, the contentious part, and we can focus on what it takes to make the pie bigger.
Guy Kawasaki:
I'm looking for guidance here. Let's talk about negotiating with your spouse. Is this a special condition or all these principles apply?
Barry Nalebuff:
Remember, what is it that I said I want to achieve? I want to achieve a giant pie and I want to split it.
Well, how could you beat that in life? I want to give my spouse what it is that she wants, because if she gets what she wants, I can get what I want. I want to make the arguments for her, so that therefore I show that I understand her perspective. I think these are the things that will lead to a very happy marriage.
And of course, by the way, one of my favorite audiences, I gave this talk to a group of investment bankers and their spouses were there, and the bankers would give me somewhat of a hard time because they don't like the idea of splitting the pie with a smaller party.
But one of the spouses says, "Oh, this is just like divorce. I get half of my husband's earnings and artwork," whatever. It's like, "Yeah, you helped him create this pie and so, yeah, you should get your half."
So this creating a large pie and there's created a large pie and there's also making sure that the other side is getting what it is they want. Now, let's be clear. That does mean everything is done fifty/fifty. My spouse loves beets. I don't like beets. I like broccoli. So we have dinner of broccoli and beats. She gets all the beats and I get all the broccoli.
Guy Kawasaki:
This is at the other extreme of this spousal negotiation, but let's say you're going to get divorced, right?
So the four of you, two spouses and two divorce lawyers. So would you say the perspective of, "You can have what you want. You want the house, you got the house, but then I want the Bentley and I want the condo." Is that how it works?
Barry Nalebuff:
Absolutely. Look again, just think of like beets and broccoli, which is, we shouldn't be splitting everything down the middle. If the house means something to you, that's worth a lot sentimentally or it's connected to your job. Then my goal is not to destroy value because in the end of the day, we're both parents to the same kid, and the more we're able to be co-parents, to be at graduations, weddings together, that's going to create a larger pie.
So some people take this objective of, "My goal is to destroy as much pie as possible to make the other side miserable." I think the Ted Lasso, the owner of the team, she wants your team to lose, to make her ex-husband to be unhappy. And you can split a very small pie, but I think that's ultimately counterproductive.
Guy Kawasaki:
I love reading your book. It has fundamentally changed how I approach negotiation.
Barry Nalebuff:
Okay. I have a couple little follow-ups to you on this one. So first off, so your AP English teacher, Mr. Kibbles, who was the hardest teacher you had, who taught you grammar.
So you talked in your book about your kid's attitude of YOLO, "You live only once." The only is in the wrong place there, my friend. It should be, "You live only once," not, "You only live once."
Guy Kawasaki:
Okay. There's some more wisdom. Thank you. I love that.
Barry Nalebuff:
I think you have this discussion of whether or not these leaders who don't listen to market research, do they get it right or not? Remember Steve Jobs had the Newton and leads to the Trump perspective of, "Only I can fix it."
And so yeah, it can work and cut through bureaucracy when the person is right. But it also creates all sorts of challenges when you give somebody essentially unlimited power. And that could be Putin deciding to invade Ukraine, which makes no sense, but he doesn't listen to his advisors. I could be Adam Neumann at WeWork.
And so, yes, there can be successes that are possible this way. And I think one of your other maxims is, "Never lie, seldom shade." And people get themselves in trouble so much in negotiation by telling lies, and more than that, the lies are both counterproductive and unnecessary.
So if I go back to the boat example, when you ask the person why it is they're selling the station, the person might not want to say, "I'm planning to take a trip around the world."
So they'll lie and say, "I'm retiring."
But they say they're retiring, that I'm not going to go and offer them a job because, "You say you're retiring. So why should I offer you a job?" And if you think about it, there are good reasons and bad reasons for selling a station. A bad reason is there's a leak in the oil tank and it's about to become a super fun site.
A good reason is, "I want to take a trip around the world," because from my perspective as the buyer, that's not bad news.
And the absence of bad news is good news. And so telling me that, actually there's no reason to hide it. So people just lie all the time about their motivations for doing something, thinking that's going to protect them.
But actually it destroys the potential for creating pie. Or somebody, that's happened to one of my students, they're offered a $100,000 for a job and they say, "My last job was paying $110,000. Will you match that?" And the company says, "Sure, we're happy to match. Just please bring us your W-Two." "Sure."
Guy Kawasaki:
Okay. Don't lie.
Barry Nalebuff:
And so now my first interaction with my new boss, is that they've caught me lying, is that how I want to start the relationship? So, don't be a jerk. Don't be a liar in a negotiation. There you go.
Guy Kawasaki:
I hope that listening to this episode has made you a remarkable negotiator.
Now go forth and dent the universe. I'm Guy Kawasaki.
This is Remarkable People. My remarkable team includes Peg Fitzpatrick, Shannon Hernandez, Jeff Sieh, Madisun, the drop-in queen of Santa Cruz, Nuismer, Alexis Nishimura, and Luis Magana.
Until next time, Mahalo and Aloha.