Mastering Negotiation Through Empathy with Barry Nalebuff

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Barry, thanks for joining us today.

Thanks for inviting me.

Oh, it's my pleasure. You come highly recommended, my friend. So how would you get us started? By telling us a little bit about yourself and what you do.

I'm a professor at Yale, where I've taught now for some 32 years. I teach strategy, game theory, and negotiation, which is, of course, why I'm here. Along with being a professor, I'm also an entrepreneur. I've started companies ranging from Honest Tea, which some of you may be more familiar with, to Justice Tea or Justice Tea, to Kombucha and lots of entrepreneurship in the food and beverage space.

Incredible. Impressive too, because that's a tough space to be in. So kudos.

Thank you.

And Barry, I know my friend, you are very humble. I want to make sure that we shout out your book. Can you tell the listeners about your book too?

The course that I've been teaching at Yale for the last decade has now become a book. It is called Split the Pie, A Radical, Revolutionary New Way to Negotiate. The subtitle is kind of a lie because it's actually a 2000 year old way to negotiate. It comes from the Babylonian Talmud. But most good ideas aren't new and most new ideas aren't good. So I'm glad that I'm able to resurrect a tried and true technique from 2000 years ago that has largely been forgotten.

Oh, that's great. Okay, so we have to get into that. Can you tell us the historical underpinnings of this before we actually get into the like, the tactics and tools and things?

Well, it'll come out when we talk about what the whole notion of the pie is and that essentially what the Talmud does is provide A way of treating people in unequal positions equally or fairly. And people have a misconstrued, misguided notion of what fairness is all about. And that when you correctly understand when negotiation is over, coming up with agreement is going to be a whole lot easier.

I love it. This is great. And so let's just start off with a brief synopsis of the. Sure.

Oh, I've heard in the past you talk a lot about the lizard brain, the amygdala going haywire, if you'd like. I am much more the prefrontal cortex, the Mr. Spock of negotiation. I'm the one who's trying to bring some logic to bear, because a little more logic can actually help bring down the emotional temperature. And as I said before, what's surprising is people negotiate and they're confused what they're negotiating over. So let's just take the simplest example possible. A and B are negotiating over a pizza. And if they can agree on how to divide up 12 slices, that's what they get to do. But if they can't agree, A will get four slices and B will get two slices. And so my question is, how do you think A and B will divide up those 12 slices?

Oh, and it's six total.

Well, there's 12 slices to be divided up.

Oh, 12 total slices.

Pizza has 12 slices, which they can only get if they agree on how to divide them up. If they don't, A can go back to some party and get four slices, and B can go to somewhere else and get two slices.

Gotcha. Well, the logical solution then would be to split the pie six and six.

So that's one view that's very common, is that the fair answer is you take the 12 and you divide it six and six. The other most common answer I hear is that people say, well, A is twice as strong as B. A can get twice as many slices with no deal. So therefore, they should get twice as much with a deal. It should be, therefore 8 and 4. And my view is that both of those answers are wrong. That really the negotiation is about the six extra slices they get by doing a deal. No deal, they get four plus two or six slices. With a deal, they get 12. The reason they're negotiating is to go from the four plus two all the way up to 12 to get those extra six slices. A and B are equally necessary, equally essential, and therefore, that's what we should split, three and three, not the 12, but the extra six.

Oh, that's fascinating. Okay, Barry, because I have to ask this. When you think about this, the approach that you provided definitely makes a lot of sense. How do you reconcile this with the. I think it's the ultimatum game.

Yeah. So in the ultimatum game, one side makes an offer and the other side says yes or no. And my view is that's not a standard negotiation, because the person who has the power to make an ultimatum is going to get more than half the pie. And yes, if I have the power to make a take it or leave it offer to you, that's going to give me more in the negotiation. I got that. But most negotiations, neither party really has that ability. They may say that, but I can come back with a counteroffer. And then they have to consider whether or not to take it. So we know from the work of van der Waal that monkeys, when they're offered an unfair deal, will reject it. Monkeys in particular, capuchins, are perfectly happy to work and do tasks for cucumbers. But if one monkey is getting paid cucumbers and the other is being paid in raisins or grapes, then the monkey, paid cucumbers is just going to throw those cucumbers back, is going to walk away. It's no deal. And that aversion to being treated unfairly is in our DNA. And therefore, people will reject deals which are profitable if they think they're being treated unfairly. What ultimately happens is people say, oh, you have to divide those 12 slices, six and six, but the person who has a four fallback doesn't think that's fair because they actually have more with no deal. And then the person says, well, I'll do eight and four. And then the person on the foresight says, no, that's not fair. And so ultimately, when you come up with a notion of fairness, it should not depend on which side you're on. It should be taken, if you'd like, from a veil of ignorance, from a blindfolded perspective. And when you understand what the pie is truly that extra six slices, then you also understand that power and fairness both say with it, three and three.

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Click the link in the description to find out more. Elevate, negotiate and succeed. That's so fascinating. Yeah, it makes sense. And it's definitely a bit of a paradigm shift sometimes, too. So. No, it's definitely a paradigm shift as well, because a lot of times I think today there's a lot of folks on emotions and feelings, and I think that there's value there. But it's refreshing to see a focus on logic and a rational approach to deal making, a decision making.

Sure. And if you can combine Mr. Spock's logic and Captain Kirk's emotional intelligence, then you're totally made.

There you go. And now let's say we try to use this more logical approach to negotiation. And on the other side of the conversation is somebody who is more emotional, that is more, let's say, limbically driven. And their feelings are leading them because they're looking at it only from their own perspective. They're feeling. Leading them to feel like it's an unfair deal, even though objectively it's not an unfair deal. How do you work through that with somebody who's not acting logically?

I think that if you can help somebody understand that what I'm proposing is truly fair, it's hard to turn that down. And so I'll give you an example with my mother. She was living in Sarasota where she had rented for a decade, and her landlord says to her, with this whole work from home thing, I'm going to put this house up for sale. And I think with this market, I can get $800,000 for it. But since you're living there, I'm happy to sell it to you for $790,000. Okay, so what, is the negotiation really over? And let's go back to the pizza example. The piece is the extra value the parties create by doing a deal compared to no deal. So in this particular case, what is the reason for my mom and this owner to do a deal now? My mom's happy to live there, to buy it and pay the market price.

And so I would say for your mother, it's the continuity, being able to stay in the same spot. And for the person on the other side, the landlord, it would be to first of all not have the stress of having to deal with a house or a tenant or anything like that, so that freedom is part of it, but also getting that liquidity so they could have more options down the road.

Both of those things are going to happen no matter who they sell it to.

That's true thinking.

What's the advantage of selling it to my mom?

Vantage of selling it to your mom is speed of the deal. You don't need to go through an agent. You also probably save the money on the commission then if you go directly. And then also, one thing that I've heard a lot in real estate is people actually care about the house itself. The person would probably trust your mom to take care of the house in a way that they feel is respectful.

Well, it was a rental house, so therefore I'm not sure he cared so much about that. But he doesn't have to spend $10,000 putting in new carpets and appliances and repainting. He doesn't have to worry about the apartment being empty for a month or two while he's trying to rent it. And he can save 5,000, 5% or about $40,000 in real estate agent commission, which is a nice chunk of change. So my mom writes back and says, look, I'm happy to buy it at market price, and if I buy it from you, I will save the cost of moving, psychic costs, financial costs. You'll save the cost of fixing it up and possibly have it empty. And let's call that a wash. And then there's a $5,000 or 5% or $40,000 real estate agent commission. We should split that 20, 20. He writes back, and this is now to your point about emotional and misunderstanding things. He writes back and says, marcia, I don't think you understand. It's a hot market. That's why I should get 3/4, not half, of the savings in the real estate agent fee. And with my help, she writes back and says, the fact that it's a hot market is why the market price is high. But if you sell to anybody else at 800,000, you collect 760. And if I buy the equivalent house for anybody else, I have to pay 800. The only way we can save that 40,000 is if I'm the buyer and you're the seller. And he gets it. He says, yep, I see that now. So we can split the real estate agent commission 50 50. And then what's market price? Well, one of my other dictums is I like to turn negotiation into a data exercise. So we're going to agree that I'll buy the house at market price and split the savings. And as for what the right market price is, there were five other houses that had sold on that very street in the last six months because a development, they're all kind of similar. So you adjust them for the size of the house. I think we got a number like 783, 512, or in that range. And then we split the agent fee. And then he gets true religion and says, you know, why are we each hiring separate lawyers? Why don't we just hire one lawyer to do the closing and save another 3,000?

Brilliant. This is a really great example of what we've been talking about the whole time, obviously. But I think one of the other things that I can take from this, and I'd love to hear your thoughts on this too, is that when the person on the other side, the seller, got more emotional and said, no, I deserve more. Because of these reasons, which were not logical considering the circumstances, the response was to maintain that same logical approach in the face of emotionality. And it seems like a lot of times people get drawn down into this unproductive emotional back and forth instead of staying true to the logical approach.

As my colleague Dalian Cain says, you don't fire with fire. You fight fire with water. The goal is when you see somebody else reacting crazy way, you want to help them put out the fire. So you have to explain to people not only why the pie logic is correct, you also have to show them sometimes why the logic they're using is incorrect. And I think that's 100% true.

Absolutely. Now, how we do this, we have to do it with tact, too, because sometimes when somebody is confronted with the reality that they are acting illogical or irrationally, that could trigger defensiveness, which can inflame some of that. So when you're countering or challenging somebody's logic, how do we actually do that?

It's less threatening when I tell them what I'm offering them is to treat them fairly, because they've often said, hey, I'm giving you a fair deal. And so if you can explain what fairness really means, I'm not trying to take advantage of you. That's something that people are much more open to. So it's not just making an argument. It's not just saying, I want more, or here's the number, or this is what I'll do. It's. Here's why I'm giving you a real reason.

I love this. Yeah. Because essentially, if we're thinking about this like a math problem, you're showing your work. How did I come to this number? There's something substantive behind it that makes sense.

And we can argue about the work. Absolutely. But not the principle.

Let's focus on that, Barry, because I think that's a really insightful point. I don't want people to miss it. Can we go deeper on that point?

Sure. So let me give you one more example. In Connecticut, there was a grant to high school teachers. I think it was called resc or resc in which there was $5,000 made available to pairs of math and physics teachers if they work together to integrate their curriculum. But unfortunately, to do that required 36 hours from the physics teacher and four hours from the math teacher. So nine to one ratio in terms of work. And they could only get that $5,000 if they agreed on how to split it up. By which I mean, if the math teacher didn't like the proposed division, says, I'm not doing it, that grant goes away. So the question is, what's the pie in this negotiation? And how should they divide it up? So let's start with the wrong answers. Wrong answer number one. Give all 5,000 to the physics teacher because they're doing more work. No. Wrong answer number two. Just divide it 2500. 2500. That's not fair because the physics teacher is doing a lot more work than the Math teacher. Case three, divided up in the same ratio as the work. $4,500 for the physics teacher, $500 for the math teacher. Now, if I were the math teacher, I'd say, in that case, I'd much rather be the physics teacher. I'd much rather do 36 hours of work and get paid 4,500 than do 4 hours of work and get paid 500. So that also tells you that isn't really fair. So let's think about what actually is fair. The pie here is not the 5,000. It's the extra amount above what it would normally take to get these people to do 40 hours of work. So because we're just talking, then we use a simple number. Let's say that overtime for teachers is $50 an hour, which translates to $100,000 a year. Well, that means that the math teacher is being asked to do four hours or $200 of extra work, and the physics teacher is being asked to do $1,800 of extra work. That's 36 hours. So therefore, it would take $2,000 to compensate them for the work. The extra amount, the pie, is the $2,000 to $5,000, that $3,000, which is really compensation above what it would take to do that work. So we take the $3,000, and we divide that 1500. 1500. And the math teacher gets an extra 200 for their hours of work, and the physics teacher gets an extra eighteen hundred dollars for their work. Now, if I have to convince you why that's really right, here are some ways of thinking about it. Imagine that the total amount available was only $1,000 to do this work. Well, we wouldn't divide it up in the nine to one ratio because basically there's not enough money there. The teacher should say, no, I'm not interested in this at that. In fact, until the total amount is up to around 2,000, they're just going to say no to this project. It's not worthwhile. So as a result, what we really need to think about is the extra value that's created by this deal. In this particular case, the 3000. And if I needed to convince the physics teacher a little bit more, I could say the following. Well, imagine we're each doing 20 hours of work. Then it's clear we divided up 2500. 2500. You with me on that? And if the math teacher says to the physics teacher, look, I know I'm only doing four, but how about I cover 16 hours of homeroom for you? So now I'm doing 20 and you're only doing 20 extra? Sure. Then we got a deal. 2500. 2,500. And then the math teacher says to the physics teacher, oh, by the way, you know those homeroom hours, those 16 homeroom hours I supposed to cover for you? Can I buy them back for $50 an hour? And of course, the person would say, yes, that's a fine price. Sure. I do that at $50 an hour. So basically, that's another way of seeing how you could get there.

It's fascinating. Now, here's one question, Barry. So what happens? Let's go a little bit deeper because we touched on it here with this one. What happens if there's a fundamental disagreement on what the pie is?

Yeah. So, by the way, what's the nature of the disagreement here? Should it be $40 an hour? Should it be $50 an hour? I don't really know that's the right number. Note, by the way, it doesn't change the answers very much. So it's true. I said, in the end, what's the fair market price for the house? What's the right market price for those extra 40 hours of work? Is it $1,600, which would be $40 an hour, or is it 2,000? Okay, yeah. So basically, there may be a disagreement over $400, relatively speaking, in terms of what the actual size of the pie is. I got that. But that's a small amount. And that's if you like a technical discussion as opposed to a principles. Yes, we've agreed we're going to create a big pie and split it. And now we can bring data to bear about what's the really. What's the right compensation per hour.

You know what's interesting, and this is kind of off the cuff, Barry.

So everything's off the cuff today.

Yes, that's true. So you tell me where I'm wrong on this one. It seems like using this more principled approach essentially lays down the ground rules for a much more productive conversation because you set some parameters with which people can negotiate with it.

What I want to do is agree up front that our goal is to create a large pie and split it. And once I've done that, now I can be much more open with you about what we're trying to achieve because I don't have to watch my back the whole time. And I also know we're going to have a deal and we can focus on the things that we like about the deal, namely how do we expand the pie as opposed to the parts that are challenging, which is how much am I going to get? And I agree that there can be some dispute level about what the actual pie is, but that's more of a data exercise. So in my own life, the place that this really came into play was when we sold Honest Tea to Coca Cola. We had a problem. Our company had about $23 million in sales, and that was just too small to fit in the Koch system. Coke is great at bringing companies from 100 million to a billion. And they're also not that bad at bringing companies from 50 million down to zero. So they recognized that we really weren't ready for them. So they said, look, we'll buy you in three years and in the meantime, we'll help you with purchasing, with production and with distribution. But can you see what the problem is? Was going to be they're going to buy us in three years. They're going to give us all this help for the next three years.

They're incurring costs in the three year period.

It turns out those costs were actually pretty minimal. The real thing is they didn't want to pay more for all the things they were doing to help us. We're going to grow your sales and now we have to pay more as a result of that. I don't want to be punished for being a good Samaritan here. And my response is, well, yeah, you shouldn't pay full price for all the things you're doing to help us, but you should pay half price. Because while it's true we need your help, you also need our golden elixir in the overpriced bottles and our brand. You need the vehicle to help. And so essentially what we should do is you should pay full price on sales up to X is what we could achieve without your help. And then half price on sales above X and let's focus on making the sales as big as possible. Now there's still two data points. What's X? That is, what is it we could achieve without their help? And what's full price? But there was a lot of evidence on that. There were many other deals that were out there in the market, whether it be Sobey or Fuse Heidemon Water in terms of what the price multiple was at a time of acquisition and they had all that data which they shared with us and we could say, oh, we're more like this company than that company. And then there's what can we achieve without them? Well, here's how fast we've been growing historically. Here are the new markets we're going into. And so that focus on the two data points was. It took us a week to resolve, but I kind of knew we were going to have a deal. And like the issue of the $40 to $50, relatively speaking, it was small potatoes.

Yeah. Oh, this is fascinating. This is fascinating because it's now thinking about it through this paradigm, just the principled approach and then also turning these data driven discussions into more technical discussions. It seems like once we get on the same page in terms of the principles of the deal, the rest of the deal is much easier to handle.

There's one other key thing we have to get on the same page on, which is how we're going to divide things up. So I love gain to. Yes, I think it's a great book. It helps us focus on interest rather than positions, but it says almost nothing about how we should divide things up. And until we resolve the contentious part of division, it's very hard to focus on making things bigger because I'm watching my back the whole time. Therefore, I want to resolve in principle what we're going to do about dividing things up right at the start. So the first thing to negotiate is not talking about price, is not even talking about interest versus positions, it's talking about how we're going to negotiate. Do you want to act like a jerk and make ultimatums and lie and use anchoring and try and start with high prices and all these things, or would you like to act in a rational way where we can think about how to create a large pie and split it? I vote for option two. How about you?

Same. This is great. And one of the things that I've heard you talk about in this interview, but I want to get it and say it explicitly here, is that it sounds like we are being very transparent with our approach. We're making it clear, and we're actually saying, I want to treat you fairly. This is my approach, and we're putting our cards on the table in that regard. Am I getting that right?

Absolutely. I mean, like I said, if you don't treat people fairly, they're going to clam up. They're going to be like those capuchins and throw the cucumbers back at you. So sometimes you can do it and get away with it because they don't appreciate they're being treated unfairly. Although even there, just like the little kid who doesn't have the vocabulary to verbalize why they're being treated unfairly, the other side may not be able to explain why they don't think your offer is truly fair, but they sense it and go Back to the 8:4 pizza case. The person who's getting the four slices doesn't think they're being treated fair, even if they haven't figured out yet the notion of the pie.

Yeah. Oh, that's fascinating. That is fascinating. Yeah. And I think it's really powerful and important for us to actually use these words, because I think a lot of times we. We almost hope that people will assume best intentions with what we're doing. But there's real power in actually saying fairly and principal approach.

It's the F word in negotiation. Fair. But people throw it around. I'm giving you a fair deal. Take it. And it ain't fair.

Yes. Yes. This is great. And one of the things that you. In this prep that you sent me here, which, again, was very, very helpful, is that the first point, the first bullet point was you don't need to be a jerk to succeed. Yeah. Can you go deeper into that one? Sure.

I mean, one of the things that I love about my students at Yale is they care about making the world a better place. Expression is called repairing the earth. In Hebrew, it's tikkun alam. And they are empathetic, they are smart, they are compassionate. Until they start negotiating, and then some disorder takes over and they think they have to be a jerk. Well, it turns out one they're bad at being jerks. And two, it's not helpful in negotiation. So they misrepresent to each other. They walk away. They just do everything wrong. They think that being empathetic is going to lead them to be taken advantage of. And it's true. If you just are being friendly out there and open up and give all the information, you know, yeah, other sides can walk all over you. And so my students come into the course mostly very apprehensive about this because they don't like negotiating. And then there are some students who really love negotiating. I'm even more worried about them because they're out there really good at taking advantage of others. And once they have a principle they can apply and they understand that we're going to split the pie. Now, all those things that make them great, their empathy, their curiosity that you've talked about in many cases, especially when it comes to race relations, are things that actually allow them to find avenues to solve problems together.

Yes, I love it.

And so the LS is not only should you not be a jerk, but if the other person's acting like a jerk, maybe they're actually a smart, empathetic person just like you, but don't know any better. And therefore, when you offer this alternative, you allow them to have their inner warm, empathetic, curious person come back out.

That last point, Barry, is so, so important because it's so funny, because a lot of people say somebody else is a jerk. This person's being ridiculous, they're being irrational. But they don't have the humility potentially or the self awareness to recognize that they display those exact same behaviors under duress. And I think just reminding ourselves that the jerk on the other side probably has some friends who don't know them as jerks. And there's somebody good inside. I think that's a good reminder.

Or they themselves, the other person doesn't want to behave the way they're behaving. They just don't know there's an alternative because they think that's what they have to do to protect themselves. So if you know that my fallback is $1200 and I don't have any other principles, you're going to offer me 1199 or $1100 and I'm going to basically walk away with very little. But if I say to you, look, or just take the case with my mom and the real estate agent's savings, it's like, oh, the savings are $40,000. I want $35,000. Or $30,000 of the $40,000. Right. That's better than nothing for you. And my answer is, yeah, it's better than nothing. But you know what? I wouldn't expect you to accept 10,000 of the 40. So I don't come back and just counter because that's fighting fire with fire and say, look, you've offered me 10, I'll give you 10. It's. I don't expect you take 10 because that would leave me 30. You 10 out of the 40, and you think that's unfair and for the same reason why you're going to reject 10. I'm going to reject 10 and I'm going to offer 20. 20. And note, I'm not asking for more than you and I'm not asking for less. It's the only thing where we're both. Basically, it's a reciprocal offer, and I don't see any reason why I should be getting less than 20. If you can give me a good reason, I'll take it. But absent that, this, to me, is the one fair solution.

Brilliant. I love how simple and easy you've made it to understand this. But again, I think sometimes those parts of negotiation that can be expressed in a way like you described it, in a way that's simple and easy are simple and easy to overlook as well, because I think we get so caught up in the fog of war that we lose this logical component.

The reason I think we don't have the logical component is we are negotiating over the wrong thing that they're negotiating over the 12 slices. We're negotiating over the market price rather than the 40,000, the saving, the real estate, the moving costs, the. The fixing up costs, and that essentially, when you understand what the negotiation is truly over, it's not so hard. Yeah.

Oh, this is great. Barry, I appreciate this. Thank you for joining us on the podcast. And before you go, can you remind the listeners again about your book and what the best way to connect is?

So also before I go, you know, I gotta come see you in Columbus because I spent a lot of time in Columbus. I was on the board of Nationwide Insurance, Nationwide Mutual for a dozen years. Got to see Jenny's when. Before Jenny's became a national kind of thing. And of course, football games at the Ohio State, your alma mater, times three, I think.

I appreciate that. And you pronounced it the right way, so thank you.

You don't mean pronounced. I mean labeled it correctly. I know, I know. O, Y, O, O, hi. E, O. I don't know.

Oh, no, the yes.

The book is called Split the Pie, which is of course what I've been talking about. It's available on Audible as well as Kindle and Hardcover. There's a website, splitthepiebook.com which has some videos as well. And we'll have a link to this podcast, so I hope you'll enjoy it. And you don't even have to negotiate the price, it's so low.

A fair price, right? A fair price, yeah. This is great, Barry. Thank you so much. Really appreciate it.

Appreciate you inviting me. Thanks.

Wait, wait, wait, wait, wait.

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