You are in a pizzeria with a partner and the owner of the business will tell you that he will give you a whole pizza for the price of half, but you have to agree on how to divide it. If you do not agree, you will only receive the paid half, so that your partner will have four parts of it and you two parts. How do you agree on the division of the pizza?
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Try to answer before you continue.
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This is an example from a book (and an article on the web Yale Insights) from American Economics Professor Barry Nalebuff. The book is called Split the cake and has the subtitle “a radical new way to negotiate.” And that’s exactly what it’s about. How to negotiate so that you come to a fair result that will also be beneficial for you.
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So back to the pizzeria. There are different ways to solve the problem. And let’s leave aside social conventions (“of course the woman decides!”) Or jokes about marriage (yes, again, “the woman decides, like everything!”). Let’s imagine that the division of pizza will actually be negotiated.
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First, a “fair” solution. There is simply a chance to get half of the pizza for free and you will both make money on it, so you and your partner will agree to divide the whole pizza “half by half”. So you will each dine six parts.
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Second, a “logical” solution. The pizza owner has already indicated how the pizza will be divided. Four parts for your wife, two for you. So you divide the whole pizza in the same proportion. In the final, your partner will have eight parts and you four.
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And third, the right solution? If it is correct, of course, it is a matter of opinion. But according to Nalebuff, it makes sense to divide the pizza by keeping the original half as the owner wishes (that is, your partner four parts and you two), and dividing the extra half in half. In total, your partner will have seven parts and you five.
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When we formulate the task in this way, it still sounds quite logical. But Nalebuff writes that we often forget this logic in business. That when negotiating a transaction, we approach it from a position of strength (a larger company wants a stronger position than a smaller one) or other criteria.
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Nalebuff claims: the goal of every trade or transaction is to create a new value, ie a “pie” that would not have been created without the participation of both parties. And no matter what else, after deducting the cost, it is fair to split this cake in half. It wants one, very important thing: to define this cake correctly, so that both parties agree on it.
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Nalebuff writes an important thing: that people don’t like negotiations because they feel that one party always comes out of it as a loser. And there is a general belief that in these situations, those who are more polite, do not lie, do not try to do any tricks and behave fairly lose. And maybe it really is, because the stereotype of a successful businessman is “a hard and ruthless maniac who can’t be trusted and will do everything for business.”
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According to Nalebuff, the most important thing is to define what is really being negotiated. That is, about the mentioned “cake”. And when done clearly and logically, there is no reason for one of the parties to leave with a bad feeling. When you are looking for a new apartment for rent and the apartment is advertised by a realtor, but there is a chance to negotiate with the owner “directly”, it is clear that if you agree, then one of you will save the realtor a fee. And it’s fair to share it no matter which of you should have paid the fee or who invented the trick.
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Many negotiations end in failure because one of the parties feels that the “pie” has been unfairly distributed. And both sides then leave empty-handed. It is a bit like the famous “ultimate game”, which is one of the most famous thought experiments in economics or psychology. Simply put: you have an offer to get a million crowns, but you have to share it with someone else. You suggest how much you get and how much he gets. And it’s up to him to either accept or reject it. You only have one try. However, if he refuses, neither of you will get anything.
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The only fair solution is to split half in half. But on the other hand, you got the offer. You contacted another person, and it could be your colleague, relative or stranger, and without you he wouldn’t get anything. So, in theory, he should be happy with any amount. He will always be in the “plus”.
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That would be true from a purely economic point of view. Having “anything” is always better than having “nothing”. But then psychology and human emotions come into play. And experiments have shown that the further we move away from the optimal “half and half” solution in reality, the more likely it is that the other person will interfere with the easy earnings of both. Illogically and irrationally. Simply because he considers it unfair.
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Another advantage is fair negotiation: that when both parties work together, it is usually possible to make the “pie” bigger. And it’s usually better to have half the big cake than most of the small one.
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Barry Nalebuff is a rather rare example of an academic who has also succeeded in business. He studied economics and mathematics and has been with the Yale University School of Management for more than thirty years. But he got rich thanks to the company Honest Teawhich he founded with his student in 1998 and in which Coca-Cola invested (and later bought it in its entirety) in 2008.
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Another company, Kombrewcha, makes an alcohol-containing kombucha, a beverage that Nalebuff discovered by accident when the originally non-alcoholic kombucha fermented in bottles. It was a big mess, the company was even sued by a Hollywood star at the time, who was caught by the police under the influence of alcohol. But good negotiations managed not only to avoid the trouble, but on the contrary to make money on it, because the brand was bought by the brewing group Anheuser-Busch.
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Think about it. Everything in life is about good negotiation. And about defining well a large cake that you can share.
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