Yale Business School professor Barry Nalebuff offers an innovative new way to negotiate based on the principles of game theory. First, identify the “pie”: the value parties generate by making the deal. Then, calculate how to divide the gain created by an agreement. Nalebuff’s clever, refreshing negotiation approach isn’t simply theoretical. It’s one he used successfully when selling Honest Tea, the company he co-founded, to Coca-Cola. Splitting the pie isn’t limited to high-stakes negotiations, either. It also works in situations such as breaking a lease, buying a car, proposing a benefits package or even haggling at the flea market.
The “negotiation pie” is the additional value created by an agreement that negotiating parties can’t produce on their own.
Rather than working out a way to share the total amount of a given thing – a common misstep – the pie approach to negotiation evenly divides only the additional gain created by the negotiators working together. Calculating the pie correctly can be tricky, but once you achieve this, forging a deal becomes easier.
Consider the following example: A pizza parlor will give Alice and Bob a 12-slice pizza, if the two can agree on how to split it. If they fail to reach an agreement, the couple will receive half a pie, skewed in favor of Alice, who will receive four slices, while Bob will get two. This negotiation has several possible approaches:
- “Power perspective” – The power perspective mimics the ratio of the parties’ respective fallbacks. It assumes that because Alice enters the negotiation with more pizza, she has more power. Thus, it awards eight slices to Alice and four to Bob. This approach focuses on the whole pizza rather than the six-slice gain produced by a successful negotiation. It overlooks...