Co-Opetition - Adam M. Brandenburger [29]
Thus, any description of a game must include how people perceive the game—even how they believe other people perceive it, how they believe other people believe the game is perceived, and so on. There is no such thing as a game separate from the way the players perceive it.
Perceptions are particularly important in negotiations. Let’s look at the classic negotiation problem of dividing up a pie.
Texas Shoot-Out When two partners set up a business or joint venture, they often include a rule specifying what to do if one of the partners wants to end the relationship. A common rule is the so-called Texas Shoot-Out. The dissatisfied partner states a price. The other partner must then either buy the first one out at that price or sell his partnership interest at that price. If you were initiating a shoot-out, what price would you pick?
Most people think that it’s best to state a price at which you’re equally happy being bought out or buying the other partner out. If you value the venture at $100 million, then you state a price of $50 million. You don’t know what the other person will do, but this way you’ve guaranteed yourself half the pie.
Actually, you can do better than this. To see how, we take a short detour to examine the game “I cut, you choose,” the kid’s version of the Texas Shoot-Out. Two kids have to divide a pie—lemon meringue—and each wants the bigger slice. The classic rule is to have one cut the pie and the other choose which of the two slices to take.
The second child—the one who chooses which slice to take—must be at least as happy with his slice as with the other, since he had the choice. Anticipating this, the first child—the one who cuts the pie—realizes that he can’t get more than half. If he divided the pie 60/40, then the second child would take the larger slice, leaving him with the smaller one. So the first child will do best to divide the pie evenly.
But this analysis is too simple. It presumes that the two kids view the pie the same way. Suppose, instead, that the second child prefers crust, and the first knows this. If that’s the case, how should the first child divide the pie? He could still cut right down the middle, as shown on the left. (See next page.) But he can do better by cutting the pie as shown on the right. The top slice is bigger, but the bottom slice has just enough extra crust to entice the second to pick it, leaving the first with more than half the pie.
Let’s apply this lesson to the Texas Shoot-Out. What matters isn’t just what you think the venture is worth but also what you think the other partner thinks it’s worth. The right strategy takes account of your perception of the other partner’s perception of the pie.
Suppose you value the venture at $100 million, and you know your partner values it at $60 million. Then the right strategy is to figure out the price at which your partner would be equally happy to buy or sell, and to give him some incentive to make the choice that you want him to make. If you state a price of $50 million, you don’t care if he buys or sells. But he would much rather sell to you at $50 million than pay that amount to buy something worth only $60 million to him. So you’d do better to state a price of $31 million. That way, he’d rather sell to you than buy you out—just. You’d get to buy his share for $31 million rather than $50 million. If you think it’s better to give your partner more of a nudge in the right direction, then state a price of $35 million; you’ll still come out ahead.
Is it reasonable to presume that you know your partner’s valuation? Obviously, you can’t know it exactly, but often you can have a pretty good idea. Remember, you were partners. The two of you have been working together, and so you have a good chance of understanding how your partner views the business. The two of you may even have debated how much the venture was worth. In a case where we helped a company through a Texas Shoot-Out, it was a disagreement over valuation that led to the breakup.