Barry Nalebuff-Good people act Badly because of wrong incentives

Barry Nalebuff
Barry Nalebuff is Milton Steinbach Professor at Yale SOM where for thirty years he has taught negotiation, innovation, strategy, and game theory. He speaks with us on why "Important projects are often easier than trivial ones", why you should "Be prepared for others to screw up" and why you should "Feel free to bend the rules". Hosted by Duff Watkins.

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About Barry Nalebuff

Barry Nalebuff is Milton Steinbach Professor at Yale SOM where for thirty years he has taught negotiation, innovation, strategy, and game theory. 

He is the co-author of six books and an online course. Thinking Strategically and The Art of Strategy are two crossover books on game theory with over 400,000 copies in print. Co-opetition looks beyond zero-sum games to emphasize the potential for cooperating while competing. Why Not? offers a framework for problem solving and ingenuity. Lifecycle Investing provides a new strategy for retirement investing. Mission in a Bottle tells the story of Honest Tea. His Negotiation course (available for free on Coursera) has 67,000 active learners and the second-highest net promoter score on the Coursera platform.

In 1998, Barry together with his former student Seth Goldman cofounded Honest Tea, a company that sells ready-to-drink iced tea that tastes like tea. One of Inc. Magazine’s fastest-growing companies, Honest Tea has now sold its second billionth bottle of tea. In 2011, the company was purchased by Coca-Cola. His second venture, Kombrewcha, is a slightly alcoholic version of kombucha. The company was acquired in 2016 by AB-Inbev. He is currently working with Quaker Oats to help create Maker Oats, an unusually thoughtful overnight oats product.

He works with many entrepreneurial firms. He serves on the board of Q Drinks (started by his former student Jordan Silbert), Calicraft Beer, and AGP Glass. Alongside startups, he has extensive experience consulting with over fifty multinational firms. He advised the NBA in their prior negotiations with the National Basketball Players Association and served on the board of Nationwide Insurance. A graduate of MIT, Rhodes Scholar, and Junior Fellow at Harvard’s Society of Fellows, Nalebuff earned his doctorate at Oxford University.

 

Episode notes 

Lesson 1: Imagine that you have 10x more money than you presently have. What would you do differently in your life? 02m 52s

Lesson 2: Important projects are often easier than trivial ones 05m 33s.

Lesson 3: You have to be fundamentally different and better to get noticed. 08m 18s

Lesson 4: If you think A is the right solution but you know others favor B, then make an impassioned case for B before explaining why A is the correct solution. 14m 24s.

Lesson 5: GOOD people are led to act poorly by BAD incentives. 18m 50s.

Lesson 6: For each action you take think about it from 3 perspectives.24m 25s.

Lesson 7: It isn’t enough to be right. You have to persuade others that you are right. 29m 45s.

Lesson 8: Be prepared for others to screw up. 31m 14s.

Lesson 9: Feel free to bend the rules 38m 27s.

Lesson 10: ?.

Barry_Nalebuff-10Lessons50Years

Barry Nalebuff: [00:00:00] There’s a line from Shakespeare, many, a slip betwixt cup and lip. And in general, people say to me all the time, you know, oh, you’re micromanaging. You’re sort of worried about all the things that can go wrong, but the answer is the amount of stupidity that’s out there never fails too.

Duff Watkins: [00:00:21] Hello, and welcome to the podcast 10 lessons it Took Me 50 Years to Learn it. We talked to sages and gurus and leaders and luminaries from all over the world to dispense wisdom for life and career in order to provide you shortcuts to excellence. My name is Duff Watkins and I’m your host. Our guest today is Barry Nalebuff who is a professor at the Yale school of management.

Barry has a 30-year career where he’s been teaching negotiation. Game theory, innovation strategy. He’s author of six books and online course that I want to talk to you about Barry. This online course is first of all, welcome to the show.

Barry Nalebuff: [00:00:57] Thank you.

Duff Watkins: [00:00:58] This online course on negotiation, and I want to mention it to them to the listeners.

 It’s offered through Coursera, which is the site, or an organization organized by 200 universities and big businesses, and they offer free online education. Your course on negotiation. Is really, really popular. There are over a one Coursera there’s over a quarter million active learners at any time, but you are the second highest ranked presenter teacher and the group.

And your score is 4.95. Out of five. So, my first question is Barry, .05?

Barry Nalebuff: [00:01:33] Who’s that person who didn’t give you the five. That’s what I want to know. Who’s that person?

Duff Watkins: [00:01:38] Where’s the 0.05. I mean, come on. Where did you let yourself down? Exactly.

Oh, my God. Who’s the top guy person mean audience?

Barry Nalebuff: [00:01:51] I don’t know. It has to be the best. And so, 4, 9, 5 that’s the units they go with is you know, when Hertz went over to Avis. We try harder so there’s always room for improvement.

Duff Watkins: [00:02:03] on that. That’s a tough gig man.

Barry Nalebuff: [00:02:07] negotiation. I don’t seem to have negotiated very well since I’m giving the course away, but there you have it.

It’s not all courses on Coursera, are free. And in fact, they’re actually slightly annoyed at me because,

Duff Watkins: [00:02:19] I’m showing up some of the

Barry Nalebuff: [00:02:20] other courses, they charge a lot more money for. There you go.

Duff Watkins: [00:02:24] There you go. That’s a friend of the people. Now, the other thing I want to point out to listeners Barry is not some sort of armchair academic, he has founded participated in two or three.

I lose track, of how many companies, two of which have been sold to major multinationals for some serious coin. So that’s why when Barry speaks. We listen. And, and it’s not an accident that well, you mean you teach in the school of management. So, you know a bit about this. Not only do you teach it, you do it and you do it well.

Now, speaking of money that takes us into the very, very first lesson. It’s actually more of a thought experiment. So, when you’re asking us to do this 

imagine that we have 10 times more money than at present. The question is what would you do differently?

Barry Nalebuff: [00:03:05] I think this is the Harry Potter. The reverse mirror desire.

Where there’s the mirror of Erisad? The question is how would you run your life differently if you had no constraints? And after we sold honesty to Coca-Cola, I was in the fortunate position of being in that case where really the financial constraints in my life were lifted. And afterwards I’m living in the same house.

I’m working the same job and married to the same woman. And what that says to me is that in some sense, I was doing things right beforehand because I, it wasn’t as if there was something I fundamentally wanted to change in my life as a result of having more financial freedom. Right. I’d say, I think an important lesson for people.

Well, if you’re doing what it is, you really enjoy doing, so you don’t have to change anything. That’s a sign that you’ve got things right now. There’s a flip to that same point, which is, there were some things I did differently. For example, I hired a personal trainer and lost,

close to 40 pounds.

Duff Watkins: [00:04:04] Congratulations.

Barry Nalebuff: [00:04:05] Thank you. But I should have done that beforehand. It wasn’t that expensive. And so, there were some things, in some sense, I didn’t do some things. I’m glad I didn’t do, but the things that I did do differently I should have done. And so, another, you can ask us, what are the things that you would do if you had a whole lot more coin and you may realize that some of them, there’s no reason not to do right away.

Duff Watkins: [00:04:27] Yeah. There’s nothing stopping you.

Barry Nalebuff: [00:04:29] There’s nothing stopping you. They weren’t that expensive. At the end of the day. And so go for it.

Duff Watkins: [00:04:33] You mentioned that company, honest tea. And I think when we first met, I don’t know if it had actually occurred yet, but I read somewhere, they just sold their 2 billionth bottle.

I don’t even know how many zero was around a billion, but the point is that’s a lot of tea. And I remember you said your business success was going to be the recipe you’re going to. Tea leaves and douse them a scalding water. I said, wait a minute. Didn’t I do that just this morning in my kitchen for breakfast.

And it worked for you.

Barry Nalebuff: [00:05:02] Tea that tastes like tea was a, it’s a pretty simple idea. But for some reason, everybody else who was selling tea in a bottle was putting in so much sugar that it turned into liquid candy, rather than iced tea. So, we brought back the basic idea of tea leaves in boiling water and it.

Duff Watkins: [00:05:17] worked, it’s still working, still working.

Barry Nalebuff: [00:05:19] Yup. Sales are closing in on a half a billion a year now. So, people outside, my immediate family are apparently buying the product.

Duff Watkins: [00:05:27] And, and drinking heavily too. Yes. All right. 

Lesson number two. Important projects are often easy. Then trivial ones.

Barry Nalebuff: [00:05:35] If you want to get something done, it helps to get a lot of people behind you, chipping in contributing.

And the fact is if it doesn’t really matter, then other folks everybody’s busy. Similarly, if you want your employees or your team members to really. You want them on Friday afternoon to be saying, damn, I have to wait the whole weekend before I can get back to work on Monday. And that’s not going to happen if this is a minor small thing.

And so, to the extent that everything you do requires effort. One, you might as well, make sure that in the end is worth something. And there’s a sense in which in academia, you write a paper, that’s a marginal paper. People come up with all sorts of reasons to make you make revisions. They take forever to review it because they don’t really care about it, but it’s something that’s super exciting.

Then they want to see it in print, and they want to help you as opposed to frustrate you. And so, we tend to think, oh, I can do this project because it’s not going to take a lot of work. And the answer is everything. And in some ways the less work you think it is the harder it’s going to be to finish. And so, you might as well go for there.

You don’t have to do world peace. I mean, let’s, let’s be clear about that. So, I don’t want to say, want you to be so ambitious that it’ll never happen, but I want you to be a lot more ambitious because the projects that matter. In the end of the day actually are ones that are easier to,

Duff Watkins: [00:06:56] to make happen, more ambitious projects.

They attract more support, more supporters, maybe even more money. And just by thinking big, and as you say, both of them take pretty much the same amount of time or very similar amounts of time.

Barry Nalebuff: [00:07:10] What you thought you think the big project is going to be a lot harder and longer, and the small project you just kind of make it happen.

There are they’re bureaucratic obstacles, there’s attention obstacles. And so, all sorts of obstacles, get in your way of these little things. And. At some point you get ground down, it’s just not exciting. And so, it isn’t worth it. And I said my own academic world, if I try and publish kind of a little simply add on paper, the referees will take months to review it.

They’ll come up with all sorts of picky comments because in some ways everyone can do the little things. And so why are you getting to do this rather than me, but when it’s the big thing, it’s like, wow, I’m excited by that. Let me join this team. Let me make sure this happens. Let me tell other people about it.

No, one’s going to be going and sharing the excitement about this small little project they’re working on. And so, focus your energies on things.

Duff Watkins: [00:08:06] Okay. Lesson number three. I think this is for entrepreneurs and this, by the way, Barry is the only one I really want to contend with I want to discuss with you this number three, 

you have to be fundamentally different and better to get noticed

but this flies in the face of all my experience,

but

Barry Nalebuff: [00:08:21] you go ahead. Well, let’s hear the objection so I can,

Duff Watkins: [00:08:23] Well, not so much an objection. And just a what I know, what I’ve read is that in marketing perception, it’s, it’s about perception, not product. There is no best product that it’s, the mind matters more than the marketplace that is in terms of getting into a person’s mind, capturing mind share again, regardless of the quality, the suitability of the product.

People are more interested in what’s new rather than what’s good or better or best. And finally, that the way to get into people’s minds to get them to behave, to get in, to buy things, just the simple, ongoing repetition of something. Anything could be true could be false, just as simple. And this is known by every marketing department, an authoritarian leader.

Barry Nalebuff: [00:09:04] If you would have gobs and gobs of money.

So, you can repeat your message again and again, and you can have all sorts of billboards and TV and digital media. Sure, you might be able to make it happen to repetition, but what are you going to do to get people’s attention when you don’t have any money? Because that’s the situation. If you’re an entrepreneur one way to do that is to solve a fundamental problem.

That people really end up caring about your product because they understand why it’s different and better. And it doesn’t have to be on the world peace level. I mean, one of my recent discoveries is a company called good culture and they have reinvented cottage cheese. Now I basically, you know, I had cottage cheese as a kid, and then I think it was Kraft cottage cheese or somebody basically they took this product and did nothing with it.

Meanwhile, if you think about how yogurt has developed over the years, Now we have full fat, low fat goat’s milk, yogurt, sheep’s milk, yogurt, Greek yogurt, Turkish yogurt. You know, you think about the number of yogurts that are out there. Cottage cheese has more protein than yogurt actually, I think has a better chewiness to it.

Fewer calories. It’s a great product. That’s done nothing. And so, I can get excited about great cottage cheese when it comes down to it. It’s not just like a little bit better. It is really like, wow. This is what cottage should have been. And I think people felt that way about Greek yogurt, by the way, when that happened.

And so that’s a sense in which if customers can’t really tell the difference. Yeah. You can try and persuade them through repetition, through banners, through who knows fancy slogan. But that’s not the situation that I think most entrepreneurs are in. So, economics says that you want to go and just offer a little bit lower price and everyone’s going to come racing to you.

I started one company that failed. In New York where we were offering title insurance for people, this is a crazy thing. The United States, when you buy a house, because title registries, aren’t all centralized by the government. People actually want to get insurance to make sure their title is really correct.

And they paid $10,000 for this. It’s insane. And the total number of claims on title insurance is below 1%. So, it’s just a whole bogus business. And we were offering a 25%. And essentially, we couldn’t break through, it was just not enough of a discount to get people’s attention because they were buying a $500,000 house.

And so, kind of the $2,500 difference just didn’t seem enough on that, on the whole transaction. So, you want to be in a situation now, situation where you get people’s attention because they notice either the fundamental difference in price difference. And yeah. If your craft okay, you can tell me again and again, you know, about this dog food or this catch-up or something, but that’s not most entrepreneurs.

Duff Watkins: [00:11:51] on the cottage cheese.

How did they improve upon cottage cheese? I can’t imagine how you, of course, I didn’t imagine how you could improve upon tea, and you taught me how to do that. So

Barry Nalebuff: [00:12:00] how could you improve on yogurt? Right? You use better milk, various ways of training. And I don’t know how you, how you make it. Whatever it is. If I gave you these two next to each other, you would know right away what the difference is.

I mean, it’s almost the different between sort of American cheese and real cheese and the other nine. And you said early on, by the way about this notion. Perception. Look, I agree in the end it’s the perception is what matters, and the perception has to be that you’re different. One way to get that perception is to have the reality be fundamentally different and better.

So, you can either try and fool people into thinking it’s better and different than it is. Or you can try and convince them of the truth. And I’d rather spend my effort convincing them of something that’s true than trying to persuade of something it’s only in their head.

Duff Watkins: [00:12:44] Well, opinions vary about that, but it seems to me on your mortgage example that you did have a substantial reduction from the competitor, but for whatever reason, it was not perceived that way as being significant to the buyer.

Because as you say, they’re buying a house that’s half a million bucks. So, what’s another, you know, few bucks here, but it was significant for your business model.

Barry Nalebuff: [00:13:02] And in the end, what we should have done is go more to the commercial market. Because when you’re buying a $50 million property, now the numbers start really adding up.

And so, so that was partly our, our challenge. That even though it percentage was large; it wasn’t the absolute dollars. Weren’t enough, really to get people’s attention, to go with an unproven company. In spite of the fact that I had Lloyd’s of London being our backstop. So, you needed people to actually pay attention.

One view is they should never care about this cause they never going to make a claim. They’re only getting it because the bank is making them get it. But it’s like, why should they pay attention? Their lawyer says, who are these people? We’ve never heard of them. No go with this. Tried and true, but if I want somebody to go and do some investigation, you know, for $15,000, they’re going to, they’re willing to do it, not maybe for two thousand.

Duff Watkins: [00:13:47] And so the other message is that even the smart guy from Yale had a failed business attempt. So, like every other entrepreneur.

Barry Nalebuff: [00:13:55] Well, let me put it this way. I was failed as an, I was a, on the board and investor, but yes it was not all my investments.

Duff Watkins: [00:14:02] Right, right. Which is the nature of business. Lesson number four.

This is I know you’ve done some negotiation work with the NBA. That’s a national basketball association, the professional basketball league in the U S just in case there’s anybody on the planet left, who doesn’t know what the NBA, so you you’ve been involved in   negotiations. And I think you said this comes from them.

If you think A is the right solution, but others prefer B, then make an impassioned robust case for point B before you suggest that point A is the right solution.

Barry Nalebuff: [00:14:40] This is a lesson I learned from David stern, who recently passed the former commissioner of the NBA. And we know this in law that you want to bring up the other side’s arguments before they bring them up. And negotiation is often viewed as a test of wills. It’s they make some arguments you have to show them why they’re wrong. Well, people then keep on arguing when they don’t get their way. They think the reason they’re not getting their way is because they’re not being understood.

And if only they could really be sure that   if you only appreciated their arguments, you would be more likely to accept their position. Now what’s the best way to convince somebody. You understand their perspective? Well, if you make their arguments for them, that’s a great demonstration that you understand where they’re coming from and why they want to be.

Now, after you’ve done that, what happens? Well, one, they don’t have anything left to say, cause you already made their arguments and there’s no point repeating. And secondly, they’re not confused about whether or not you understand why they want B you better, of course have some arguments for why A is the right choice.

That’s better than theirs. But we spent all of our time, trying to knock down somebody’s arguments against B. The end result is that they’re convinced that we don’t understand. Why B has some advantages to it.

Duff Watkins: [00:15:55] So when you demonstrate that you do understand B, understand it, well, that puts you in a position to refer more authoritatively to solution A and as you say, you got to have some arguments for that to support that.

Barry Nalebuff: [00:16:06] Yeah. I’m okay with the authoritative, but I want to emphasize something else, which is if you’re the, A supporter. I’m sorry, you’re the B supporter. And I’ve made all of your arguments for you. You have nothing left to say because there’s no point repeating things.

That’s just taking up airtime that doesn’t help. And then the other thing is, are you still concerned that I don’t understand your arguments and I ease that issue? If you’re not getting your way, it’s not because you haven’t been understood. And that’s a critically important thing that the more you argue against the other person’s claims, the more they think you’re not understanding them.

And it’s scary because you’re acknowledging there’s some validity to their arguments. And therefore, we think, oh my God, that means I’m going to have to give them B no, there better be just some other. Powerful more valid arguments in favor of a great way of diffusing

Duff Watkins: [00:16:54] arguments, something herb Cohen. I learned from herb Cohen many years ago will famous negotiator just draining the emotion from it.

I mean, and as you, right? I mean, if you’re a point B support, it’s very hard to say. Yeah, what Barry just said. Yeah. That’s our position that makes it.

Barry Nalebuff: [00:17:11] I’m a huge herb Cohen fan as well. I’ve learned many lessons from him. We see this with kids. If you want to get a kid to leave the swimming pool and you say, come on time to go home for dinner.

The kids basically starts crying. And why is that? Well, one, they don’t want to leave the pool, but two, they don’t have the vocabulary to articulate. Why it is, they think the pool is the cool place to stay. And so, by helping them verbalize their arguments, you demonstrate that they’re leaving the pool.

Not because the pool isn’t fun. It’s because it has to be some better reason look, we’re going to go home. By the time we get home and have dinner ready, you’re really going to be hungry. And it’s not just you, there are other people who are going to be hungry and therefore, as much as I’d like to spend the rest of my life in the pool, and God knows I do.

At some point we do have to eat and not just you. And that’s that inability of the other side to either verbalize or have you, or have the view that you haven’t understood. Is what I really am trying to emphasize here. And by the way, when you make their arguments, don’t assume you’ve got it right. So, you should always be saying, have I understood? Is that correct? Have I missed, left anything out? Is that really? What’s motivating you here.

Duff Watkins: [00:18:24] Good examples all the way. All right. Very good. 

Lesson number five, good people, or lead to act poorly or behave objectionably or act badly because of their poor incentives.

Barry Nalebuff: [00:18:40] I was once we a consulting assignment for a company, and there was a salesperson who was effectively a one-man price war. And as a result, prices kept on going down to this industry and we’re trying to get how to end the price war. And the answer is we were the ones starting it. And why was it?

Well, this gentleman was constantly getting his full bonus for hitting his sales target. And nobody seemed to care about his profit margin. They focused on his Q not his P. And so, you can tell the person all day long. Not to go out there and try and steal everybody else’s business. But at the end of the day, we seem to reward him for that.

So that’s what he did. And one view was, well, we should fire this person. And the answer is no, we should fire ourself because we were the ones who were rewarding him for doing the wrong thing. And when we changed, set a contract and made it clear, the guy’s behavior changed. And so, he understood how he was being compensated.

We asked you a question that you you’d like to think, oh, I’m going to pay you for this, but I’d really like you to do that. And it turns out that doesn’t work, that people figure out what it is that you are paying them for.

Duff Watkins: [00:19:45] Cause the guy is smart. Of course, he figured it out. And of course, I’ve seen it replicated in so many companies.

Barry Nalebuff: [00:19:50] Right? My wife was a banker at Citibank, and they would give her a bonus. Based on the fees she would earn on their first year of her contracts when she signed up another bank. And these tend to be three and five-year contracts. Of course, when you bring in the new customer in what they fundamentally cared about was getting a great deal in year one.

So, they could look good because we had this whole problem because from her perspective, she only cared about year, one fee from the banks, the customers. They, in some sense, one of the first year for you to be low, she wanted it to be high and nobody seemed to care about years two through five. And so, at one point we talked to the senior managers was like, well, why isn’t the bonus based on the lifetime value of the contract?

Not just the first-year fee answers. Well, what happens if the person leaves, and the answer is we’ll send you a forwarding address to send the checks. So, it doesn’t. We appreciate that the fees and the money has to come in in years two through five. But when it does, you can pay a bonus based on that. And so, you’ve created this incentive scheme whereby you’ve made it harder for us to make the customer happy and to bring the new customer on board.

Duff Watkins: [00:20:55] I mean, you know, people are not dummies. They, they see which behavior is being rewarded. They can figure it out and that’s how they act. You know, it, doesn’t not at all, no longer listening to what the bosses say. You know, I can, I can see who gets rewarded and for what actions.

Barry Nalebuff: [00:21:10] So there are just, if you look around, it’s not hard to find cases where incentives are misaligned and when you find them just fix the incentives and behavior will follow rather than try and change the behavior directly.

Duff Watkins: [00:21:22] Pretty simple, isn’t it fixed incentives. The behavior will follow.

Barry Nalebuff: [00:21:26] But it’s not so simple because people don’t see those. Cases, I give you one that’s I think very well hidden in the United States. People are really trying to get a tax on gasoline for carbon and folks. Who’ve talked about 50 cents a gallon tax, a dollar, $2, no one even thinks $3 taxes at all feasible. Politically, if you look at the way auto insurance is sold, auto insurance is sold on an all you can drive basis. By that, I mean, you pay the same amount for auto insurance. If you drive 10,000 miles or a hundred thousand miles a year, which is insanity, it’s like saying I’m going to charge you the same amount for gasoline.

If you drive 10,000 or a hundred thousand miles a year, no, you pay 10 times as much for gas. And the average person who drives 12,000 miles a year pays roughly. $1,200 for gas and $1,200 for insurance. And so, insurance is about the same price as gasoline. What that means is if you had to pay for insurance on a per mile basis, which is the smart way of doing it, you would effectively double the price of gasoline.

So, it’ll be like the equivalent of another $3 a gallon tax. So, we are subsidizing people to drive. More by saying, we’re not going to charge you an extra $3 for 25 miles of driving, which is what we should be doing. And as a result, people drive too much.

Duff Watkins: [00:22:41] So you’re saying you more of a user pays system. The more you drive, the more you pay.

Barry Nalebuff: [00:22:46] Correct. And the answer is obvious. You just have to say, wait a second. How come we’re not doing that here?

Duff Watkins: [00:22:52] Well, the answer, I suppose it would be the entrenched interests that have a financial incentive to keep it the way it is.

Barry Nalebuff: [00:22:58] So I, I served on the board of a fortune 100 insurance company for a dozen years.

And I was pushing them the entire time to, to do this one challenge is that men drive twice as much as women and pay the same amount for auto insurance. If you’re going to go to a pay per mile basis, you have to raise your rates on half your customers and lower your rates on the other half. Well, those people you raise your rates on, might leave you and take with them, their homeowner insurance, their life insurance and other products.

And so that’s a challenge, but what’s happened since then is companies like Metro mile have come in and are offering pay per mile insurance. And so, all the people who are low mileage drivers are moving over to them and does that do that leave you stuck with a really high mileage people who are being subsidized.

And so eventually that system collapses because it, the people that ultimately have to keep on raising their price, and then they’re going to leave when it takes a while. And so that’s why it’s hard for the incumbents to change.

Duff Watkins: [00:23:49] So it’s not as easy and straightforward as it appears, but again, the point is align your incentives with the, with the behaviors that you want repeated.

Lesson number six, this is for every manager out there. I want you to hear this in fact, write it down. 

For each action. You take, think of three perspectives first. What is the effect we’ll have on the current situation? Two what is the effect it will have on the precedent three, what is the effect it will have on my relationship with others.

Barry Nalebuff: [00:24:19] I’ll give you an example of where I got this wrong and got myself in trouble. I served on a board where we had great trips to Hawaii and Paris and all sorts of things where we would meet the top salespeople and the management of the company gave us, the board members, the same kind of, I don’t know. I want to come chotskies cause they more, that rewards presence that they were giving their top salespeople, things like apple watches, funky, fancy sunglasses and so on.

And I pointed out. You know, it’s one thing for us to be there because we want to congratulate and reward the salespeople, but we hadn’t done the sales. We weren’t entitled to these presents, these bonuses management wasn’t giving it to themselves. They were just giving it to them the top performers.

So why were we getting this? On a scale of things you know, I don’t know, maybe it was a thousand dollars, so it wasn’t like a huge amount of money, but I thought we’re in the process of costs tightening and it was just sending the wrong signal. Some of the management folks. They said, you know, thank you for saying that because some of our staff, you know, they feel a little jealous about this.

They don’t think it’s really right, but they didn’t want to upset the board. So, it has to come from the board. And so, I propose this, and it passed unanimously. Cause how could anybody possibly object to this? Can’t really say, yeah, we should be getting these things that we don’t deserve. And then it turns out many of my board members, spouses we’re all upset because they like those things because their spouses were just too damn cheap to get it for them. And so, I really, pissed off a lot of my colleagues in this process and hurt my relationships, the question was, was it worth doing or not? And it was a small battle. And the end of the day, it didn’t really make a lot of difference in terms of the money.

So, I don’t know. My view in life is I really care about making the right decision and I care less about the effect it has on other people and my relationships and the precedent. I care about that, but I suspect I would’ve been more effective in the long run if I cared about those things more as well.

Duff Watkins: [00:26:13] Possibly, possibly, but I mean, I think it says more about them. The board members and their spouses than it does anything else. I mean, let’s not overlook that fact, but humans are humans.

Barry Nalebuff: [00:26:22] I got it, but I had, I had to work with them. Right. They’re there, they’re not going anywhere and they going to be for the next 10 years. And so okay. Some of them were small-minded and cheap. I got it. Now, the question is, what do I do about that?

Duff Watkins: [00:26:33] Well, take it into consideration and modify your behavior accordingly or not. I mean, that’s what it comes down to I suppose.

Barry Nalebuff: [00:26:40] I mean, they’re getting, you know, $300,000 a year for being a board member and they’re whining about losing a thousand dollars in little presents anyway.

So, I tried to set the right example, but I said it, it definitely hurt my interpersonal relations. And you know, you spend a lot of time having dinner with your other board members and often their spouses on these trips.

Duff Watkins: [00:27:02] Well, I’m a little surprised by that and I can understand it being a kerfuffle. If that’s the word I’m searching for, but for it to linger and carry on and be extended past, you know, eight, 12 minutes.

I mean,

Barry Nalebuff: [00:27:13] I that’s what I’m dealing with my friend. So, here’s the thing. Had you been on the board with me? You would have made the same decision and I wouldn’t have had that problem with you, but for the other folks, some of them that was not who they were.

Duff Watkins: [00:27:30] You’re saying that, recently in Australia, a woman who headed Australia post, she gave her senior executives some Cartier watches valued at, I don’t know, I think 20,000 each and, and a bunch of them, I don’t know, let’s say 200 grand and the press found out about it when crazy government found out a bit, went crazy. She said, wait a sec. These people just won a $26 million contract that will keep this company Australia post afloat.

And by the way, it’s all according to board guidelines. Bottom line is she ended up leaving the company after much embarrassing she’s. Now she now has another job, but you know, the people who look bad are the government and the press were getting it so wrong. Somebody brings some the bacon for $26 million to a shrug me enterprise.

She gives him a Cartier watch. I mean, where are you going to wear a Cartier watch? I mean, you know, I mean, not have to go to that many balls.

Barry Nalebuff: [00:28:21] But I think that was her mistake. It was the wrong, it was the wrong watch. They should,

Duff Watkins: [00:28:26] it should have been a Casio, like, you know, like mine. Yeah. But I mean

Barry Nalebuff: [00:28:31] a smart car or something, give him a Tesla.

But the point is they’re these small, minded folks. In this case, it was the press. And it turned out that she made the right decision. I thought I made the right decision, but it ended up backfiring because of the cost it had on relationships. And so, you have to think about what did you learn when, when small minded people protect their own interests?

You know, this was a case. Remember I one of our earlier points is you should focus on the big things, rather than little things. They were big issues I cared about too. If I’m going to piss somebody off, I might as well piss them off on the big things.

Duff Watkins: [00:29:03] Yeah. So, spend your political capital wisely, I suppose, is my take on that?

Yeah. All right. Well, that takes us to the 

Lesson number seven. It isn’t enough to be right. You must persuade others that you are right.

Barry Nalebuff: [00:29:19] That’s I’d say the biggest difference between a professor and being in the real world, because academia, the best thing that ever happens is you go out there with your theory, your research, and everyone says, oh, that’s completely BS it’ll never work. And then 10 years later, people discover you were right. You win your Nobel prize, you get your tenure, whatever it is as like, wow, look how smart original that person must be because no one thought it could ever work in the real world. If you’re proven, right? 10 years later, that doesn’t help because you haven’t launched you, haven’t made it happen.

And so, there’s a distinction between having the right idea and convincing others. Now, not in 10 years, it doesn’t help to say yeah. You know, idea that iced tea thing that people said wouldn’t work. Look, 10 years later, somebody else did it, I was right! You have to go and get people to be believers. The, I told you, so get you a huge amount of points in academia not in the real world.

Duff Watkins: [00:30:15] Well, I always say in terms of sales, marketing, and relationship, it’s all about, can you convince and persuade the other person? Can you convince, persuade me to buy your product or whatever, you know, you’re married, you know what it’s like, you got a partner you got to convince and persuade all the time and sometimes you can and sometimes you can’t and sometimes it’s okay.

Maybe even good if you can’t, because that’s the way it goes. You don’t win them all. That’s for sure. 

Lesson number eight, be prepared for people to screw up

And my corollary to that is, and they will not disappoint you.

Barry Nalebuff: [00:30:46] Yeah. So, there’s a of Shakespeare, “Many, a slip betwixt cup and lip”. In general people say to me all the time, you know, oh, you’re micromanaging. You’re sort of worried about all the things that can go wrong, but the answer is the amount of stupidity that’s out there never fails to surprise me. My favorite examples of this. I’ll give you two. We went to one store Honest Tea. Where they weren’t putting Honest Tea in the cooler right next to the salad bar.

And we said to the manager there, look, here’s some data showing our tea, outsells the product you have there two to one. In your store. So, can you please put our product in the cooler here? I know that we used to have the tea there. The problem is it’s sold out so quickly that the shelves were empty by lunchtime.

And then we’ve got complaints. I put this new thing in there. It doesn’t sell and now it’s not a problem. It’s like, okay, I want to shoot him at this point and say, well, what about just restocking? Because, well, if I restock, then it’s not cold. And I said, well, what about taking cases? Putting them in the cooler in your back?

So, when you restock, you restock with chilled product? He said well I’m not allowed to do that. Because your product’s shelf stable and we have to reserve the refrigerated area only for products that need to be refrigerated. Okay. So let me get it right. So basically, your solution is to put stuff in that doesn’t need to be restocked because that’s how you’re going to make customers happy by giving them stuff they don’t want.

Duff Watkins: [00:32:15] No, it’s going to make his job easier with fewer hassles.

Barry Nalebuff: [00:32:20] What our solution was is we bought the guy a bigger fridge. So, because ultimately his problem was our problem. But nonetheless, it’s like, yeah, guess what, if you don’t open up the store until five in the afternoon, you don’t have to worry about restocking for lunch.

Another case is we had a distributor who told us he wouldn’t carry our product cause he wasn’t making five bucks a case thinking that doesn’t make any sense. Snapple, you know, what do you make with Snapple’s is I make 7.20 with Snapple. Wait a second, you know, you’re making what, 4.50 with us.

How can you make so much more Snapple since our product sells for more? And then I realized Snapple comes in 24 bottle cases. We come in 12 bottle cases. So, on a 24-bottle equivalent, he’d be making $9 with us versus 7.20 with Snapple.

Duff Watkins: [00:33:03] Darn that arithmetic.

Barry Nalebuff: [00:33:05] And I said, look, you know, you’re comparing a 24-bottle case to a 12-bottle case, you know?

And I said, look, if we took two of our cases and wrapped them together with tape. Would that work for you? So yeah, that works. I’d make nine bucks a case. So, could you just wrap them in your mind?

Duff Watkins: [00:33:26] You know, what I love about this is that it’s so real, so true, so accurate. And I think anybody in businesses had similar experiences.

Barry Nalebuff: [00:33:32] When we just in a, in another company I’m in, we just got kicked out of a large supermarket chain because they didn’t think our unit volume was high enough. And yet we were killing it in dollar volume.

Cause we were 9 99 for five pouches, and we’re going up against other people who are selling single cups for 2 79. So, our unit volume to be half of theirs and our sales could be three times theirs. And like, what do you care about units? Or you care about dollars? It’s like, yeah, well, I’m being measured on the unit velocity.

And so, they, this is going back to that old notion. If you give people the wrong incentives, they do the wrong thing. In my case, we ended up being screwed by it because of the pandemic we didn’t have the chance to make our case in person, but it’s just insanity. So, in the end, by the way, we had to start selling single pouches.

And so, because that way we had many more units, but we’re measured on stuff. That makes sense.

Duff Watkins: [00:34:26] The thing that I see here, and I I’ve, you know, I’ve been management consulting for decades now is so many companies don’t actually understand their own business. And as you say, they’re measuring the wrong things, set up for the wrong things.

And it’s not, I forget who said it, but the whole idea is to create a customer and keep a customer. You do that. And you’re pretty much on the right track.

Barry Nalebuff: [00:34:46] And they come up with silly rules. Like I’m going to mark everything up 30%. And not make a distinction between a product that’s a premium product or generic product.

And so, if you’re selling Honest Tea, a $2 and Snapple at one, you actually need to make 60 cents and every bottle of Snapple versus 30 cents on a I’m sorry, 60 cents on a bottle of Honest Tea versus 30 cents on a bottle of Snapple? At the end of the day, the customer is going to be buying one bottle. And so, I don’t claim that profit to have to be the same on each.

So, you might say, I want to make 40 cents on Honest Tea and 30 cents on Snapple, but I don’t know, why should you be double? And they basically say, well, you know, I have to have the, my analysts who just looking at my profit margin, but ultimately, it’s profits. It’s not profit margin that matter. And you want the customer to buy the $2 thing.

So, you could make 40 cents around the $1 one, so you can make 30. And they’re actually discouraging customers from buying the products where they make more money. And so instead of thinking about what our profit margin should be on each product, they just say for this whole category, We are going to impose a 30% or 40% or whatever markup rule they’re using.

And that just penalizes anybody who has a premium product. And so, it pushes everybody towards the low end, which is not great. And this is true, even at Amazon where you think that they have, you know, literally thousands of people who are plenty smart and super data focused to get this. But they don’t.

Duff Watkins: [00:36:15] I think what you’re also illustrating is the resistance that people have when the explanation is proffered to them. And I really liked the lateral thinking did by buying the guy, a new refrigerator, a new cooler, because. A good win-win situation. That’s thinking laterally, thinking outside the normal constraints,

Barry Nalebuff: [00:36:34] You’re assuming their thinking, but that’s the problem they don’t get to think. That what companies do is they create rules. So, they can be run by idiots because eventually they will be, that was the Peter Lynch line. You want to invest in a company that can be run by an idiot because eventually it will be in. And the problem is the company doesn’t want folks thinking.

And so, either they don’t think, or they’re not allowed to. And that’s the, that’s the challenge. And it goes back to our earlier lineup, but incentives that this guy being incentivized to move unit volume or another case in the company I was involved with basically, we were making products at below efficient scale because we’re new.

What that meant is we would do a larger production when they made sense. So, we therefore have more inventory, but the person who’s in charge of inventories basically was killing us saying, oh, you’re all my metrics are looking terrible. Because in this matrix organization, he didn’t care about what, what our cost to production was.

He only cared. What does inventory turns were? So, everybody looks at their one piece of the picture and not the big piece, not the full picture.

Duff Watkins: [00:37:35] Well, and that of course is that’s where the general manager, the managing director, the senior execs, that’s what they’re supposed to be doing yes?

Barry Nalebuff: [00:37:42] Assuming it ever gets to them.

Duff Watkins: [00:37:43] All right. We’ll move on to lesson number nine, which is 

feel free to bend the rules

For example, if somebody asks you for a list of 10 life lessons, you can bet that they’ll be pretty happy with nine.

Hey, wait a minute You’re talking to me?

Barry Nalebuff: [00:37:59] I’m afraid I am,

One of the things that’s true in life is that the rules are things that, you know, I’m not talking about antitrust laws or laws of physics. I don’t want to repeal gravity, but in negotiations, in most things the rules of what you agree they are. And so, feel free to talk about them, right at the beginning.

All right. Say in negotiation, let’s talk about how we’re going negotiate. What’s our ground rules for negotiation. Don’t, don’t jump into talk about price. Don’t jump into talk about reasons. Let’s talk about how it is. We’re going to negotiate. And in general people, I think a little quick to accept the rules.

Duff Watkins: [00:38:29] And you’re pointing out that there is flexibility there is latitude, whether you see it or not, whether you acknowledge it’s there. It’s there. It’s just say, why not explore it? You’re not the only one person, William Murray, a very other famous negotiators point that out.

Barry Nalebuff: [00:38:42] So there you go. Your nine lessons today. That’s it. 

Duff Watkins: [00:38:45] Let me leave one final question. What have you unlearned lately? Something you absolutely knew to be positively true then a while ago. It could be years ago. It could be yesterday, but now, you know, it’s not the case at all.

Barry Nalebuff: [00:38:59] I’m not sure what it is that one of my models in life is often wrong never in doubt. And so, so I think I’ve been wrong about so many things that it’d be hard for me to figure out which one it is that I have unlearned.

So, I would say the recent case of looking at whether or not the COVID-19 came from a UConn lab or not. I would say I pretty early on dismissed that along for some reasonable reasons and it probably isn’t true, but I guess I’d say. I May have dismissed that a little quicker at the time than I should have.

Duff Watkins: [00:39:32] I’m with you.

I mean, I’ve been wrong about so many things. My new motto in life and has been for the last few years a few years is don’t be so sure. That’s what I tell myself all the time.

Barry Nalebuff: [00:39:44] I’m going to try and flip that on you. It’s fine to be sure long as you realize that you’re often wrong.

Duff Watkins: [00:39:49] I have a steady stream of disconfirming evidence coming at me all the bloody time, you know, so, and, and that’s all right, too.

That’s the other thing I quite accept this happened, you know, if I’m wrong, I’m happy. You know, just, just let me know. We can get on with it.

Barry Nalebuff: [00:40:00] We have one of the things I did, and you can give a link to in this piece in the New York times where it’s really a test to look for disconfirming. The people are always trying to find evidence that supports the hypothesis and that what a good scientist does.

And I think actually a good entrepreneur does is look for evidence that proves themselves wrong rather than proves themselves right.

Duff Watkins: [00:40:18] That’s what Don Peppers says. And he, he quotes the story about Warren buffet. I don’t know if it’s true, but it’s worth repeating. He says, Warren Buffett wants to make an investment.

He hires a team of advisors to tell him what we should, and then he hires a team of advisors to tell him why he should. And then he listens.

Barry Nalebuff: [00:40:33] The red team and the blue team. And Israel does that with its intelligence. And the Pope does this, when you elevate somebody to sainthood, it’s the advocatus diaboli. Yeah.

And so, I think we need a lot more of the devil’s advocate out there that the idea that you could be arguing against them, even if you believe in it, because we want to make sure both sides of the argument have been heard.

Duff Watkins: [00:40:54] And we’ll close on that note. Folks, you’ve been listening to the podcast and lessons that took me 15 years to learn where we dispense wisdom for career in life.

Our guest today has been Barry Nalebuff from the Yale school of management. This episode is produced by Robert Hossary. Sponsored as always by Professional Development Forum, which office insights, community or discussions, podcasts, parties, anything you want here, but they’re unique and it’s all free online. You can find the www.professionaldevelopmentforum.org you’ve heard from us we’d like to hear from you. Email us it’s podcast@10lessonslearned.com that’s podcast, 10 number one zero, lessons learned.com. Go ahead and hit that subscribe button because remember, this is the podcast the only podcast. That’s makes the world wiser lesson by lesson.

Barry Nalebuff

Barry Nalebuff-Good people act Badly because of wrong incentives

Barry Nalebuff is Milton Steinbach Professor at Yale SOM where for thirty years he has taught negotiation, innovation, strategy, and game theory. He speaks with us on why "Important projects are often easier than trivial ones", why you should "Be prepared for others to screw up" and why you should "Feel free to bend the rules". Hosted by Duff Watkins.

About Barry Nalebuff

Barry Nalebuff is Milton Steinbach Professor at Yale SOM where for thirty years he has taught negotiation, innovation, strategy, and game theory. 

He is the co-author of six books and an online course. Thinking Strategically and The Art of Strategy are two crossover books on game theory with over 400,000 copies in print. Co-opetition looks beyond zero-sum games to emphasize the potential for cooperating while competing. Why Not? offers a framework for problem solving and ingenuity. Lifecycle Investing provides a new strategy for retirement investing. Mission in a Bottle tells the story of Honest Tea. His Negotiation course (available for free on Coursera) has 67,000 active learners and the second-highest net promoter score on the Coursera platform.

In 1998, Barry together with his former student Seth Goldman cofounded Honest Tea, a company that sells ready-to-drink iced tea that tastes like tea. One of Inc. Magazine’s fastest-growing companies, Honest Tea has now sold its second billionth bottle of tea. In 2011, the company was purchased by Coca-Cola. His second venture, Kombrewcha, is a slightly alcoholic version of kombucha. The company was acquired in 2016 by AB-Inbev. He is currently working with Quaker Oats to help create Maker Oats, an unusually thoughtful overnight oats product.

He works with many entrepreneurial firms. He serves on the board of Q Drinks (started by his former student Jordan Silbert), Calicraft Beer, and AGP Glass. Alongside startups, he has extensive experience consulting with over fifty multinational firms. He advised the NBA in their prior negotiations with the National Basketball Players Association and served on the board of Nationwide Insurance. A graduate of MIT, Rhodes Scholar, and Junior Fellow at Harvard’s Society of Fellows, Nalebuff earned his doctorate at Oxford University.

 

Episode notes 

Lesson 1: Imagine that you have 10x more money than you presently have. What would you do differently in your life? 02m 52s

Lesson 2: Important projects are often easier than trivial ones 05m 33s.

Lesson 3: You have to be fundamentally different and better to get noticed. 08m 18s

Lesson 4: If you think A is the right solution but you know others favor B, then make an impassioned case for B before explaining why A is the correct solution. 14m 24s.

Lesson 5: GOOD people are led to act poorly by BAD incentives. 18m 50s.

Lesson 6: For each action you take think about it from 3 perspectives.24m 25s.

Lesson 7: It isn’t enough to be right. You have to persuade others that you are right. 29m 45s.

Lesson 8: Be prepared for others to screw up. 31m 14s.

Lesson 9: Feel free to bend the rules 38m 27s.

Lesson 10: ?.

Barry_Nalebuff-10Lessons50Years

Barry Nalebuff: [00:00:00] There’s a line from Shakespeare, many, a slip betwixt cup and lip. And in general, people say to me all the time, you know, oh, you’re micromanaging. You’re sort of worried about all the things that can go wrong, but the answer is the amount of stupidity that’s out there never fails too.

Duff Watkins: [00:00:21] Hello, and welcome to the podcast 10 lessons it Took Me 50 Years to Learn it. We talked to sages and gurus and leaders and luminaries from all over the world to dispense wisdom for life and career in order to provide you shortcuts to excellence. My name is Duff Watkins and I’m your host. Our guest today is Barry Nalebuff who is a professor at the Yale school of management.

Barry has a 30-year career where he’s been teaching negotiation. Game theory, innovation strategy. He’s author of six books and online course that I want to talk to you about Barry. This online course is first of all, welcome to the show.

Barry Nalebuff: [00:00:57] Thank you.

Duff Watkins: [00:00:58] This online course on negotiation, and I want to mention it to them to the listeners.

 It’s offered through Coursera, which is the site, or an organization organized by 200 universities and big businesses, and they offer free online education. Your course on negotiation. Is really, really popular. There are over a one Coursera there’s over a quarter million active learners at any time, but you are the second highest ranked presenter teacher and the group.

And your score is 4.95. Out of five. So, my first question is Barry, .05?

Barry Nalebuff: [00:01:33] Who’s that person who didn’t give you the five. That’s what I want to know. Who’s that person?

Duff Watkins: [00:01:38] Where’s the 0.05. I mean, come on. Where did you let yourself down? Exactly.

Oh, my God. Who’s the top guy person mean audience?

Barry Nalebuff: [00:01:51] I don’t know. It has to be the best. And so, 4, 9, 5 that’s the units they go with is you know, when Hertz went over to Avis. We try harder so there’s always room for improvement.

Duff Watkins: [00:02:03] on that. That’s a tough gig man.

Barry Nalebuff: [00:02:07] negotiation. I don’t seem to have negotiated very well since I’m giving the course away, but there you have it.

It’s not all courses on Coursera, are free. And in fact, they’re actually slightly annoyed at me because,

Duff Watkins: [00:02:19] I’m showing up some of the

Barry Nalebuff: [00:02:20] other courses, they charge a lot more money for. There you go.

Duff Watkins: [00:02:24] There you go. That’s a friend of the people. Now, the other thing I want to point out to listeners Barry is not some sort of armchair academic, he has founded participated in two or three.

I lose track, of how many companies, two of which have been sold to major multinationals for some serious coin. So that’s why when Barry speaks. We listen. And, and it’s not an accident that well, you mean you teach in the school of management. So, you know a bit about this. Not only do you teach it, you do it and you do it well.

Now, speaking of money that takes us into the very, very first lesson. It’s actually more of a thought experiment. So, when you’re asking us to do this 

imagine that we have 10 times more money than at present. The question is what would you do differently?

Barry Nalebuff: [00:03:05] I think this is the Harry Potter. The reverse mirror desire.

Where there’s the mirror of Erisad? The question is how would you run your life differently if you had no constraints? And after we sold honesty to Coca-Cola, I was in the fortunate position of being in that case where really the financial constraints in my life were lifted. And afterwards I’m living in the same house.

I’m working the same job and married to the same woman. And what that says to me is that in some sense, I was doing things right beforehand because I, it wasn’t as if there was something I fundamentally wanted to change in my life as a result of having more financial freedom. Right. I’d say, I think an important lesson for people.

Well, if you’re doing what it is, you really enjoy doing, so you don’t have to change anything. That’s a sign that you’ve got things right now. There’s a flip to that same point, which is, there were some things I did differently. For example, I hired a personal trainer and lost,

close to 40 pounds.

Duff Watkins: [00:04:04] Congratulations.

Barry Nalebuff: [00:04:05] Thank you. But I should have done that beforehand. It wasn’t that expensive. And so, there were some things, in some sense, I didn’t do some things. I’m glad I didn’t do, but the things that I did do differently I should have done. And so, another, you can ask us, what are the things that you would do if you had a whole lot more coin and you may realize that some of them, there’s no reason not to do right away.

Duff Watkins: [00:04:27] Yeah. There’s nothing stopping you.

Barry Nalebuff: [00:04:29] There’s nothing stopping you. They weren’t that expensive. At the end of the day. And so go for it.

Duff Watkins: [00:04:33] You mentioned that company, honest tea. And I think when we first met, I don’t know if it had actually occurred yet, but I read somewhere, they just sold their 2 billionth bottle.

I don’t even know how many zero was around a billion, but the point is that’s a lot of tea. And I remember you said your business success was going to be the recipe you’re going to. Tea leaves and douse them a scalding water. I said, wait a minute. Didn’t I do that just this morning in my kitchen for breakfast.

And it worked for you.

Barry Nalebuff: [00:05:02] Tea that tastes like tea was a, it’s a pretty simple idea. But for some reason, everybody else who was selling tea in a bottle was putting in so much sugar that it turned into liquid candy, rather than iced tea. So, we brought back the basic idea of tea leaves in boiling water and it.

Duff Watkins: [00:05:17] worked, it’s still working, still working.

Barry Nalebuff: [00:05:19] Yup. Sales are closing in on a half a billion a year now. So, people outside, my immediate family are apparently buying the product.

Duff Watkins: [00:05:27] And, and drinking heavily too. Yes. All right. 

Lesson number two. Important projects are often easy. Then trivial ones.

Barry Nalebuff: [00:05:35] If you want to get something done, it helps to get a lot of people behind you, chipping in contributing.

And the fact is if it doesn’t really matter, then other folks everybody’s busy. Similarly, if you want your employees or your team members to really. You want them on Friday afternoon to be saying, damn, I have to wait the whole weekend before I can get back to work on Monday. And that’s not going to happen if this is a minor small thing.

And so, to the extent that everything you do requires effort. One, you might as well, make sure that in the end is worth something. And there’s a sense in which in academia, you write a paper, that’s a marginal paper. People come up with all sorts of reasons to make you make revisions. They take forever to review it because they don’t really care about it, but it’s something that’s super exciting.

Then they want to see it in print, and they want to help you as opposed to frustrate you. And so, we tend to think, oh, I can do this project because it’s not going to take a lot of work. And the answer is everything. And in some ways the less work you think it is the harder it’s going to be to finish. And so, you might as well go for there.

You don’t have to do world peace. I mean, let’s, let’s be clear about that. So, I don’t want to say, want you to be so ambitious that it’ll never happen, but I want you to be a lot more ambitious because the projects that matter. In the end of the day actually are ones that are easier to,

Duff Watkins: [00:06:56] to make happen, more ambitious projects.

They attract more support, more supporters, maybe even more money. And just by thinking big, and as you say, both of them take pretty much the same amount of time or very similar amounts of time.

Barry Nalebuff: [00:07:10] What you thought you think the big project is going to be a lot harder and longer, and the small project you just kind of make it happen.

There are they’re bureaucratic obstacles, there’s attention obstacles. And so, all sorts of obstacles, get in your way of these little things. And. At some point you get ground down, it’s just not exciting. And so, it isn’t worth it. And I said my own academic world, if I try and publish kind of a little simply add on paper, the referees will take months to review it.

They’ll come up with all sorts of picky comments because in some ways everyone can do the little things. And so why are you getting to do this rather than me, but when it’s the big thing, it’s like, wow, I’m excited by that. Let me join this team. Let me make sure this happens. Let me tell other people about it.

No, one’s going to be going and sharing the excitement about this small little project they’re working on. And so, focus your energies on things.

Duff Watkins: [00:08:06] Okay. Lesson number three. I think this is for entrepreneurs and this, by the way, Barry is the only one I really want to contend with I want to discuss with you this number three, 

you have to be fundamentally different and better to get noticed

but this flies in the face of all my experience,

but

Barry Nalebuff: [00:08:21] you go ahead. Well, let’s hear the objection so I can,

Duff Watkins: [00:08:23] Well, not so much an objection. And just a what I know, what I’ve read is that in marketing perception, it’s, it’s about perception, not product. There is no best product that it’s, the mind matters more than the marketplace that is in terms of getting into a person’s mind, capturing mind share again, regardless of the quality, the suitability of the product.

People are more interested in what’s new rather than what’s good or better or best. And finally, that the way to get into people’s minds to get them to behave, to get in, to buy things, just the simple, ongoing repetition of something. Anything could be true could be false, just as simple. And this is known by every marketing department, an authoritarian leader.

Barry Nalebuff: [00:09:04] If you would have gobs and gobs of money.

So, you can repeat your message again and again, and you can have all sorts of billboards and TV and digital media. Sure, you might be able to make it happen to repetition, but what are you going to do to get people’s attention when you don’t have any money? Because that’s the situation. If you’re an entrepreneur one way to do that is to solve a fundamental problem.

That people really end up caring about your product because they understand why it’s different and better. And it doesn’t have to be on the world peace level. I mean, one of my recent discoveries is a company called good culture and they have reinvented cottage cheese. Now I basically, you know, I had cottage cheese as a kid, and then I think it was Kraft cottage cheese or somebody basically they took this product and did nothing with it.

Meanwhile, if you think about how yogurt has developed over the years, Now we have full fat, low fat goat’s milk, yogurt, sheep’s milk, yogurt, Greek yogurt, Turkish yogurt. You know, you think about the number of yogurts that are out there. Cottage cheese has more protein than yogurt actually, I think has a better chewiness to it.

Fewer calories. It’s a great product. That’s done nothing. And so, I can get excited about great cottage cheese when it comes down to it. It’s not just like a little bit better. It is really like, wow. This is what cottage should have been. And I think people felt that way about Greek yogurt, by the way, when that happened.

And so that’s a sense in which if customers can’t really tell the difference. Yeah. You can try and persuade them through repetition, through banners, through who knows fancy slogan. But that’s not the situation that I think most entrepreneurs are in. So, economics says that you want to go and just offer a little bit lower price and everyone’s going to come racing to you.

I started one company that failed. In New York where we were offering title insurance for people, this is a crazy thing. The United States, when you buy a house, because title registries, aren’t all centralized by the government. People actually want to get insurance to make sure their title is really correct.

And they paid $10,000 for this. It’s insane. And the total number of claims on title insurance is below 1%. So, it’s just a whole bogus business. And we were offering a 25%. And essentially, we couldn’t break through, it was just not enough of a discount to get people’s attention because they were buying a $500,000 house.

And so, kind of the $2,500 difference just didn’t seem enough on that, on the whole transaction. So, you want to be in a situation now, situation where you get people’s attention because they notice either the fundamental difference in price difference. And yeah. If your craft okay, you can tell me again and again, you know, about this dog food or this catch-up or something, but that’s not most entrepreneurs.

Duff Watkins: [00:11:51] on the cottage cheese.

How did they improve upon cottage cheese? I can’t imagine how you, of course, I didn’t imagine how you could improve upon tea, and you taught me how to do that. So

Barry Nalebuff: [00:12:00] how could you improve on yogurt? Right? You use better milk, various ways of training. And I don’t know how you, how you make it. Whatever it is. If I gave you these two next to each other, you would know right away what the difference is.

I mean, it’s almost the different between sort of American cheese and real cheese and the other nine. And you said early on, by the way about this notion. Perception. Look, I agree in the end it’s the perception is what matters, and the perception has to be that you’re different. One way to get that perception is to have the reality be fundamentally different and better.

So, you can either try and fool people into thinking it’s better and different than it is. Or you can try and convince them of the truth. And I’d rather spend my effort convincing them of something that’s true than trying to persuade of something it’s only in their head.

Duff Watkins: [00:12:44] Well, opinions vary about that, but it seems to me on your mortgage example that you did have a substantial reduction from the competitor, but for whatever reason, it was not perceived that way as being significant to the buyer.

Because as you say, they’re buying a house that’s half a million bucks. So, what’s another, you know, few bucks here, but it was significant for your business model.

Barry Nalebuff: [00:13:02] And in the end, what we should have done is go more to the commercial market. Because when you’re buying a $50 million property, now the numbers start really adding up.

And so, so that was partly our, our challenge. That even though it percentage was large; it wasn’t the absolute dollars. Weren’t enough, really to get people’s attention, to go with an unproven company. In spite of the fact that I had Lloyd’s of London being our backstop. So, you needed people to actually pay attention.

One view is they should never care about this cause they never going to make a claim. They’re only getting it because the bank is making them get it. But it’s like, why should they pay attention? Their lawyer says, who are these people? We’ve never heard of them. No go with this. Tried and true, but if I want somebody to go and do some investigation, you know, for $15,000, they’re going to, they’re willing to do it, not maybe for two thousand.

Duff Watkins: [00:13:47] And so the other message is that even the smart guy from Yale had a failed business attempt. So, like every other entrepreneur.

Barry Nalebuff: [00:13:55] Well, let me put it this way. I was failed as an, I was a, on the board and investor, but yes it was not all my investments.

Duff Watkins: [00:14:02] Right, right. Which is the nature of business. Lesson number four.

This is I know you’ve done some negotiation work with the NBA. That’s a national basketball association, the professional basketball league in the U S just in case there’s anybody on the planet left, who doesn’t know what the NBA, so you you’ve been involved in   negotiations. And I think you said this comes from them.

If you think A is the right solution, but others prefer B, then make an impassioned robust case for point B before you suggest that point A is the right solution.

Barry Nalebuff: [00:14:40] This is a lesson I learned from David stern, who recently passed the former commissioner of the NBA. And we know this in law that you want to bring up the other side’s arguments before they bring them up. And negotiation is often viewed as a test of wills. It’s they make some arguments you have to show them why they’re wrong. Well, people then keep on arguing when they don’t get their way. They think the reason they’re not getting their way is because they’re not being understood.

And if only they could really be sure that   if you only appreciated their arguments, you would be more likely to accept their position. Now what’s the best way to convince somebody. You understand their perspective? Well, if you make their arguments for them, that’s a great demonstration that you understand where they’re coming from and why they want to be.

Now, after you’ve done that, what happens? Well, one, they don’t have anything left to say, cause you already made their arguments and there’s no point repeating. And secondly, they’re not confused about whether or not you understand why they want B you better, of course have some arguments for why A is the right choice.

That’s better than theirs. But we spent all of our time, trying to knock down somebody’s arguments against B. The end result is that they’re convinced that we don’t understand. Why B has some advantages to it.

Duff Watkins: [00:15:55] So when you demonstrate that you do understand B, understand it, well, that puts you in a position to refer more authoritatively to solution A and as you say, you got to have some arguments for that to support that.

Barry Nalebuff: [00:16:06] Yeah. I’m okay with the authoritative, but I want to emphasize something else, which is if you’re the, A supporter. I’m sorry, you’re the B supporter. And I’ve made all of your arguments for you. You have nothing left to say because there’s no point repeating things.

That’s just taking up airtime that doesn’t help. And then the other thing is, are you still concerned that I don’t understand your arguments and I ease that issue? If you’re not getting your way, it’s not because you haven’t been understood. And that’s a critically important thing that the more you argue against the other person’s claims, the more they think you’re not understanding them.

And it’s scary because you’re acknowledging there’s some validity to their arguments. And therefore, we think, oh my God, that means I’m going to have to give them B no, there better be just some other. Powerful more valid arguments in favor of a great way of diffusing

Duff Watkins: [00:16:54] arguments, something herb Cohen. I learned from herb Cohen many years ago will famous negotiator just draining the emotion from it.

I mean, and as you, right? I mean, if you’re a point B support, it’s very hard to say. Yeah, what Barry just said. Yeah. That’s our position that makes it.

Barry Nalebuff: [00:17:11] I’m a huge herb Cohen fan as well. I’ve learned many lessons from him. We see this with kids. If you want to get a kid to leave the swimming pool and you say, come on time to go home for dinner.

The kids basically starts crying. And why is that? Well, one, they don’t want to leave the pool, but two, they don’t have the vocabulary to articulate. Why it is, they think the pool is the cool place to stay. And so, by helping them verbalize their arguments, you demonstrate that they’re leaving the pool.

Not because the pool isn’t fun. It’s because it has to be some better reason look, we’re going to go home. By the time we get home and have dinner ready, you’re really going to be hungry. And it’s not just you, there are other people who are going to be hungry and therefore, as much as I’d like to spend the rest of my life in the pool, and God knows I do.

At some point we do have to eat and not just you. And that’s that inability of the other side to either verbalize or have you, or have the view that you haven’t understood. Is what I really am trying to emphasize here. And by the way, when you make their arguments, don’t assume you’ve got it right. So, you should always be saying, have I understood? Is that correct? Have I missed, left anything out? Is that really? What’s motivating you here.

Duff Watkins: [00:18:24] Good examples all the way. All right. Very good. 

Lesson number five, good people, or lead to act poorly or behave objectionably or act badly because of their poor incentives.

Barry Nalebuff: [00:18:40] I was once we a consulting assignment for a company, and there was a salesperson who was effectively a one-man price war. And as a result, prices kept on going down to this industry and we’re trying to get how to end the price war. And the answer is we were the ones starting it. And why was it?

Well, this gentleman was constantly getting his full bonus for hitting his sales target. And nobody seemed to care about his profit margin. They focused on his Q not his P. And so, you can tell the person all day long. Not to go out there and try and steal everybody else’s business. But at the end of the day, we seem to reward him for that.

So that’s what he did. And one view was, well, we should fire this person. And the answer is no, we should fire ourself because we were the ones who were rewarding him for doing the wrong thing. And when we changed, set a contract and made it clear, the guy’s behavior changed. And so, he understood how he was being compensated.

We asked you a question that you you’d like to think, oh, I’m going to pay you for this, but I’d really like you to do that. And it turns out that doesn’t work, that people figure out what it is that you are paying them for.

Duff Watkins: [00:19:45] Cause the guy is smart. Of course, he figured it out. And of course, I’ve seen it replicated in so many companies.

Barry Nalebuff: [00:19:50] Right? My wife was a banker at Citibank, and they would give her a bonus. Based on the fees she would earn on their first year of her contracts when she signed up another bank. And these tend to be three and five-year contracts. Of course, when you bring in the new customer in what they fundamentally cared about was getting a great deal in year one.

So, they could look good because we had this whole problem because from her perspective, she only cared about year, one fee from the banks, the customers. They, in some sense, one of the first year for you to be low, she wanted it to be high and nobody seemed to care about years two through five. And so, at one point we talked to the senior managers was like, well, why isn’t the bonus based on the lifetime value of the contract?

Not just the first-year fee answers. Well, what happens if the person leaves, and the answer is we’ll send you a forwarding address to send the checks. So, it doesn’t. We appreciate that the fees and the money has to come in in years two through five. But when it does, you can pay a bonus based on that. And so, you’ve created this incentive scheme whereby you’ve made it harder for us to make the customer happy and to bring the new customer on board.

Duff Watkins: [00:20:55] I mean, you know, people are not dummies. They, they see which behavior is being rewarded. They can figure it out and that’s how they act. You know, it, doesn’t not at all, no longer listening to what the bosses say. You know, I can, I can see who gets rewarded and for what actions.

Barry Nalebuff: [00:21:10] So there are just, if you look around, it’s not hard to find cases where incentives are misaligned and when you find them just fix the incentives and behavior will follow rather than try and change the behavior directly.

Duff Watkins: [00:21:22] Pretty simple, isn’t it fixed incentives. The behavior will follow.

Barry Nalebuff: [00:21:26] But it’s not so simple because people don’t see those. Cases, I give you one that’s I think very well hidden in the United States. People are really trying to get a tax on gasoline for carbon and folks. Who’ve talked about 50 cents a gallon tax, a dollar, $2, no one even thinks $3 taxes at all feasible. Politically, if you look at the way auto insurance is sold, auto insurance is sold on an all you can drive basis. By that, I mean, you pay the same amount for auto insurance. If you drive 10,000 miles or a hundred thousand miles a year, which is insanity, it’s like saying I’m going to charge you the same amount for gasoline.

If you drive 10,000 or a hundred thousand miles a year, no, you pay 10 times as much for gas. And the average person who drives 12,000 miles a year pays roughly. $1,200 for gas and $1,200 for insurance. And so, insurance is about the same price as gasoline. What that means is if you had to pay for insurance on a per mile basis, which is the smart way of doing it, you would effectively double the price of gasoline.

So, it’ll be like the equivalent of another $3 a gallon tax. So, we are subsidizing people to drive. More by saying, we’re not going to charge you an extra $3 for 25 miles of driving, which is what we should be doing. And as a result, people drive too much.

Duff Watkins: [00:22:41] So you’re saying you more of a user pays system. The more you drive, the more you pay.

Barry Nalebuff: [00:22:46] Correct. And the answer is obvious. You just have to say, wait a second. How come we’re not doing that here?

Duff Watkins: [00:22:52] Well, the answer, I suppose it would be the entrenched interests that have a financial incentive to keep it the way it is.

Barry Nalebuff: [00:22:58] So I, I served on the board of a fortune 100 insurance company for a dozen years.

And I was pushing them the entire time to, to do this one challenge is that men drive twice as much as women and pay the same amount for auto insurance. If you’re going to go to a pay per mile basis, you have to raise your rates on half your customers and lower your rates on the other half. Well, those people you raise your rates on, might leave you and take with them, their homeowner insurance, their life insurance and other products.

And so that’s a challenge, but what’s happened since then is companies like Metro mile have come in and are offering pay per mile insurance. And so, all the people who are low mileage drivers are moving over to them and does that do that leave you stuck with a really high mileage people who are being subsidized.

And so eventually that system collapses because it, the people that ultimately have to keep on raising their price, and then they’re going to leave when it takes a while. And so that’s why it’s hard for the incumbents to change.

Duff Watkins: [00:23:49] So it’s not as easy and straightforward as it appears, but again, the point is align your incentives with the, with the behaviors that you want repeated.

Lesson number six, this is for every manager out there. I want you to hear this in fact, write it down. 

For each action. You take, think of three perspectives first. What is the effect we’ll have on the current situation? Two what is the effect it will have on the precedent three, what is the effect it will have on my relationship with others.

Barry Nalebuff: [00:24:19] I’ll give you an example of where I got this wrong and got myself in trouble. I served on a board where we had great trips to Hawaii and Paris and all sorts of things where we would meet the top salespeople and the management of the company gave us, the board members, the same kind of, I don’t know. I want to come chotskies cause they more, that rewards presence that they were giving their top salespeople, things like apple watches, funky, fancy sunglasses and so on.

And I pointed out. You know, it’s one thing for us to be there because we want to congratulate and reward the salespeople, but we hadn’t done the sales. We weren’t entitled to these presents, these bonuses management wasn’t giving it to themselves. They were just giving it to them the top performers.

So why were we getting this? On a scale of things you know, I don’t know, maybe it was a thousand dollars, so it wasn’t like a huge amount of money, but I thought we’re in the process of costs tightening and it was just sending the wrong signal. Some of the management folks. They said, you know, thank you for saying that because some of our staff, you know, they feel a little jealous about this.

They don’t think it’s really right, but they didn’t want to upset the board. So, it has to come from the board. And so, I propose this, and it passed unanimously. Cause how could anybody possibly object to this? Can’t really say, yeah, we should be getting these things that we don’t deserve. And then it turns out many of my board members, spouses we’re all upset because they like those things because their spouses were just too damn cheap to get it for them. And so, I really, pissed off a lot of my colleagues in this process and hurt my relationships, the question was, was it worth doing or not? And it was a small battle. And the end of the day, it didn’t really make a lot of difference in terms of the money.

So, I don’t know. My view in life is I really care about making the right decision and I care less about the effect it has on other people and my relationships and the precedent. I care about that, but I suspect I would’ve been more effective in the long run if I cared about those things more as well.

Duff Watkins: [00:26:13] Possibly, possibly, but I mean, I think it says more about them. The board members and their spouses than it does anything else. I mean, let’s not overlook that fact, but humans are humans.

Barry Nalebuff: [00:26:22] I got it, but I had, I had to work with them. Right. They’re there, they’re not going anywhere and they going to be for the next 10 years. And so okay. Some of them were small-minded and cheap. I got it. Now, the question is, what do I do about that?

Duff Watkins: [00:26:33] Well, take it into consideration and modify your behavior accordingly or not. I mean, that’s what it comes down to I suppose.

Barry Nalebuff: [00:26:40] I mean, they’re getting, you know, $300,000 a year for being a board member and they’re whining about losing a thousand dollars in little presents anyway.

So, I tried to set the right example, but I said it, it definitely hurt my interpersonal relations. And you know, you spend a lot of time having dinner with your other board members and often their spouses on these trips.

Duff Watkins: [00:27:02] Well, I’m a little surprised by that and I can understand it being a kerfuffle. If that’s the word I’m searching for, but for it to linger and carry on and be extended past, you know, eight, 12 minutes.

I mean,

Barry Nalebuff: [00:27:13] I that’s what I’m dealing with my friend. So, here’s the thing. Had you been on the board with me? You would have made the same decision and I wouldn’t have had that problem with you, but for the other folks, some of them that was not who they were.

Duff Watkins: [00:27:30] You’re saying that, recently in Australia, a woman who headed Australia post, she gave her senior executives some Cartier watches valued at, I don’t know, I think 20,000 each and, and a bunch of them, I don’t know, let’s say 200 grand and the press found out about it when crazy government found out a bit, went crazy. She said, wait a sec. These people just won a $26 million contract that will keep this company Australia post afloat.

And by the way, it’s all according to board guidelines. Bottom line is she ended up leaving the company after much embarrassing she’s. Now she now has another job, but you know, the people who look bad are the government and the press were getting it so wrong. Somebody brings some the bacon for $26 million to a shrug me enterprise.

She gives him a Cartier watch. I mean, where are you going to wear a Cartier watch? I mean, you know, I mean, not have to go to that many balls.

Barry Nalebuff: [00:28:21] But I think that was her mistake. It was the wrong, it was the wrong watch. They should,

Duff Watkins: [00:28:26] it should have been a Casio, like, you know, like mine. Yeah. But I mean

Barry Nalebuff: [00:28:31] a smart car or something, give him a Tesla.

But the point is they’re these small, minded folks. In this case, it was the press. And it turned out that she made the right decision. I thought I made the right decision, but it ended up backfiring because of the cost it had on relationships. And so, you have to think about what did you learn when, when small minded people protect their own interests?

You know, this was a case. Remember I one of our earlier points is you should focus on the big things, rather than little things. They were big issues I cared about too. If I’m going to piss somebody off, I might as well piss them off on the big things.

Duff Watkins: [00:29:03] Yeah. So, spend your political capital wisely, I suppose, is my take on that?

Yeah. All right. Well, that takes us to the 

Lesson number seven. It isn’t enough to be right. You must persuade others that you are right.

Barry Nalebuff: [00:29:19] That’s I’d say the biggest difference between a professor and being in the real world, because academia, the best thing that ever happens is you go out there with your theory, your research, and everyone says, oh, that’s completely BS it’ll never work. And then 10 years later, people discover you were right. You win your Nobel prize, you get your tenure, whatever it is as like, wow, look how smart original that person must be because no one thought it could ever work in the real world. If you’re proven, right? 10 years later, that doesn’t help because you haven’t launched you, haven’t made it happen.

And so, there’s a distinction between having the right idea and convincing others. Now, not in 10 years, it doesn’t help to say yeah. You know, idea that iced tea thing that people said wouldn’t work. Look, 10 years later, somebody else did it, I was right! You have to go and get people to be believers. The, I told you, so get you a huge amount of points in academia not in the real world.

Duff Watkins: [00:30:15] Well, I always say in terms of sales, marketing, and relationship, it’s all about, can you convince and persuade the other person? Can you convince, persuade me to buy your product or whatever, you know, you’re married, you know what it’s like, you got a partner you got to convince and persuade all the time and sometimes you can and sometimes you can’t and sometimes it’s okay.

Maybe even good if you can’t, because that’s the way it goes. You don’t win them all. That’s for sure. 

Lesson number eight, be prepared for people to screw up

And my corollary to that is, and they will not disappoint you.

Barry Nalebuff: [00:30:46] Yeah. So, there’s a of Shakespeare, “Many, a slip betwixt cup and lip”. In general people say to me all the time, you know, oh, you’re micromanaging. You’re sort of worried about all the things that can go wrong, but the answer is the amount of stupidity that’s out there never fails to surprise me. My favorite examples of this. I’ll give you two. We went to one store Honest Tea. Where they weren’t putting Honest Tea in the cooler right next to the salad bar.

And we said to the manager there, look, here’s some data showing our tea, outsells the product you have there two to one. In your store. So, can you please put our product in the cooler here? I know that we used to have the tea there. The problem is it’s sold out so quickly that the shelves were empty by lunchtime.

And then we’ve got complaints. I put this new thing in there. It doesn’t sell and now it’s not a problem. It’s like, okay, I want to shoot him at this point and say, well, what about just restocking? Because, well, if I restock, then it’s not cold. And I said, well, what about taking cases? Putting them in the cooler in your back?

So, when you restock, you restock with chilled product? He said well I’m not allowed to do that. Because your product’s shelf stable and we have to reserve the refrigerated area only for products that need to be refrigerated. Okay. So let me get it right. So basically, your solution is to put stuff in that doesn’t need to be restocked because that’s how you’re going to make customers happy by giving them stuff they don’t want.

Duff Watkins: [00:32:15] No, it’s going to make his job easier with fewer hassles.

Barry Nalebuff: [00:32:20] What our solution was is we bought the guy a bigger fridge. So, because ultimately his problem was our problem. But nonetheless, it’s like, yeah, guess what, if you don’t open up the store until five in the afternoon, you don’t have to worry about restocking for lunch.

Another case is we had a distributor who told us he wouldn’t carry our product cause he wasn’t making five bucks a case thinking that doesn’t make any sense. Snapple, you know, what do you make with Snapple’s is I make 7.20 with Snapple. Wait a second, you know, you’re making what, 4.50 with us.

How can you make so much more Snapple since our product sells for more? And then I realized Snapple comes in 24 bottle cases. We come in 12 bottle cases. So, on a 24-bottle equivalent, he’d be making $9 with us versus 7.20 with Snapple.

Duff Watkins: [00:33:03] Darn that arithmetic.

Barry Nalebuff: [00:33:05] And I said, look, you know, you’re comparing a 24-bottle case to a 12-bottle case, you know?

And I said, look, if we took two of our cases and wrapped them together with tape. Would that work for you? So yeah, that works. I’d make nine bucks a case. So, could you just wrap them in your mind?

Duff Watkins: [00:33:26] You know, what I love about this is that it’s so real, so true, so accurate. And I think anybody in businesses had similar experiences.

Barry Nalebuff: [00:33:32] When we just in a, in another company I’m in, we just got kicked out of a large supermarket chain because they didn’t think our unit volume was high enough. And yet we were killing it in dollar volume.

Cause we were 9 99 for five pouches, and we’re going up against other people who are selling single cups for 2 79. So, our unit volume to be half of theirs and our sales could be three times theirs. And like, what do you care about units? Or you care about dollars? It’s like, yeah, well, I’m being measured on the unit velocity.

And so, they, this is going back to that old notion. If you give people the wrong incentives, they do the wrong thing. In my case, we ended up being screwed by it because of the pandemic we didn’t have the chance to make our case in person, but it’s just insanity. So, in the end, by the way, we had to start selling single pouches.

And so, because that way we had many more units, but we’re measured on stuff. That makes sense.

Duff Watkins: [00:34:26] The thing that I see here, and I I’ve, you know, I’ve been management consulting for decades now is so many companies don’t actually understand their own business. And as you say, they’re measuring the wrong things, set up for the wrong things.

And it’s not, I forget who said it, but the whole idea is to create a customer and keep a customer. You do that. And you’re pretty much on the right track.

Barry Nalebuff: [00:34:46] And they come up with silly rules. Like I’m going to mark everything up 30%. And not make a distinction between a product that’s a premium product or generic product.

And so, if you’re selling Honest Tea, a $2 and Snapple at one, you actually need to make 60 cents and every bottle of Snapple versus 30 cents on a I’m sorry, 60 cents on a bottle of Honest Tea versus 30 cents on a bottle of Snapple? At the end of the day, the customer is going to be buying one bottle. And so, I don’t claim that profit to have to be the same on each.

So, you might say, I want to make 40 cents on Honest Tea and 30 cents on Snapple, but I don’t know, why should you be double? And they basically say, well, you know, I have to have the, my analysts who just looking at my profit margin, but ultimately, it’s profits. It’s not profit margin that matter. And you want the customer to buy the $2 thing.

So, you could make 40 cents around the $1 one, so you can make 30. And they’re actually discouraging customers from buying the products where they make more money. And so instead of thinking about what our profit margin should be on each product, they just say for this whole category, We are going to impose a 30% or 40% or whatever markup rule they’re using.

And that just penalizes anybody who has a premium product. And so, it pushes everybody towards the low end, which is not great. And this is true, even at Amazon where you think that they have, you know, literally thousands of people who are plenty smart and super data focused to get this. But they don’t.

Duff Watkins: [00:36:15] I think what you’re also illustrating is the resistance that people have when the explanation is proffered to them. And I really liked the lateral thinking did by buying the guy, a new refrigerator, a new cooler, because. A good win-win situation. That’s thinking laterally, thinking outside the normal constraints,

Barry Nalebuff: [00:36:34] You’re assuming their thinking, but that’s the problem they don’t get to think. That what companies do is they create rules. So, they can be run by idiots because eventually they will be, that was the Peter Lynch line. You want to invest in a company that can be run by an idiot because eventually it will be in. And the problem is the company doesn’t want folks thinking.

And so, either they don’t think, or they’re not allowed to. And that’s the, that’s the challenge. And it goes back to our earlier lineup, but incentives that this guy being incentivized to move unit volume or another case in the company I was involved with basically, we were making products at below efficient scale because we’re new.

What that meant is we would do a larger production when they made sense. So, we therefore have more inventory, but the person who’s in charge of inventories basically was killing us saying, oh, you’re all my metrics are looking terrible. Because in this matrix organization, he didn’t care about what, what our cost to production was.

He only cared. What does inventory turns were? So, everybody looks at their one piece of the picture and not the big piece, not the full picture.

Duff Watkins: [00:37:35] Well, and that of course is that’s where the general manager, the managing director, the senior execs, that’s what they’re supposed to be doing yes?

Barry Nalebuff: [00:37:42] Assuming it ever gets to them.

Duff Watkins: [00:37:43] All right. We’ll move on to lesson number nine, which is 

feel free to bend the rules

For example, if somebody asks you for a list of 10 life lessons, you can bet that they’ll be pretty happy with nine.

Hey, wait a minute You’re talking to me?

Barry Nalebuff: [00:37:59] I’m afraid I am,

One of the things that’s true in life is that the rules are things that, you know, I’m not talking about antitrust laws or laws of physics. I don’t want to repeal gravity, but in negotiations, in most things the rules of what you agree they are. And so, feel free to talk about them, right at the beginning.

All right. Say in negotiation, let’s talk about how we’re going negotiate. What’s our ground rules for negotiation. Don’t, don’t jump into talk about price. Don’t jump into talk about reasons. Let’s talk about how it is. We’re going to negotiate. And in general people, I think a little quick to accept the rules.

Duff Watkins: [00:38:29] And you’re pointing out that there is flexibility there is latitude, whether you see it or not, whether you acknowledge it’s there. It’s there. It’s just say, why not explore it? You’re not the only one person, William Murray, a very other famous negotiators point that out.

Barry Nalebuff: [00:38:42] So there you go. Your nine lessons today. That’s it. 

Duff Watkins: [00:38:45] Let me leave one final question. What have you unlearned lately? Something you absolutely knew to be positively true then a while ago. It could be years ago. It could be yesterday, but now, you know, it’s not the case at all.

Barry Nalebuff: [00:38:59] I’m not sure what it is that one of my models in life is often wrong never in doubt. And so, so I think I’ve been wrong about so many things that it’d be hard for me to figure out which one it is that I have unlearned.

So, I would say the recent case of looking at whether or not the COVID-19 came from a UConn lab or not. I would say I pretty early on dismissed that along for some reasonable reasons and it probably isn’t true, but I guess I’d say. I May have dismissed that a little quicker at the time than I should have.

Duff Watkins: [00:39:32] I’m with you.

I mean, I’ve been wrong about so many things. My new motto in life and has been for the last few years a few years is don’t be so sure. That’s what I tell myself all the time.

Barry Nalebuff: [00:39:44] I’m going to try and flip that on you. It’s fine to be sure long as you realize that you’re often wrong.

Duff Watkins: [00:39:49] I have a steady stream of disconfirming evidence coming at me all the bloody time, you know, so, and, and that’s all right, too.

That’s the other thing I quite accept this happened, you know, if I’m wrong, I’m happy. You know, just, just let me know. We can get on with it.

Barry Nalebuff: [00:40:00] We have one of the things I did, and you can give a link to in this piece in the New York times where it’s really a test to look for disconfirming. The people are always trying to find evidence that supports the hypothesis and that what a good scientist does.

And I think actually a good entrepreneur does is look for evidence that proves themselves wrong rather than proves themselves right.

Duff Watkins: [00:40:18] That’s what Don Peppers says. And he, he quotes the story about Warren buffet. I don’t know if it’s true, but it’s worth repeating. He says, Warren Buffett wants to make an investment.

He hires a team of advisors to tell him what we should, and then he hires a team of advisors to tell him why he should. And then he listens.

Barry Nalebuff: [00:40:33] The red team and the blue team. And Israel does that with its intelligence. And the Pope does this, when you elevate somebody to sainthood, it’s the advocatus diaboli. Yeah.

And so, I think we need a lot more of the devil’s advocate out there that the idea that you could be arguing against them, even if you believe in it, because we want to make sure both sides of the argument have been heard.

Duff Watkins: [00:40:54] And we’ll close on that note. Folks, you’ve been listening to the podcast and lessons that took me 15 years to learn where we dispense wisdom for career in life.

Our guest today has been Barry Nalebuff from the Yale school of management. This episode is produced by Robert Hossary. Sponsored as always by Professional Development Forum, which office insights, community or discussions, podcasts, parties, anything you want here, but they’re unique and it’s all free online. You can find the www.professionaldevelopmentforum.org you’ve heard from us we’d like to hear from you. Email us it’s podcast@10lessonslearned.com that’s podcast, 10 number one zero, lessons learned.com. Go ahead and hit that subscribe button because remember, this is the podcast the only podcast. That’s makes the world wiser lesson by lesson.

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