Turn Short-Term Games Into Long-Term Games

Do you want to talk about Pareto optimal? Pareto optimal is another concept from game theory, along with Pareto superior. Pareto superior means that something is better in some ways while being equal or better in the other way, so it's not worse off in any way. This is an important concept when you're negotiating with somebody because if you can make a solution Pareto superior to where it was before, you will always do that.

Pareto optimal is when the solution is the best that it can possibly be. Then you can't change it without making it worse in at least one dimension. There is a hard trade-off from this point forward. These were just important concepts to understand when you're involved in a big negotiation.

In negotiation, though, I would generally say that this is a tweet that I have: negotiations are won by whoever cares less. Negotiation, at the end of the day, is about not wanting it too badly. If you want something too badly, then the other person will be able to extract more price from it. If you do care more about something than the other person, and they are taking advantage of you in a negotiation, then your best way to deal with that is to turn it from a short-term game into a long-term game.

Try to make it into a repeat game. Try to bring reputation into line. Try to bring other people in who may have a say in the future or may want to play games with this person in the future.

So, an example of a very high cost, low information, single move game is you're having your house renovated. You're having your kitchen renovated. Contractors are notorious for overbooking, ripping people off, and being unaccountable. I'm sure contractors have their own side of it; the homeowner has unreasonable demands. We found problems, the homeowner doesn't want to pay for it, and they don't understand.

There are low information buyers, it's a very expensive transaction, and historically, it's been very hard to find good contractors. The contractor has no choice on what a good homeowner is. So, you try to go through friends, you try to go through reputation, and what you're basically doing there is you're trying to convert a single move expensive game, with a high probability of cheating on both sides, into a multi-move game.

So, one way to do that would be to say, "Well, actually I need two different projects done, and so the first project we'll do together and then based on that I'll decide if we do the second project." You can split your work up into two projects. Another way might be, "I'm gonna do this project with you, and then I have three friends who want projects done and they're waiting to see the outcome of these projects."

Another one might just be the same person operating within the same community and having a reputation in the community to protect. Another one could just be you write them a Yelp review or a Thumbtack review.

So, these are all ways of turning a single move game into a longer-term game and helping get past a position of poor negotiating leverage and poor information.