Major-League Negotiations

Published on May 19, 2010

The suggestion in the film Wall Street that business is a “zero-sum game” is “abominable,” said John Huizinga, Walter David “Bud” Fackler Distinguished Professor of Economics. “That’s the way a lot of people think about the world and the way a lot of lawyers think about negotiations,” Huizinga said during the student-led Media, Entertainment & Sports Group’s inaugural Sports Lunch and Learn event at Harper Center on May 19.

“They believe there is a fixed pie and dividing up that fixed pie is a zero-sum game, so that whatever I get, you lose,” he said. “A good economist views the world more like a clip from the TV news program 20/20, in which a customer walks into a store, pays for a gallon of milk, and the cashier and the customer each say, ‘Thank you.’ Transactions where both side have reliable information generally make both parties better off. The world is not a zero-sum game.”

It is with this concept in mind that Huizinga approaches negotiations, including those on behalf of Yao Ming, a Chinese-born National Basketball Association star who enlisted Huizinga to help secure his right to pick his own agent to represent him in the NBA draft. “Rather than trying to negotiate with the Chinese over their mindset, which is ‘Yao represents a fixed income stream and we have to figure out how much we each get out of that zero-sum game,’ my approach was, ‘How can we make the pie bigger before we think about dividing it up?’” he said.

For example, Huizinga asked what Yao could do for the Chinese Basketball Association, other than give the CBA his money. “As a worldwide basketball star, how can he help you by helping you promote your basketball league in China?” he said. “The overall approach was, ‘Let’s not think there is some fixed pile of dollars we can divide up. Before we divide things up, how large a pie can we make?’ As a negotiator, you get much more buy-in if you can make the other side feel that it is not a zero-sum game. If you’re willing to help them, they often reciprocate and are willing to help you.”

Another economic view Huizinga employs as Yao’s agent is the idea that “a dollar is not a dollar” in many ways, he said. “If you think about the problem as dividing up a set number of dollars, you’ve already lost,” Huizinga said. “The most obvious one is that a dollar today is not the same as a dollar tomorrow. You’d be surprised how often progress can be made by playing off of different discount rates.”

During negotiations an agent should always try to give up what is least valuable to his client and most valuable to the other party, he said. “Find a way to figure out what they want or value,” Huizinga said. “One dimension you always need to think about is time. When you’re valuing uncertain streams of income, you also have to remember people have different probabilities attached to these dollars coming in. So you give up streams you think are low probability and they think are high probability of coming in.”

Other factors to consider are each party’s aversion to risk and the decreasing marginal utility of consumption, he said. “When I’m thinking about which dollars are the least costly for Yao to give up, it’s not the first dollars,” Huizinga said. “Many people think they will simply take a certain percentage of what you make.

“I know enough to know that taking a fixed percent of his first $10 million is much more costly to him than taking that same fixed percentage of the next $10 million. Thinking about that non-linearity, promising a higher percentage when he is making $100 million to $150 million, is not nearly as costly as giving up stuff early on.”

For Meaghan Remshard, a first-year student in the Full-Time MBA Program who is sports co-chair of the Media, Entertainment & Sports Group, one key takeaway from Huizinga’s talk was hearing that jobs in sports are available for MBAs, she said. “Another was to hone negotiation tactics—to always keep your integrity and your business ethics, which is something we’ve been learning here at Booth,” Remshard said. “The last takeaway was to always keep your eyes open for the right opportunity and to always ask questions, because you never know what might be out there unless you start asking.”

—Phil Rockrohr