Don't Take The Last Dollar

My favorite scene in the movie Arbitrage (spoiler alert) is where Richard Gere’s character, Robert Miller, negotiates the sale of his business to a rival, James Mayfield. Miller, who has become increasingly frustrated with the lengthy negotiation process, tells Mayfield that the deal is off and he is leaving. As he starts to walk away, Mayfield offers him $400 million for his business. Miller counters with $550 million. Mayfield comes back with $475 million. Then Miller makes a final offer of $525 million and tells Mayfield that the deal is off if he doesn’t take it. Mayfield accepts.

Miller writes up the contract on the back of a restaurant menu and both men sign it. Following the signing, Miller has the following exchange with Mayfield:

Miller: Before I leave, what would you have paid?

Mayfield: 600 [million]. And, you would have taken?

Miller: 475.

Mayfield: So we made a good deal.

Miller: Yeah.

Miller starts to leave the restaurant before coming back and saying, “Actually I lied. I would’ve taken 400.”

I’ve always remembered this scene because of how bad it makes Miller look. Here’s a guy that just sold his fraudulent business (sorry for the spoiler) for $525 million and yet he still has the nerve to give a final “F— you” to the person that bought it from him. Despite Miller’s questionable character, many would agree that he is a good negotiator. But, I don’t.

In the world of negotiation, there seems to be this implicit assumption that you should always strive to get the best deal possible. There’s this belief that the more value that you can extract from a situation, the better of a negotiator you are. While this might seem true in theory, I don’t think it’s true in practice. 

The problem with thinking of negotiation as a zero sum game (i.e. your loss is my gain) is that it doesn’t take into account the impact of time on your success. Yes, in a single negotiation (or a one-shot game as it’s called), you should always try to get the best deal possible. But, most things in life aren’t one-shot games. Most of the negotiations you will have throughout your life will happen with the same people over and over again. Whether that’s your employer , your spouse, your friends, or someone else entirely, these aren’t one-off scenarios. These are what economists call infinite games.

And the way you negotiate in an infinite game is different than the way you negotiate in a one-shot (or finite game). Because infinite games have future consequences. So, if you play an infinite game like you would play a finite game, you can lose out in the long run. 

For example, imagine you and your partner are trying to figure out who’s job it is to take out the trash and who’s job it is to clean the dishes. You guys agree for you to take out the trash and for your partner to do the dishes. What a deal, right? Inside you are jumping with joy because you know that periodically taking out the trash is a far easier job than doing the dishes each day. 

While you may have “won” in the short run, imagine what will happen over time. At first your partner may not say anything. After all, you guys agreed to it. But as the days and months go by, they may start to secretly resent you for doing much less work than them. And that resentment builds until one day it explodes into a fight. Is that what you want? Is this worth being a better negotiator? I think not.

The same kind of dynamic can unfold with your employer if you ask for a higher salary too soon or too often. You can sour the relationship and jeopardize your career. Of course, I am not telling you to take “no” for an answer when asking for a raise. However, I am warning about what can happen if you don’t go about it in the right way.

This is why one of my favorite pieces of advice from Charlie Munger is, “You don’t need to take the last dollar.” Munger realized that if a deal is good, it’s good. Trying to squeeze every last penny out of such a situation rarely serve your interests. This is what hyper-optimizers do and it’s a terrible way to live. Trust me, I know.

If you are an optimizer/maximizer, you’ll always be wondering if you could do better. You’ll always be thinking about whether you got the best deal. Thankfully, there are a few ways to counteract this:

1. Think about the long-term. When you think about how something can turn out in the future, it’s much easier to ignore the starting details. For example, if you knew Berkshire Hathaway Class A shares were one day going to be worth over $600,000 a share, would you care if you paid $5,000 or $6,000 upfront? Of course you wouldn’t. I do these kinds of thought experiments all the time and it truly helps me be less of an optimizer.
2. Be content with what you have. Finding contentment with what you have is a far better use of your mental energy than thinking about what could be. It’s far better to get a decent deal and move on mentally than strive for more and get hung up on whether you could do better.
3. Accept that you will never capture your full value. You’ve probably heard that your employer will never pay you what you’re worth, otherwise they wouldn’t be profitable. Yes, this is true. But it’s true for everyone else at the company too. Even someone like Jeff Bezos has only captured a fraction of the value that he has created by founding Amazon. When I worked at a consulting firm, my compensation was roughly equal to 20% of my billable revenue. This meant that 80% of my quantifiable value was not taken home by me. And that’s fine. This is how it is for most people. The only people who this doesn’t apply to are frankly, parasitic. They capture more value than they produce. This happens, but it’s rare. Almost everyone creates more value than what they take home. The sooner you realize this, the easier it is to deal with these scenarios.

Ultimately, the best way to negotiate is to not take the last dollar. It’s to always negotiate as if you’re playing an infinite game. Of course, no game is truly infinite. But, you should act as if it is in almost all cases. Even when you know that an infinite game is ending (i.e. becoming finite), you should still pretend its infinite. Why? Because how you behave in those situations will follow you. It’s your reputation you have to worry about. And your reputation is an infinite game. It lives on even after you’re gone.

For example, both you and your employer know that one day you will no longer work there. It’s a finite game, but both parties should treat it like an infinite game. Because, if your employer mistreated you after you stopped working there, imagine how current employees would feel about this. They wouldn’t think too highly of their company and they might leave. By treating any game as finite, it can impact all the other games you are playing. This is why the simplest solution is to treat all games like infinite games. When you do that, you naturally set yourself up for success.

Negotiating is hard, but if you treat it like an infinite game, it makes it a whole lot easier. If you’re interested in learning more on this topic, I highly recommend reading Finite and Infinite Games by James Carse. Thank you for reading.

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