3 Rules of Game Theory to Make You a Better Negotiator

3 Rules of Game Theory to Make You a Better Negotiator

Understanding the underlying rules to winning an argument will make you a better negotiator for your clients.

Negotiations are battles. They place the interests of buyers on one side and the interests of sellers on the other. As a negotiator, you are tasked with emerging victorious for your side.

To emerge unscathed, you need to understand the rules of the game. And when I talk about the rules of the game, I’m not just talking about the legal regulations, state statutes, and local codes and ordinances. I’m talking about negotiation strategy rules. The more you know about the strategy of negotiations, the more you can help your side of the battle win the dealings.

When it comes to becoming an expert in negotiation strategy, you should have an understanding of game theory.

The formal definition of game theory is the study of mathematical models of strategic interaction between rational decision-makers. Essentially, game theory looks at all of the potential outcomes of a negotiation and determines which outcome is the most likely to occur, and which outcome may be the best for all parties involved. Game theory can be used not only in negotiations in business terms, but even in your personal life you can apply some of the rules of game theory.

There are several models of game theory that you can take when entering into a negotiation strategy. No matter which strategy you decide to take, you will want to take these three rules to heart to make sure you come out with a winning strategy.


1) Never Play a Dominated Strategy

Imagine you are playing a game of tic-tac-toe. You are the x’s, and your opponent is the o’s. You’ve both played a few moves, and now there are only a few options left to play. It is now your move, and you have two options. The first option will give you a certain victory. The second option does not give you or your opponent a victory, but the next move your opponent would take would most likely result in their victory.

Sounds like a pretty obvious choice which space you should take, right? It’s not a trick question. If you want to win the game, you would take the square that would lead to your immediate victory. If you chose the latter option, you would lose the game. In this example, the latter option would be the dominated strategy. This second option would always lose to the first option.

In your negotiations, always pick the strategy that is going to provide the best outcome for you and your client. This would mean never taking the dominated strategy. Taking the dominated strategy means that you would be giving up the victory. If you see an opportunity to win the negotiations, you should take it.


2) Put Yourself in the Shoes of Your Opponent

Peyton Manning, the longtime quarterback of the Indianapolis Colts and the Super Bowl-winning quarterback for the Denver Broncos, was one of the best quarterbacks of all time. I would consider him one of the best not only for his passing capabilities, but also for his understanding of defense. As a quarterback, Manning is the captain of the offensive unit on the field. He directs the ten other players on the offense to make specific plays. What made Manning so great was his ability to read the defense and call an audible if he needed to change the play on offense.

In this example, Peyton Manning had to know seemingly more about his opponents than he did of his own team. Negotiations are no different. For as much knowledge and information you need to have of what your own side wants from the deal, you should know exactly what your negotiation opponent wants too. When you know exactly what your opponents want, you will be able to accurately predict what your opponent is going to do.

Using the real estate transaction as an example, if you are the selling agent representing your buyer client you should be conducting a comparative market analysis (CMA) report on the property your buyer is interested in purchasing. CMAs aren’t just for listing agents looking to represent a seller in a transaction. Once you complete your report, you will have an understanding of not only your own buyer’s needs and wants, but you will also have a much deeper understanding as to what the seller’s financial position will be during the negotiations.

When you put yourself in the shoes of your opponent, you develop a winning negotiating strategy because you can say with a level of certainty exactly what your opponent will do next.


3) Never Assume Common Knowledge

Let’s go back to the real estate transaction example. Imagine you are representing a buyer who sends you a listing she would like to see. In the listing description, the listing agent has described the house as one that’s “in need of a little TLC.” After you look through the pictures, you can completely agree. The house is in definite need of a little work. The only problem is that your buyer client doesn’t see it that way. Your buyer sees a home that is nearly perfect in every way.

In this example, both you and the listing agent have committed the fatal error of assuming common knowledge. The listing agent thought that every buyer looking at this home would see it as a renovation project. You assumed your buyer would also view this project as a fixer-upper based on your previous experience seeing property with this particular buyer.

The fatal flaw in assuming common knowledge is that you can use that as negotiation tactic to your benefit when you find someone else assuming common knowledge. It can also be just as easily used against you when you are the one assuming there is common knowledge.

A house for sale described as one “in need of little TLC” can mean that the seller is expecting a much lower closing price than what the market says the home is worth. As the buyer’s agent, you now have the winning edge when it comes to the negotiations because your opponent assumed his opinion was common knowledge.

However, if you portray to your buyer client that this particular listing is no good and there is no value in the home, you can easily turn off your buyer client as you assumed the common knowledge of the home needing “a little TLC” when in reality the buyer did not see it the same way. Don’t interject your subjective opinion into the situation. Subjectivity leads to uncertainty. Only interject your objective opinion to your client to let them make the most informed decisions.

When you look at negotiations as battles, there can only be one party that can emerge victorious. If you want to be on the winning side of the negotiation, make sure you follow these three rules of game theory to come away with the winning strategy.


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Nico Hohman

Nico Hohman is the broker/owner of Hohman Homes, a residential real estate brokerage based in Tampa, Fla. Nico is also a contributing author to Realtor Magazine and Inman News, the innovative news source for the real estate industry. Nico has contributed his time and talents to better the standards of the real estate industry and the local community by leading and serving on committees at Greater Tampa Realtors, Emerge Tampa Bay, the University of Florida School of Construction Management Alumni Council, Toastmasters International, Nativity Catholic School, and Johns Hopkins All Children's Hospital Guild. Plus, every fall, Coach Hohman is the Head Golf Coach at Jesuit High School of Tampa.

 

Since he began practicing full time in the residential real estate in the fall of 2014, Nico has been involved in the transaction and management of over 100 properties with a total value of nearly $20,000,000.

 

With a degree in Construction Management from the University of Florida and past experience in the home building and remodeling industries, Nico focuses on helping homebuyers find and purchase new construction homes. He also helps home sellers looking to sell their properties that also require significant renovation.