Learning how to negotiate requires work and preparation.

The movies show you the exchange of two people playing a game of virtual chicken, going head-on until a person blinks.

Reality is more complex.

A lot of preparation goes into understanding why, how, and when a party has leverage in a negotiation.

“In life, you never get what you deserve, only what you negotiate” – A bunch of people with fancy-sounding names appropriating common sense

If you are a mixed martial arts fan, you probably know about Conor McGregor and the saga with his UFC 200 negotiation. You can brush up on the timeline here.

McGregor has shrewdly promoted himself and his fights, climbing the ranks of the UFC in a relatively short period. He has enchanted the masses with his bravado, which has largely been backed by his results and skills in the octagon.

McGregor has also worked to leverage his popularity and draw to increase his leverage in negotiations with the UFC. Make no mistake, a lot of the back-and-forth on Twitter and the press conference statements are a negotiation.

So what can you learn from this if you are negotiating?

In this article, I show you how to negotiate by combining lessons I learned during my time at Stanford Business School with my observations from the back-and-forth of McGregor’s UFC 200 negotation.

Hopefully some of these can help prepare you for your next negotiation.

Prospect Theory (aka Winning is OK, but losing REALLY sucks)

Prospect theory comes from behavioral economics. In plain English, it states that if I give you $10, your happiness goes up by 100 points, but if I take the same $10 from you, your happiness declines by more than 100 points.

We value losses more than gains.

This is important in the Conor McGregor situation because it all started with a tweet implying he had made enough money, and that he was retiring. At that point he was looking at his UFC 200 loot as a gain that had not yet materialized, and given his past success, he did not need it to materialize.

As the negotiation progressed, I believe McGregor changed the way he saw his UFC 200 payday from potential earnings to lost earnings. This led to his gambit to get back on the card (it did not work). He became flustered and he probably started thinking about all the things he could do with the money he was leaving on the table. McGregor lost his leverage at that point. He started trying to recoup what he saw as rightfully his. This led to him thrashing unpredictably by lying and saying he was back on the card, causing the UFC to lose trust (more on this later).

The lesson here is to be aware of your own biases and go into a negotiation prepared. If you are going for a bonus and start thinking about all the boats you are going to buy with that money, that hurts your negotiating position because you will start seeing any decrease in your bonus as “something you lost” instead of “something you gained.” Lose your balance and center, lose your leverage.

BATNA (aka What if this falls through?)

BATNA stands for Best Alternative to a Negotiated Agreement. This matters a lot. There is a massive BATNA imbalance in this negotiation.

The UFC: Darren Rovell at ESPN estimates that the UFC will make about $45 million less at UFC 200 without McGregor. That is meaningful cash, but the event is still projected to generate a lot of money, especially given that Jon Jones vs. Daniel Cormier 2 is a great headliner (even if neither of them can sell a fight quite like McGregor can). Even if the event “only” generates $50-60 million, the drop-off is not as steep as McGregor’s, who goes to a flat zero.

McGregor: Depending on who you believe, McGregor could have made $7-15 million at UFC 200. Forbes estimates McGregor makes $3-5 per pay-per-view buy. McGregor’s last fight with Nate Diaz sold about 1.5 million pay-per-views, so 2 million views for the rematch is not out of the question. That would be a cool $10 million cash plus bonuses, endorsements, and other considerations.

Now he gets zero. He may fight on a future card, but it won’t have the cachet of “UFC 200.” He also may get injured or actually want to retire. In other words, who knows what will happen?

In what is most likely a publicity stunt, another promotion offered McGregor $3 million to fight on the same card as fighting legend Fedor Emelianenko. The problem is McGregor can’t take that. His contract with the UFC would have him dealing with lawyers for the next five years if he tried to do that. The UFC knows that, and as we will see below, they have done this negotiation a few times.

The lesson here is know your BATNA. And perhaps most importantly, know your counterparty’s BATNA.

Counterparty Asymmetry (aka Pick your Goliath carefully)

I briefly met Dana White when he visited professor George Foster’s Sports Management class at Stanford. He is sharp. Love him or hate them, White and the Fertitta brothers took a fringe unprofitable promotion and transformed it into one of the most valuable sports franchises in the world. McGregor trying to outmuscle them is like me or you trying to negotiate with Bill Gates. To paraphrase Warren Buffet, if you sit down at the poker table and 15 minutes later you don’t know who the patsy is, you’re the patsy. I believe McGregor overestimated his leverage and picked the wrong Goliath.

McGregor and his agents have negotiated a tiny fraction of the times the UFC has negotiated. Every event, every fighter, every venue, every TV contract, the list goes on. The UFC is in the business of negotiating, McGregor is in the business of fighting.

Size imbalance in a negotiation is OK…but there are some ground rules. One of them is not to make any unpredictable jerky movements that cause the other party to lose trust. If the more powerful counterparty loses trust, they default to a position of safety and not-losing, away from a position of ambition and winning-more.

If you are nerdy like me and are interested in how this all works, you can read more about The Prisoner’s Dilemma, one of the oldest ideas in game theory here.

One-time vs multi-time negotiations

Many people in the media (including Darren Rovell at ESPN) have made the argument that the UFC needs to just swallow their pride and make the fight happen because the fans want it and because it will net them more money. I disagree with that argument.

Conor McGregor is only negotiating with the UFC on this. But the UFC is negotiating every contract from here to forever, every time. Parties behave differently when the exchange is a one-time negotiation (e.g. buying a car from a stranger on Craigslist) vs. when it is a multi-time negotiation (e.g. buying a car from the dealer in your small town).

The UFC is setting a precedent with everything they do. Folding to thrashing deceitful tactics (such as announcing a non-existing reinstatement) has monetary consequences that far outweigh whatever happens at UFC 200.

Even within the context of negotiating with McGregor only. If McGregor stays in the game for another five years, that is 5-10 more instances of negotiating. The groundwork for all of those talks is being laid out today.

The bottom line is prepare, prepare, prepare. Know yourself, your BATNA, and your counterparty. Negotiations are less mysterious than many people think. Just take the time to understand them ahead of time.

——

I would be remiss if I did not thank Margaret Neale, my negotiations professor. Many of these ideas stem directly from what she taught me.