In this episode we discuss the fundamental principles of game theory, we correctly guess the answers to SAT questions - without every knowing what the question was! We look at how to use game theory in practical ways, and go deep on how a college professor and his student started a beverage company, sold a billion bottles of tea, and competed against Coke, Nestle, and other major players to become incredibly successful with our guest Barry Nalebuff.

Barry is a Professor of Economics and Management at Yale School of Management. A graduate of MIT, a Rhodes Scholar and Junior Fellow at the Harvard Society of Fellows, Barry earned his doctorate at Oxford University. Barry is the author of several books, an expert in game theory which he applies to business strategy, and the co-founder of Honest Tea which has been named one of America’s fastest Growing Companies

We discuss:

• What is Game Theory?

• What are the fundamental principles of game theory?

• The difference between ego-centric and being alo-centric

• How do you design a system that avoids death spirals?

• Everything in life is a game

• Barry grills me on game theory with a fascinating example

• We crush through some SAT questions and find the correct answer - without every knowing the question!

• We use a simple game to understand Nash equilibrium and how that explains third world development challenges and corruption

• What is the prisoner’s dilemma and how does it apply to the real world?

• How global warming demonstrates a multi-person prisoner’s dilemma

• The concept of “signaling” in game theory and how Michale Spence won a noble prize studying it

• A real-world example of how signaling can be used to change outcomes getting hired

• How to use game theory to negotiate and create the best possible outcomes

• A concrete example of how to "divide the pie” and reach a fair and “principled” conclusion in a negotiation

• Why it's important to figure out what the pie is before you determine how to split it

• How a professor and his student pooled their resources, started a beverage company, sold a billion bottles of tea, and competed against coke, nestle, and other major players

• The concept of “declining marginal utility” and how that shaped the founding of Honest Tea

• We explain why a function is maximized when its derivative is zero

• The “Babysitter Theorem” and why it was critical to Honest Tea’s success

• How Barry and Seth used the Lean Startup approach to launch Honest Tea

• Would it make sense for Pepsi to release a perfect replica of Coke?

• Barry’s advice for aspiring entrepreneurs

• Be radically different

  • Solve a challenging problem

  • Succeed without being copied

• How Honest Tea prevented their business model from being copied and knocked off

• And much more

Thank you so much for listening!

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SHOW NOTES, LINKS, & RESEARCH

• [Coursera Lecture] Negotiating Online

• [Bio] Michael Spence

• [Book] Mission in a Bottle by Seth Goldman, Barry Nalebuff, and Sungyoon Choi

• [Movie] A Beautiful Mind (2001)

• [Book Site] Mission in a Bottle

• [Bio] Barry J. Nalebuff

Episode Transcript