How to negotiate a pay raise using game theory–Youtube video

Update: Several of you have pointed out I have blogged about this topic before! For a more advanced discussion, please read my article how to negotiate at your job using game theory.

I came across an interesting video that relates game theory to salary negotiations.

The video is “How to Negotiate a Pay Raise With Game Theory” on Youtube created by Michael Anuzis.

Anuzis explains how he negotiated a pay raise from $12 per hour to $300 per hour using a simple game theory diagram. While this is not a realistic goal for most of us, the example is still useful that game theory can help the negotiation process. I will warn the video is somewhat drawn out as it is introductory, but it interesting nevertheless.

Watch it on Youtube, or read my transcription below:

Video link: http://www.youtube.com/watch?v=ikE1pn034WA

My transcription:

Hey welcome to the video. Michael Anuzis here and I’m going to teach lesson on two things.

One, how do you negotiate a pay raise with your boss from $12/hr up to $300/hr. This is a true story.

And two, how do you use game theory. What is game theory? Why is it so cool? And how do you negotiate a pay raise through game theory? And the principles of game theory that I teach are applicable to general business applications, major life decisions, pretty much anything that benefits from rational thought can benefit from some game theory.

Let’s drive right in. I’m going to give you a quick primer on where I was having to do this pay raise negotiation. And let’s dive in.

[0:55]: starts discussing job situation

It was my first job right out of high school. I got a job as an IT consultant under a guy, he was an independent consultant himself. And I remember at our first job interview, he asked me, “What do you think you should get paid?” And I didn’t know, it was my first job ever, so I said “I don’t know, why don’t you give me $12 an hour.”

And he gave me a look, like, “Okay, but if you ever feel like you deserve more than that, then come see me we’ll talk about it.”

And it turns out the reason he was giving me that look was-the work I was doing which was open BSD consulting…its a Unix based operating…you don’t really need to know what it is…but basically-it turns out the work I was doing was worth closer to about $250 per hour, in that day back in 2001.

So he kind of gave me that look. And time went by. It was 2 years later and I was still working at $12 an hour. But I was pretty content even though somewhere in the middle there I learned I was worth a lot more. I wasn’t really money hungry. And I was happy with the killer experience I was getting.

[2:12]: the first attempt to negotiate

But it turned out the day came, I was attending the University of Michigan, and I was living in my own apartment paying for rent, food, gas, stuff like that, and I was only working about 10 hours a month. The $12 an hour leads to not very much money. You can kind of see how it wasn’t really a sustainable lifestyle, a $100 or so per month.

I ended up starting to ask for a pay raise. I didn’t know how to do it. Put yourself in my shoes here. It’s your first job ever. You don’t know how to negotiate a pay raise.

And my boss would ask me to do something, and I would do it. And then in the email response, I would say I got all this done, and I might add a sentence right in the end, “By the way, could we discuss my pay raise some time?” And I would get totally brushed off. It would not get acknowledged. And that went on for six months. I kept doing it increasingly obvious and I was getting totally ignored.

I was getting to the point that I had to leave the job. I had to leave. I had a feeling in my gut that I could ask for a pay raise but it wouldn’t be enough. He might give me like $20 an hour. At 10 hours a month, it’s still not going to cut it.

[3:48]: game theory inspires a new strategy

I was taking a game theory class, at the time, at the University. And just very fortunately I learned some principles of strategy that came perfectly applicable. So let’s take a look.

I have something written out here ahead of time [pointing to a 3x3 matrix, see picture below]. It might look complicated but don’t get scared. I promise it’s very easy.

It looks kind of like a tic-tac-toe chart. We have Mr. Z, so this is my boss. And then the other player is me. And each of us have three strategies we can use in our negotiations. We can play soft ball. So this is Mr. Z palying soft ball [pointing to a column]. We can play kind of a medium ball, whatever that is, trying to be reasonable not soft or hard. Or you can play total hard ball, total hard nose negotiations. And I’ve got the same strategies.

I didn’t really know what I was doing when I did this. I thought maybe I could come up with some fun. Thinking about it, Mr. Z is a hard guy. He’s a hard negotiator. He’s never going to play soft ball. So I crossed out the whole column [corresponding to playing soft ball, see picture below].

[5:04]: elimination of one strategy

So then I thought, where are we currently? I’m playing soft ball and Mr. Z is playing hard ball. So we’re down in this cube here [pointing, see picture]. I gave myself a 0 and Mr. Z a 4. These values aren’t too important, but just think, I’m getting screwed so I get 0 and he’s getting a 4, whatever that is. He’s making a lot of money off my service. It’s good for him.

So, I thought, let’s see if we can fill out another box. What if I play medium ball and he’s still playing hard ball? I could get that pay raise from $12 to $20 an hour. It’s still not that great. I’d give myself a 1, but he’s down to a 3. He’s still doing well and making a lot of money.

It wasn’t until I learned game theory, and I actually drew out this diagram that I asked myself, “what if I play hardball?” Just imagine if I were super tough guy doing the hard ball negotiation, what would happen?

I was kind of thinking from my perspective, worst scenario is that I play hard ball, he plays hard ball, I lose my job, I get a -1. And thinking about it, these were my three options. I could stay at 0, I could move up to 1, or I could get -1 [see picture below]. None of them look great. And this is how I was thinking about them before game theory.

But with game theory, I have to fill out, how does it affect him too? If I play hardball, and he plays hardball, then he would have to find another BSD consultant. And as far as I knew, I was the only one in the state at that time. And he doesn’t know how to manage his own servers for his own clients. So he gets a -5 here [if we both play hardball], so that’s kind of a tough situation for him. And maybe something that he’s not going to be happy with.

So seeing that I could force-if I play hardball-I could force Mr. Z. into a -5 situation, then maybe he has a better option he can choose by going medium ball. And it turns out he does. He can pay me fair giving me a 2 and he can still make a profit, stuff for his clients, he gets a 2 as well [see picture below].

So I could see this was a solution here. I could see if I could play hard ball, then I force him to choose [between] a -5 and 2. He’s probably going to choose the 2, meaning that I get a 2 or a 3. I get something better if I force him into that column.

It ended up happening that I knew very confidently he would make this decision before I even made that proposal. It was kind of cool to work this out and see. I could end up getting this result, and I didn’t even have to be a jerk playing hard ball. I could kind of just go, and I ended up being very polite. I told him I have to leave unless I get $300 an hour for the amount that I work, and I upped it from the $250 to $300 because I wanted to compensate for the last six months I was getting ignored. And he ended up accepting it because he didn’t have a better option.

I ended up saying I have to leave unless I get this, and because I finally was confident in approaching him, from that day forward, he also showed me a lot more respect. He kind of doesn’t know, to this day, that I did all of this. So hey if you’re watching this. He thought Michael was a lot more confident so it ended up working out well.

And that kind of concludes the lesson. If you’ve enjoyed this, leave me a comment…[concluding remarks]

What are your thoughts?

If you want to thank Michael Anuzis, leave a comment on his Youtube video page (http://www.youtube.com/watch?v=ikE1pn034WA) or check out his homepage www.michaelanuzis.com.