You Can't Make a Good Deal With a Bad Person

The simplest rule

Warren Buffett has spent decades distilling complex ideas into sentences a child could understand. Among the most potent: "You can't make a good deal with a bad person."

It sounds like folk wisdom. Something your grandfather might say. But underneath that simplicity is a principle that formal game theory, negotiation science, and decades of behavioral economics have arrived at through far more circuitous routes.

Buffett isn't guessing. He's describing an equilibrium.

The Harvard model: separate the people from the problem

In 1981, Roger Fisher and William Ury published Getting to Yes at the Harvard Negotiation Project. It became the foundational text for what's now called principled negotiation. The core framework rests on four pillars:

• Separate the people from the problem. Emotions, perceptions, and communication are negotiation variables, not obstacles to ignore.
• Focus on interests, not positions. A position is what someone says they want. An interest is why they want it. The space between these two is where deals live.
• Generate options for mutual gain. Before deciding, invent. Expand the pie before dividing it.
• Insist on objective criteria. Anchor agreements to external standards — market value, precedent, expert opinion — not to who has more leverage.

This framework assumes something that's easy to miss: both parties are operating in good faith. Fisher and Ury acknowledge this explicitly. Their follow-up work deals with "difficult" negotiators, but the elegant version of principled negotiation requires a baseline of rationality and honesty on both sides.

Buffett, characteristically, skips the framework and goes straight to the prerequisite.

Nash equilibrium: when no one wants to move

John Nash's equilibrium concept, published in 1950, describes a state in a game where no player can improve their outcome by unilaterally changing their strategy. Everyone is doing the best they can, given what everyone else is doing.

This sounds abstract. It isn't. Every stable business relationship you've ever had is a Nash equilibrium. Both parties continue because neither benefits from defecting. The contract holds not because of the paper it's written on, but because honoring it is each party's best response to the other party honoring it.

The key insight: Nash equilibria can be good or bad. Two companies cooperating productively is an equilibrium. Two companies locked in a mutually destructive price war is also an equilibrium. The difference isn't the mathematics — it's the players.

When you negotiate with someone who operates in bad faith, the equilibrium you converge toward is almost always a destructive one. Defection breeds defection. Mistrust becomes self-reinforcing. The game-theoretic term is a defect-defect equilibrium — both parties withhold, both parties lose, and neither can unilaterally fix it.

Buffett's rule is a strategy for avoiding that equilibrium entirely. Don't play the game with the wrong player.

The Prisoner's Dilemma, iterated

The most famous model in game theory is the Prisoner's Dilemma. Two players can cooperate or defect. If both cooperate, both do well. If one defects while the other cooperates, the defector wins big and the cooperator gets crushed. If both defect, both lose.

In a one-shot game, the rational move is to defect. But business isn't a one-shot game. It's iterated. You deal with the same people, the same companies, the same markets, repeatedly. And in iterated games, the calculus changes fundamentally.

Robert Axelrod's famous tournaments in the 1980s showed that the most successful strategy in iterated Prisoner's Dilemmas is Tit for Tat: start by cooperating, then mirror whatever the other player did last round. It's simple, retaliatory when necessary, and forgiving. It rewards good-faith players and punishes bad-faith ones.

But here's what Axelrod's work also showed: Tit for Tat only dominates in a population that has enough cooperators. If you're playing against a field of chronic defectors, even the best strategy bleeds. The optimal meta-strategy is Buffett's: choose your games. Select for players who cooperate, and the equilibrium takes care of itself.

Equilibrium as a design choice

Most people think of negotiation as a skill — something you do at the table. Harvard teaches you how to do it well. Game theory models the dynamics. But what Buffett understood before any of them formalized it is that the most important negotiation decision happens before you sit down.

The question isn't "how do I negotiate better?" The question is "should I be negotiating with this person at all?"

This is an equilibrium design problem. You're not just playing a game; you're choosing which game to play. And the single highest-leverage choice is the selection of your counterpart.

In game-theoretic terms:

• A good-faith negotiation partner creates the conditions for a cooperative equilibrium — one where both parties iteratively improve outcomes.
• A bad-faith partner guarantees a non-cooperative equilibrium — one where resources are spent on protection, enforcement, and damage control rather than value creation.

No amount of Harvard technique can overcome a fundamentally adversarial counterpart. The math doesn't allow it. This is why Buffett's rule isn't just practical wisdom — it's a theorem.

BATNA and the courage to walk away

The Harvard model introduces the concept of BATNA: Best Alternative to a Negotiated Agreement. It's your fallback. The thing you do if the deal falls through. A strong BATNA gives you leverage not because you threaten, but because you genuinely don't need the deal.

Buffett has the ultimate BATNA: he doesn't need any single deal. His willingness to walk away isn't a negotiation tactic. It's a structural advantage that comes from patience, discipline, and the ability to say no.

This connects back to equilibrium. A player who can credibly walk away changes the game. They shift the other player's incentives toward cooperation, because defection no longer yields an advantage — the cooperator simply leaves. In mechanism design, this is called an exit option, and it's one of the most powerful tools for sustaining cooperative equilibria.

The lesson for the rest of us: build your BATNA before you need it. Cultivate options. The ability to walk away is the ability to negotiate from a place of balance rather than desperation.

Balance as the underlying principle

What ties all of this together — Harvard negotiation, Nash equilibrium, iterated games, Buffett's folk wisdom — is a single word: balance.

A good deal is balanced. Not in the naive sense of splitting everything 50/50, but in the deeper sense that both parties are better off inside the agreement than outside it. Both parties can sustain the arrangement over time without resentment, renegotiation, or defection.

Nash equilibrium is balance formalized. Harvard negotiation is a method for finding it. Buffett's rule is a filter for ensuring the conditions exist for it to emerge.

In our work at Santacroce, we see this pattern everywhere. The best client relationships aren't the ones with the most elaborate contracts. They're the ones where both sides understand what they're building, why it matters, and what fair looks like. The equilibrium is self-sustaining because the people in it are trustworthy.

The worst engagements — the ones that drain energy and produce mediocre work — are almost always traceable to a misalignment of character, not capability. The technical problems are solvable. The human ones, often, are not.

What this means in practice

If you're building a company, hiring a partner, choosing a client, or entering any negotiation:

• Evaluate character before terms. The best contract in the world is worthless if the person signing it will look for loopholes the moment it's inconvenient.
• Look for repeated games. One-shot deals attract one-shot behavior. Long-term relationships align incentives naturally.
• Build your BATNA. The ability to walk away is the foundation of every balanced negotiation. Without it, you accept whatever equilibrium the other party imposes.
• Focus on interests, not positions. When both parties are operating in good faith, Harvard's framework works beautifully. Use it.
• Trust the equilibrium. If you have to constantly enforce an agreement, it's not an equilibrium — it's a cage. Real deals sustain themselves.

Buffett and Munger built Berkshire Hathaway on handshake deals and trust. Not because they were naive, but because they understood something the game theorists would later prove: cooperative equilibria between good-faith players produce better outcomes than any amount of clever strategy between adversaries.

The simplest rule is also the deepest. Choose who you deal with. Everything else follows.

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