The reason we want to understand not just our payoffs, but the payoffs of the other side is because we want to be able to make a presentation to the other party, of why this is a great deal for them, not just a great deal for ourselves. So here we have the five options, A, B, C, D, and E. And how is it that we can go about choosing between them? Well, there are many arguments that people might make. Let's look at what incentives are provided, by each of the five options. Let's figure out if there's anything which makes everybody better off, compared to some other opportunity. Can we get there by alternating removals, I'll get rid of A if you get rid of E. Can we do things with ultimatums? Are there an ways of meeting half-way between some of these proposals? Or better yet, are there any principles that we could use that would allow us to choose between the different options? The first principle I'd like to introduce is something called Pareto Optimality. It's named after an Italian economist, Vilfredo Pareto. And his idea was a pretty simple one. If it's the case, that everyone prefers B over A, then we should never choose A. This would be a statement that A is Pareto inferior to B. And as it turns out, we have a situation like that in this case. Which is Hasan thinks B is worth 29 which is better than 25, or in our improvement scenario, Hasan thinks that B is worth plus 9 compared to A which is plus 5. Similarly, the buyer thinks that B is worth 8.5 compared to 5 for A. So both, the buyer and the seller think that B is better than A. It's true that the lawyer thinks that A is a little bit better than B because of commission, but I think that small amount isn't enough to block the deal. And certainly, I would hope the lawyer wouldn't over ride the incentives of both the client and the buyer in this particular case. So one good argument for getting rid of A is that hey, I don't like it as much as B, and you don't like it as much as B. So, why are we talking about A? You can also make that same argument to get rid of C, in terms of D. Because from the perspective of Hasan, C is worth plus 6, and D is worth plus 6. But from the perspective of the buyer, C is worth 9, and D is worth 11.5. And so 11.5 beats 9. Now here you might make the counter point, which is Hasan is getting the same amount of money in C and D on average, but you're asking Hasan to take a lot more risk with D rather than C. And so because he's not being compensated for that risk, perhaps actually D isn't really quite as good as C. So that's an argument for getting rid of A, I think. It may be a less good argument for getting rid of C. Another argument that I think is based on principles for getting rid of A, is that no one has any incentive here. Which is that essentially Hasan is gonna get the same amount of money, in the event that the FDA approves the drug, or doesn't approve the drug. And to the extent that we need his help, his cooperation, his effort to make this all work, he isn't being appropriately incentivized. Whereas under B, C, D, and E, we've got the incentives aligned with the action we want. Another argument you might use to get rid of A, is to say the risk is all off. Which is for the buyer, the buyer will lose $5 million, in the event that the drug doesn't get approved. They'll make $95 million, in the event that it does. And the question is, that's a huge spread between minus 5 and plus 95, where Hasan is taking no risk to whatsoever. Now maybe Hasan shouldn't take as much risk as the buyer, but I don't know why it's all in one party rather than the other. A principal that I think is very effective and also legitimate, is the idea of no regret. It turns out that under A, the buyer could regret having making this decision, if the drug is not approved. Because in that case the buyer is out of 5 million. But under option B no matter what happens, whether the drug is approved or not approved, both the buyer and the seller still are better off having done this deal than no deal at all. So from Hasan's perspective, he gets the 20 million which is the same as what he would have gotten for not doing the deal. And if the drug is approved, there's another $15 million of bonus. So that makes him better off in the approval case, and equally well off in the non-approval case. And as far as the buyer's concerned, it's a wash for them when they pay the 20 million when the drug isn't approved, because they can still make that back with the over the counter approach. But when the drug is approved, they've paid out an extra 15 of the hundred in profits they're gonna make. And so, they are better off too. So the nice thing about option B, is that no one regrets having made the decision. And now If you go and try and make the argument for D or E, then instead of having the potential regret from the buyer, you could have regret from the seller. So in the case of E, Hasan would say, you know I had the option of making 20 million. And now if it doesn't get approved, I'm only gonna be at 12. So it's true that if it gets approved I'll be up to 32, and that's better off. But I will regret having made this decision, in the event that it's not approved. And so if the buyer is saying, I can't do A because there's a potential for regret, the response from the seller is, well then, I can't do E, cuz there's a potential regret on my part. Well, I think regret is a legitimate argument. I also don't think that somebody should turn down deals that allow them to have a potential for regret. So, consider the following. Should Hasan really say no to a deal which is 19 million up front, and 100 million bonus? Absolutely not, right? It's worth having the risk of a $1 million worth of regret, in order to get a $100 million bonus, which is worth $60 million to him. So while it's an argument, and it's something to be factored in to your calculations, I wouldn't say that it should be used to completely eliminate any of the options.
