When it comes to dividing up property, one of the most commonly used tools is one you might remember from childhood. I cut, you choose. It goes something like this. There's only one piece of cake left. Angel and his annoying little sister, Beatrice both want it. The solution? Angel cuts the piece in two and Beatrice chooses which half she wants. Of course, she'll take the bigger half. So Angel has an incentive to make the halves as equal as possible, so she doesn't leave him with a smaller piece. What's great about I cut, you choose is neither party can ever complain. Beatrice gets the bigger piece according to the way she sees things, Angel had the chance to make the two parts equal. And if he did that, then he shouldn't care which half Beatrice takes, but what if the object you're fighting over can't be cut in two? This is where the Texas Shootout, a more grown up version of I cut, you choose comes into play. In a Texas Shootout, one party gets the object and the other gets cash. Here's how it works. Say, Anju and Bharat are splitting up and so they're dividing their joint property. They own some artwork together including a miniature Indian painting. Anju and Bharat both want the painting, but they can't both have it. Under the Texas Shootout Anju would state a price and Bharat would say buy or sell. Let's have Anjou say, $500. If Bharat says buy, then he pays Anju a $500 and walks away with full ownership of the painting. If Bharat says sell, then Anju has to pay him $500 and she ends up with the painting. If Anju thinks the painting is worth a 1,000, then saying, 500 in the shootout is just like cutting the cake perfectly in 2. If Brock says buy then Andrew gets $500. If he says sell, then Anju pays 500 for something worth 1,000 to her and so it also ends up precisely $500 ahead. Thus, she shouldn't care whether Bharat says, buy or sell. Bharat has nothing to complain about either. If he thinks the painting is worth more than a thousand, then he should say, buy. If it's worth less than a 1,000 to him, then he should say, sell and take the 500. It's better to take 500 than pay 500 for something worth less than 1,000. Hopefully, this is pretty straightforward. But there's a wrinkle, it's the same wrinkle that exists in I cut, you choose. Imagine that Angel knows Beatrice really likes frosting and doesn't much care for the inside of a cake. Then in theory, Angel could cut the cake in a fashion that gives Beatrice most of the frosting and almost none on the inside. Angel would come out way ahead, he doesn't even have to give Beatrice all the frosting. He just has to give her enough, so that she'd rather take say, 60% of the frosting with 1% of the cake over 40% of the frosting with 99% of the cake. At this point, Angel is enclosed to indifferent about what Beatrice chooses. If she chooses the 40% frosting, 99% cake, then he's in big trouble. Angel is using his knowledge of Beatrice preferences to take advantage of her. It's just like making an ultimatum. Beatrice would rather get a little more frosting in return for giving up almost all of the cake and that's the choice she's given. Let's take this issue back to the Texas Shootout. Say, Anju knows Bharat doesn't especially care for the Indian miniature. His value is somewhere below 100, while her value is still a $1,000. In that case, Anju can propose a shoot out price of $60. Bharat would rather get 60, then pay 60 for something that's worth less than 100, which nets him something less than 40. Anju was counting on Bharat making the right call. She ends out $940 if he says sell, but only $60 ahead if he says buy. Even in this case, it is true that Bharat got at least half of the value for the painting, but it was his value. He didn't get anywhere close to half of Anju's value. This says two things. One, if the person who goes first really splits things in half, then the one who says buy or sell will generally end up with more than half. The person going first will do the even split when they really don't know what the other side will do and need to be cautious. Two, if you know more about the other side's value than they know about yours, you might want to be the one who does the cutting or names the price, but don't push things too far. If Anju values the painting at 1,000 and states a price of 60, she'll be in for a nasty surprise if Bharat says, buy out of spite. Or if his value is somewhere above 120 and he says buy, because it's a good deal. In other words, leave yourself some margin for error if you're trying to tell the other side which way they should go.
