Friday, June 10, 2011

Let's Not Make a Deal: An Empirical Study of Decision Making in Unsuccessful Settlement Negotiations

Do lawyers make reasonable judgments regarding settlement of cases? Many experienced mediators suggest they do not. Plaintiffs can overvalue their cases and defendants often fail to see the risks.

But is there evidence that this is true? Do lawyers and their clients really overvalue their cases and reject settlement offers that are better than awards in the subsequent litigation?

Randall L. Kiser of DecisionSet, Martin A. Asher, Director, Research and Scholars Programs, Wharton Undergraduate Division and Adjunct Professor of Finance at The Wharton School, University of Pennsylvania and Blakeley B. McShane, a graduate student in the Department of Statistics, The Wharton School, University of Pennsylvania analyzed 2,054 contested litigation cases in which the plaintiffs and defendants engaged in settlement negotiations, decided to reject the adverse party's settlement proposal, and proceeded to arbitration or trial.

The study defined "decision errors" as either a plaintiff or a defendant rejecting the other side's settlement offer, going to trial, and finding that the result at trial is financially the same as or worse than the rejected settlement offer—the "oops" phenomenon.

According to this quantitative evaluation of errors made by attorneys and their clients about whether to accept settlement offers or proceed to litigation, the answer is clearly yes.

The parties' settlement positions were compared with the verdict. The study demonstrated that non-settling parties had a high incidence of decision-making errors by both plaintiffs and defendants. As the authors write:

[T]he incidence of decision error for plaintiffs is higher than for defendants, but the cost of decision error is higher for defendants than for plaintiffs….Plaintiffs receiving an award less than or equal to the last offer made by the defendant in 61.2 percent of the cases and defendants committed decision error in 24.3 percent of the cases. Table 1

This data, to me at least, is not particularly surprising. What is interesting is that attorney-mediators make fewer such decision errors.

The study identified attorneys with substantial settlement experience and dispute resolution skills and whether the attorney-mediator represented a plaintiff or defendant in a case tried to a verdict. Obviously these are cases in which the attorney-mediator was simply representing a client as counsel, not in cases where the attorney worked as a mediator.

The study concluded that: “The presence of an attorney-mediator generally was associated with a reduced decision error rate....Regardless of which party is represented by an attorney-mediator, the total amount of error is modestly lower.”

Kiser has written a book, Beyond Right and Wrong about legal decision-making based on this and other studies.

According to the publisher:

The book guides attorneys and clients through legal decision making. It analyzes 11,306 attorney-client decisions in actual cases and summarizes decades of research regarding judge, jury, litigant and attorney decision making. To explain why many litigation outcomes are suboptimal, the book describes the psychological and institutional factors that impede sound decision making. The roles of attorneys and clients in legal decision making and the legal malpractice and disciplinary consequences of ineffective legal representation also are discussed. To rapidly promote better financial outcomes in civil litigation and to assist attorneys and clients in becoming expert decision makers, the book presents more than 65 ideas, methods and systems for improving personal and group decision making.

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