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.

The New Lawyer and Planned Early Negotiation

Professor John Lande, Director of the Program in Dispute Resolution at the University of Missouri School of Law –ranked by U.S. News as one of the best dispute resolution law school programs in the country -- has written a new book for lawyers entitled Planned Early Negotiation: How You Can Get Good Results for Clients and Make Money.

Professor Lande describes the book on his website as

…written primarily for lawyers who want to improve their effectiveness….This guide shows how you can be more successful using Planned Early Negotiation (PEN). The strategies in this book can help you become a more effective negotiator, which can increase your professional satisfaction, generate good will, relieve stress, and increase your effective billing rates with creative fee arrangements. The book includes advice from interviews of outstanding lawyers who handle all kinds of cases….With PEN, you serve your clients’ interests by planning to negotiate from the outset. Litigation is still possible, but it isn’t the first step.

This book is based on research on mediation and Cooperative and Collaborative Practice. It suggests that lawyers take the initiative to jointly manage their cases. This involves exchanging the information you need to settle instead of waiting to respond to courts or mediators. It suggests procedures to plan constructive negotiations - and deal with problems that commonly arise.

I have previously blogged about the changes coming and why the practice of law is moving from the “lawyer as warrior” paradigm to the much more complex New Lawyer roles of counselor, negotiator, mediator and meta-expert.

Professor Lande has written a “how to” guide for lawyers to assist them to become effective practicing New Lawyers.

The American Bar Association published the book, which includes a CD with practical information and forms. Here are links to the table of contents and a detailed summary of the book. For more information and to order the book, click here.

This is exactly the kind of information the profession needs. I’ve already ordered my copy. Thank you John Lande.

David Brooks on the Splendor of Cities

I try to read all of David Brook’s columns in The New York Times. He is one of the few columnists who has interesting things to say. Brooks writes about ideas and research and the impact of new research and ideas on society and politics. In my opinion most columnists, on the right and the left, are predictable, boring and simply restate their ideology in light of the issue of the day.

Brooks is different; often fresh and interesting.

A good example is his column in the February 7, 2011 New York Times. The column starts off about Rahm Emanuel running for Mayor of Chicago and why local government politics are more interesting and concrete. Brooks then discusses why cities are incubators of innovation and creativity.

Brooks also writes about the difference between in-person communication and electronic communication, saying that cities have become more, not less, important in this age of information, citing to and praising a “terrific new book” Triumph of the City by Edward Glaeser.

According to Glaeser, cities have flourished “because humans communicate best when they are physically brought together.” I agree. But more important than either Brooks’, Glaeser’s or my beliefs, Brooks points out research to back up the point.

Two University of Michigan researchers brought groups of people together face to face and asked them to play a difficult cooperation game. Then they organized other groups and had them communicate electronically. The face-to-face groups thrived. The electronic groups fractured and struggled.

My guess is that many readers will recognize that electronic communications (e.g. email) splits groups faster than it brings them together. I pay close attention to how I structure discussions in my mediation practice – I use email a lot, not so much in discussions, but rather to communicate information – meeting dates, drafts of items, etc.

I don’t often try to substantively engage people in email or online debates. Others do; I have certainly facilitated my share of conference calls, webinars and even computer assisted video (e.g. Skype) meetings. But I prefer actual meetings to resolve difficult disputes.

Ideas – the grist of our mediation mill – spread and take root more easily person-to-person. Cities, according to Brooks, “magnify people’s strengths … because ideas spread more easily in dense environments.” I agree.

Unexpected (Right!) Truths about Male Judgment and Decision-Making

This one may take the cake for unnecessary research.

The Psychology Today Blog reported on December 18^th that recent studies have suggested that beautiful women can provoke men to take risks, make more mistakes, gamble more freely and generally behave as men (i.e. impulsively).

DUH! And this was in doubt?

According to the blog:

“Males are biologically driven to impress attractive women, and they're also at the mercy of testosterone, the same hormone that prompts aggression and other forms of impulsivity. There's plenty of evidence to suggest that attractive women promote risky behavior among men because they activate short-sighted biological urges.”

I hope whoever paid for the research was rewarded with more and better data or at least a lot of articles and citations to this; the latter I’m sure they will get now that the Psychology Today blog is out.

Because this research certainly did not add anything new about men.