We know from several important studies that often lawyers who fail to settle their cases are not valuing them accurately. In 2008, a large-scale analysis of attorney-litigant decision making was published by Randall Kiser of DecisionSet, and Martin Asher and Blakely McShane of the Wharton School. Supported by both earlier and later studies, Let’s Not Make a Deal: An Empirical Study of Decision Making in Unsuccessful Settlement Negotiations (see 5 Journal of Empirical Legal Studies 551 (2008)) analyzed more than 2,000 cases in which one party rejected the other’s final demand or offer and proceeded to arbitration or trial. The study addressed whether the party refusing to settle obtained as good a result after trial as the result they would have achieved had they accepted the demand or offer that was rejected—even without factoring in the cost and fees associated with trial. The study compared the proposed settlement number with the eventual verdict. What it found was startling.
Plaintiffs committed decision error in 61.2 percent of their cases. That is, in more than 60 percent of the cases where plaintiffs refused settlement, they received an award at trial that was equal to or less than the defendant’s settlement offer. Defendants made decision error in 24.3 percent of the cases, paying more at trial than the plaintiff’s last settlement demand.
But the magnitude of error was very different. Verdicts or recoveries for plaintiffs were $43,100 less than the average demand, while defendants paid on average $1,140,000 more than they could have to settle the case.
Randall Kiser, in Beyond Right and Wrong (Springer 2010), recently studied New York cases and confirmed these results by demonstrating that defendants’ mean cost of error is roughly 19 times plaintiffs’ decision error. Adding in costs and attorney fees, most of the cases examined should have arrived at a zone of possible agreement had the attorneys involved been able to accurately assess the value of their cases.
Why Are We Making These Errors?
The underlying reason for poor risk assessment is that our brains get in our way: Unconscious biases, heuristics (unconscious mental shortcuts), and reactions blind us to visible and knowable risk. Nobel laureates have been publishing on the subject for at least 30 years. See, e.g., Amos Tversky and Daniel Kahneman, The Framing of Decisions and the Psychology of Choice, Science (1981). In addition, popular literature explains these cognitive barriers in the context of economic and policy decisions. See, e.g., Daniel Kahneman, Thinking Fast and Slow (Farrar Straus Giroux 2011); Richard H. Sunstein and Case R. Thaler, Nudge (Yale 2008), and Christopher Chabris and Daniel SimSons, The Invisible Gorilla and Other Ways Our Brains Deceive Us (Random House 2010).
These invisible factors have a direct bearing on a lawyer’s ability to accurately assess the value of her clients’ cases. One example of unconscious bias is “anchoring,” which is the influence that can result from extraneous and irrelevant information. Many studies have confirmed the effect of anchoring on decision making. You can do this little experiment yourself. Write down the last three digits of your phone number. Put a one in front of the number. Now answer this question: When do you think the Taj Mahal was completed? Was it before or after the number you just wrote? Now write down your best guess as a date. The actual date is 1652. Typically in exercises like this one, the disparity in the guesses by people who don’t know the actual date is approximately 300 years between people who had phone numbers beginning with six or higher and those with phone numbers beginning with four or less. See, e.g., Thomas Gilovich, Dale W. Griffin and Daniel Kahneman, Heuristics and Biases: The Psychology of Intuitive Judgment,(Cambridge U. Press 2002). In anchoring and adjustment, you typically start with a number you know and then adjust in the direction you think is appropriate. But the bias is that you do not adjust enough; you are tied to the anchor.
Although you know your phone number has nothing to do with the year in which an historic event occurred, the unconscious impact of a number you have focused on recently is enormous. So too, a number the client arbitrarily mentions or a team member suggests may have a tremendous and unwarranted impact on how we value our case.
Other unconscious cognitive barriers together cause attention blindness or selective attention. The confluence of the circumstances that impair litigators’ judgment is “client-think,” a version of the phenomenon defined as groupthink. Irving Janus, in Victims of Groupthink (2nd Ed. Houghton Mifflin 1982), based his study of groupthink on the Bay of Pigs fiasco during the Kennedy administration. He determined that the poor judgments arrived at were a product of the process of group decision making.
Janus identified the following symptoms of groupthink:
The group feels it cannot fail.
The group rationalizes away disconfirming data and discounts warnings.
The people in the group believe they are inherently better than their rivals; the opposition is stereotyped.
Dissent is discouraged, overtly or covertly.
The group comes to the belief that it unanimously supports a particular proposal without necessarily asking what each individual believes.
Individuals self-censor. Few or no alternatives are discussed and people do not surface risks or seek outside expertise that has no vested interest.
These symptoms fit many client/lawyer teams faced with bringing or defending suit. But for litigators, a large group is not needed. Even the solo lawyer becomes a team with the client and knows the desired outcome.
Other cognitive impacts include the product of overconfidence (the mistaken belief in the accuracy of our predictions) (see Jane Goodman-Delahunt, Pär Anders Granhag, Maria Hartwig and Elizabeth Loftus, “Insightful or Wishful: Lawyer Ability to Predict Case Outcomes,” Psychology, Public Policy & Law (May 2010)) and sunk cost biases (the bias that makes us throw good money after bad simply because it is already spent). Together, these and other cognitive barriers coalesce to impair our ability to fully see and therefore evaluate the evidence before us. If you have any doubt that you can miss information because you are concentrating on (or biased by) something else, look at a YouTube presentation called the “Monkey Business Illusion,” by the authors of the Invisible Gorilla. Read about other ways perception may deceive us.
How Can We Improve?
If we do not perceive these impediments, how can we improve our chances of seeing and weighing risks?
The first step is gathering the requisite information as early as possible. One way to do this is early case assessment (ECA), a systematic and objective tool for investigating, collecting, and analyzing information about a dispute and its impacts. ECA requires collaboration to ferret out relevant information from internal and external sources, objective analysis of that information, and organization of that information into a format that decision makers can readily understand to evaluate risks and options for resolution. ECA educates clients about the demands of litigation and facilitates outside counsel’s preparation of an informed and realistic litigation budget.
Developing an ECA process is not difficult, particularly with existing resources such as one developed by CPR International Institute for Conflict Prevention & Resolution (CPR Institute), the “Corporate Early Case Assessment Toolkit.” [PDF] The Toolkit outlines steps for conducting an ECA including:
obtaining factual information (e.g., interviews, documents) about the dispute, relevant witnesses, and similar disputes involving the client;
identifying business concerns (e.g., economic, timing, relationship, publicity, sensitive information, need for court remedies);
analyzing the impact of the forum and your adversary;
assessing your client’s risk management vulnerabilities in areas like electronic discovery and insurance;
analyzing the legal strengths and weaknesses of your and your opponent’s case (i.e., risk assessment) including the costs (soft/hard) of achieving litigation objectives and the spectrum of damages;
performing a comprehensive cost/benefit analysis that synthesizes the results from the above considerations; and
determining the value your client is willing to ascribe to the case––the settlement value.
Marshaling this information highlights missing facts, which may militate against an overconfident position. Working collaboratively with in-house personnel in various disciplines (e.g., business, finance, legal, technical) and outside experts, as necessary, to collect and analyze empirical facts permits more transparent and objective conclusions. ECA may also encourage the team to engage in perspective testing.
In analyzing the gathered information, we need to improve our chances of actually perceiving damaging information and avoiding attention blindness. One means for achieving this is to adopt our opponent’s perspective. If you have a team of attorneys working on collecting information or discovery, one attorney should be assigned to be the devil’s advocate, to truly adopt the role of the other side in reviewing documents, depositions, and legal developments. That person should have the authority to provide the client and lead lawyer directly (without intervention by others) any damaging or problematic document or testimony, without gloss or explanation. The litigation team should have a clear understanding of how this person’s role ultimately is furthering the team goals. Use of the devil’s advocate should be ongoing and not await a mock jury at the end of the case.
Another way to avoid attention blindness is to have the client or a colleague role-play as the opponent to give what he or she thinks will be the opponent’s reaction or testimony. Similarly, you may try to get intelligence on the other side’s views through discussions with opposing counsel or between clients directly. And you may consider engaging an independent expert or a person who does not know what side you support to evaluate the evidence.
Also consider doing a premortem on your case. Assume that you have lost the case and ask the team to analyze the causes; this is an exercise in changing perspective. To calibrate your ability to predict the cost of litigation and the accuracy of your risk assessment, for each of your cases, start recording settlement offers proffered by you and your opponents and compare them with the final result at trial or settlement. Likewise, keep tabs on your estimates of fees and costs and compare them with the actual results dating from the time of the last settlement offer forward. (Don’t count sunk costs.) Encourage your colleagues to do the same. Examine the reasons for discrepancies between your predictions and the real data and try to calibrate your predictive accuracy.
Make it a policy to give and get feedback on settlement positions from your colleagues or client. Become as methodical in preparing for settlement as you are in preparing for trial. Establish and follow a method like ECA for collecting and evaluating information to counter cognitive biases. Remember that the biases will sabotage these efforts, so make your new habits routine. Get early buy-in from your litigation team and client to implement procedures to combat cognitive barriers, and confirm that those procedures are followed and are working.
You can have more accurate information—less blurred by attention blindness—even early in the case. Once you have more accurate information, you will be in a better position to assess risk going forward and to use that risk assessment to calculate the net present value of a potential award less the costs of going to trial. Accordingly, you will position yourself for obtaining information that is more valuable in negotiations and mediations, and for improving litigation strategy, resulting in improved results for your clients.
Keywords: woman advocate, litigation, settlement, mediation, case valuation