By:  Bennett G. Picker, IAM Distinguished Fellow, and Gregg F. Relyea,                                     Posted: March 22, 2016 When preparing for mediation, most parties establish benchmarks for settlement. After assessing the likely risks and costs of litigation, most parties identify settlement ranges and many establish tentative “bottom lines.” Often these assessments are unconsciously influenced by limitations in our five senses and the way we process information, collectively called “cognitive barriers.” When establishing benchmarks for settlement, parties and counsel should make every effort to avoid the following errors of judgment that may affect their evaluations and decisions about settlement.

1.   Advocacy Bias. Most parties and counsel have difficulty overcomingself-serving judgments about the likelihood of success on the merits in litigation (or arbitration). The bias results from (1) selective perception and (2) the fact that most parties spend substantial time identifying their strengths but pay insufficient attention to or discredit possible weaknesses. In one study on advocacy bias, given the same set of facts and an instruction to make an objective evaluation of a case in order to provide the client with a benchmark to assist in making settlement decisions, participating “plaintiffs” overwhelmingly found in favor of plaintiffs and for substantially higher amounts than did participating “defendants.” This Harvard/MIT Study concluded that it is almost impossible for a lawyer or client with an interest in the outcome of a dispute to make a completely objective settlement assessment.

2.   Endowment Effect. This cognitive barrier refers to the tendency to overvalue things in which one has a property interest (homes, cars, personal property, and – as lawyers and parties to disputes – the value of claims in dispute).

3.   Certainty Bias. Studies of negotiations have established that most people are overly certain when making assessments about probable outcomes in litigation. As a group, lawyers are particularly likely to be overly certain. This bias should be examined when making settlement recommendations and decisions, particularly when predicting the likely result on a percentage basis. Given the uncertainty in litigation, it is difficult to predict outcomes in exact percentages, in contrast to a range of percentages.

4.   Egocentric Bias. Individuals tend to claim for themselves greater responsibility for a joint action than would be given by an outside observer. Egocentric bias is also at work when negotiators consider subjective issues such as “fairness.” Thus, it is important to examine both the economic elements of a case and the “egonomics.”

5.   Inattentional Blindness. We tend to see/hear only that on which we are focused. One classic example is a video of several people standing in a circle, passing a basketball among them. Viewers are asked to count the number of times the basketball changes hands. In the middle of the approximately 90-second video, a young man dressed in a gorilla costume walks into the center of the circle, turns to the camera, pounds his chest, and walks away. More than half of viewers are so focused on completing the task of counting basketball passes that they completely miss the gorilla, with many swearing that a gorilla never appears in the video. Similarly, many parties and their counsel fail to see and assess the “big picture” (e.g., overall case value, themes of a case, jury appeal factors, witness appearance) because they are focusing sharply on other specific points.

6.   Reactive Devaluation. People tend to minimize the value of an offer or proposal from another party due to animosity toward the opposing party or concerns about the credibility or competence of the source of the offer.

7.   Competitive Arousal. There is a tendency for negotiators to lose sight of their bottom line “reservation price” due to the drama of the negotiation (“auctioneer’s effect”). Based on the principle of “social facilitation,” there is also a tendency to grandstand for the other party (especially when attorneys are in the presence of clients).

8.   Change Blindness. This bias refers to the tendency to fail to detect even large changes to objects and scenes because the mind tends to fixate on the first image. In the classic experiment, viewers are shown two alternating still photographs that have significant parts of the scene altered (e.g., people boarding a jet plane with a large jet engine in one photograph and the same scene where the jet engine has been deleted from the photograph). Consistently, a large percentage of people are unable to identify the changes in the scenes. Likewise, attorneys may overlook significant factual developments in their cases as discovery progresses and fail to re-evaluate based on the new information.

9.   Risk Aversion (Loss Aversion). Studies on negotiation have established that parties make different decisions about risk depending on whether they categorize (or “frame”) the risk as a gain or a loss. Usually, from the reference point of the status quo, most parties are risk-averse when protecting settlements regarded as current “gains” and are risk-seeking when making decisions involving results regarded as current “losses.” For example, most plaintiffs would prefer receiving $100,000 (i.e., a settlement offer framed as a “gain”), while avoiding the perceived loss of a 50 percent chance of a verdict of $200,000. Conversely, most defendants would prefer a 50 percent chance of a verdict of $200,000 over a certain payment (framed as a “loss”) of $100,000.

10.   Hindsight Bias. Parties and counsel invariably overestimate the predictability of past events and fail to recognize, when making predictions, that hindsight is 20-20. As a consequence, the assessment of whether or not conduct is wrongful is likely to be determined differently by one person making an objective decision before the fact and another person (or jury) assessing the same conduct after the fact. For example, a decision that it is not necessary to adopt a safety measure will be viewed more critically after the fact in the context of a trial to determine whether or not the failure to take a precaution caused the actual harm.

11.   Perception of a False Dichotomy Between Competition and Compromise. Parties in conflict tend to believe they have a choice only between competition (i.e., the pursuit of self-interest) and compromise (i.e., making unnecessary and damaging concessions). This over-simplification blinds parties to other approaches, such as one that permits the interests of both sides to be considered, as well as integrative solutions that can achieve all parties’ objectives.

Perhaps Winston Churchill said it best: “Where you stand depends upon where you sit.” As a matter of human nature, it is only normal for a party’s or counsel’s assessments to be skewed by these cognitive barriers. However, in order to make a responsible settlement decision, both parties and their attorneys should make every effort to recognize and overcome the cognitive barriers that may impact their judgment

© 2016 By:  Bennett G. Picker and Gregg F. Relyea