Tuesday, September 17, 2013

Mediation and the Science of Decision Making Part XI: Do The Math, With Pencil And Paper.

We talked last time about using the endowment effect and shifting reference points to help close deals.  But how do you actually do that?  One good way is by showing the parties the numbers: "What will you gain by resolving the case?  What will you lose if you don't?" 

Some people are very good at math and can run numbers in their heads. Others require a calculator or adding machine. In any case, all of us are subject to the cognitive errors identified by Kahneman, and it can be very difficult to identify and compensate for these errors when called upon to make important decisions. 

One of the best ways to help people avoid these errors is to work through the numbers with them as they make their decisions. And because most people are not great at doing math in their heads, it helps to work through the numbers on paper, or on a white board, which is particularly good for this purpose. Putting the numbers on paper makes them more concrete, increases the likelihood that the parties will adopt them as reference points – even if they differ from their original reference points – and helps the parties evaluate them rationally, rather than emotionally. 

For example, while a party typically will evaluate a $50,000 settlement intuitively as a loss or gain relative to his existing reference points, he typically will not evaluate its expected value relative to a 50% chance of a $100,000 judgment at trial. Explaining and walking through this type of calculation makes the settlement more real, increases the likelihood that the party will adopt it as a reference point, and helps the party accept or reject it on rational, rather than emotional, grounds.  

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