Improving Results in Mediation: Should Lawyers Make Extreme Demands To Take Advantage of the Anchoring Effect?

I wrote recently about the impact of the anchoring effect on mediation. Improving Results in Mediation: Should the Defense Request a Pre-Mediation Demand? I wrote that human beings tend to rely too heavily on the first piece of information they receive when making decisions. This is known as the anchoring effect, and that first piece of information is known as the anchor. For example, a high initial sales price for a used car serves as the anchor for the rest of the negotiations, dragging the final sales price higher than a more reasonable initial demand would. Numerous experiments have shown that the anchoring effect exerts a powerful pull, even on experienced professionals. In one study, a simple roll of the dice had an astonishingly strong influence on the sentencing decisions of highly experienced criminal judges. Finally, I explained that because of the anchoring effect, the defendant should not ask the plaintiff for a demand until the defendant sets its own anchors by determining its "walk-away" and "go-for" numbers.

Since I published the article, I've received numerous questions along these lines: "Are you saying that the plaintiff should make a very high demand early in every case? If my demand can anchor the negotiations, shouldn't I make an exceptionally high demand every time, even if the case does not have a high value?"

The answer is no. Despite the impact of anchoring on negotiations, plaintiffs' lawyers should avoid making unreasonably high demands, and the reason is credibility. Credibility is critical in every ongoing relationship, and the prosecution or defense of a law suit is very much an ongoing relationship, one that often lasts for years. This all sounds obvious, I know, but it is very important. While demands can anchor settlement negotiations, extreme numbers damage counsel's credibility, and this loss of credibility can more than offset any gain realized as a result of the anchoring effect.

In order to understand the importance of credibility in negotiation, one first must understand this: Parties derive power in negotiation from their alternatives. "What happens next if I don't get this deal done?" Mediators like to talk about this in terms of a party's best alternative to a negotiated agreement (BATNA) or worst alternative to a negotiated agreement (WATNA). The better a party's alternatives, the more comfortable she will feel walking away, the harder she will press the other side to meet her conditions, and the greater her power at the bargaining table.

Think of a well-informed consumer shopping for a car. He knows that he can get a good price from Dealer A, and this gives him power in his negotiation with Dealer B. He feels comfortable pressing Dealer B to meet his terms, and if Dealer B won't do the deal, he has no problem getting up and walking away. And of course once the dealer knows that the buyer is willing to walk away, he becomes more flexible.

This operates in litigation as well. If a party has a high level of confidence that it is going to win the case, then its alternatives to a negotiated agreement look positive, it feels powerful in the negotiation, and it will have no problem walking away if its conditions of satisfaction are not met.

Back to credibility. Counsel's credibility has a strong impact on how the opposing side sees its alternatives. For example, attorneys frequently tell each other that if a case does not settle, they will litigate aggressively, leave no stone unturned, and take the case to trial. Where opposing counsel has a low level of credibility, the threat of a tough road ahead is minimized, the party's alternatives to a negotiated agreement look better, and the party feels more powerful at the negotiating table. Of course, the threat of hard-fought litigation and trial sounds very different when it comes from an attorney with a high level of credibility.

As another example, plaintiff's counsel in a recent mediation gave me a witness statement to show to the defendants (with the witness's name redacted), and asked me to tell them that she had two more witnesses prepared to give similar testimony. Plaintiff's counsel had credibility with the defense, and she had not damaged that credibility by making outrageous demands in mediation. Although defendants did not take the witness statement or counsel's representation at face value, they did take them into account, and they did increase the settlement value at the end of the day. The witness statement would not have had the same effect if plaintiff's counsel did not have credibility in the other room. 

Plaintiff's attorneys must step carefully in crafting their opening demands. Though they know that their numbers will have an anchoring effect on the negotiation, counsel should consider carefully the effect that overly aggressive demands will have on their credibility -- and the importance of credibility in closing the deal. 

Improving Results in Mediation: Should the Defense Request a Pre-Mediation Demand?

The study of human decision-making holds important lessons for people involved in all types of negotiations, including mediation. Learning the ropes will help the attorneys and their clients achieve better results in mediation.

Employee E sues her former employer, Company C, alleging harassment, discrimination, and retaliation. Company C answers, and the parties conduct discovery and take the depositions of Employee E and other key witnesses. The court orders the parties to mediate, and they select their mediator and set a date.

In order to get a better idea of the plaintiff’s expectations and the likelihood of resolution, defense counsel asks plaintiff’s counsel for a pre-mediation demand. Plaintiff’s counsel says that she will discuss the issue with her client and call defense counsel back if they decide to convey a number. Defense counsel asks again two weeks later, with the same response. The day of mediation arrives, and defense counsel tells the mediator that he still does not have a demand. When Employee E makes her demand an hour into the process, the demand is far more than Company C had anticipated or prepared for. Defense counsel expresses his frustration to the mediator, stating that he has been sandbagged, and that the delay decreases the probability of resolving the case.

It is easy to understand why defense counsel would have wanted a pre-mediation demand, and easy to understand his frustration, but the underlying question is this: Is a pre-mediation demand good for the defendant? The field of behavioral economics, which studies the way that humans make economic decisions, suggests strongly that a pre-mediation demand helps the plaintiff move the final settlement number to his or her favor, and the defendant should avoid a pre-mediation demand at all costs.

Scientists have found that a cognitive bias -- a tendency to think in a certain way -- known as the anchoring effect has a surprisingly strong impact on our decisions. Simply put, human beings tend to rely too heavily on the first piece of information they receive when making decisions. This is known as the anchoring effect, and that first piece of information is known as the anchor. For example, a high initial sales price for a used car anchors the rest of the negotiations, dragging the final sales price higher than a more reasonable initial demand would.

A number of studies demonstrate just how strong the anchoring effect is. In one study, researchers asked two groups of students to estimate how old Mahatma Gandhi was when he died. (Strack and Mussweiler, 1999). The researchers asked the first group whether he was older or younger than nine when he died. Of course, the students knew that he was older than nine. When researches then asked his actual age, the first group, on average, said 50. Researchers asked the second group whether he was older or younger than 144. These students answered correctly and then gave an average answer of 67. The only difference between the two groups was the obviously inaccurate number in the initial question. Yet this seemingly irrelevant difference actually moved the students’ answers by more than 33%.

Back to the question at hand: Should the defendant request a pre-mediation demand? The Gandhi study and many others suggest that obtaining the plaintiff’s demand in advance will anchor the negotiations, dragging the settlement figure higher than it otherwise would be. This obviously is a bad idea for the defense.

“But I have years of experience in litigation and mediation,” you say. “I know the reasonable settlement range and the likely outcomes on summary judgment and at trial. Just getting the plaintiff’s number isn’t going to affect me.”

Yet other studies suggest that the anchoring effect exerts a powerful force even on experienced professionals. In one study, researches asked a number of very experienced judges (averaging more than 15 years on the bench) to read a description of a woman who had been caught shoplifting and then asked them to roll a pair of dice. Yes, a pair of dice. Once they rolled the dice, the judges were asked to sentence the woman. Unbeknownst to the judges, the dice were loaded to land on either three or nine. Shockingly, those who rolled a three gave an average sentence of five months; those who rolled a nine gave an average sentence of eight months. (Kahneman, 2011.) The mere roll of the dice impacted these sentences by more than 50%. Other studies have shown similar results.

So how does a defendant avoid the anchoring effect of the plaintiff’s initial demand? After all, even if the plaintiff does not make the demand in advance, it typically will be the first number on the table at the mediation.

The answer is this: Defendants must create their own anchors before they hear the plaintiff’s opening number. Fortunately for the defense, they frequently do exactly that through early evaluation, reporting to clients and carriers, and the setting of reserves and settlement authority. All of these numbers, developed before the defense hears the plaintiff’s demand, serve to anchor the negotiations for the defense. Armed with their own anchors before they hear the plaintiff’s demand, defendants are in a much better position to weather the storm and keep the final settlement figure closer to their own evaluation of the case’s reasonable settlement value.

In sum, the last thing that a defendant wants to do is to hear the plaintiff’s demand in advance of mediation, allowing that number to anchor the negotiations before the defendant has set its own anchor firmly in the sand.