Thursday, October 15, 2015

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.

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