Wednesday, December 23, 2015

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. 

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