Mediation and the Science of Decision Making: Conclusion

Daniel Kahneman and Amos Tversky revolutionized economics by changing the focus from hypothetical “rational actors” to real people, who frequently make bad decisions as a result of behavioral patterns and cognitive errors of which they are not aware. Learning to recognize these patterns and errors will help you be more successful in all decision-making processes and in all negotiations. And a mediator who understands these patterns and errors and how to deal with them will do a better job helping the parties resolve their cases.

Here are the links to all eleven installments of this series: 

Part I: Introduction 

Part II: People Act Rationally, Don’t They? 

Part III: People Avoid Risk When They Stand to Gain and Seek Risk When They Stand to Lose 

Part IV: People Evaluate Gains and Losses Relative to Their Reference Points 

Part V: The Greater the Loss or Gain, the Less Any Incremental Change Matters 

Part VI: People Hate Losing More Than They Love Winning. Losses Loom Larger Than Gains. 

Part VII: States of Change -- The Possibility and Certainty Effects 

Part VIII: Set Your Reference Points Before You Begin Negotiating 

Part IX: Think Like A Trader 

Part X: Shift Reference Points And Use The Endowment Effect To Close The Deal. 

Part XI: Do The Math, With Pencil And Paper.

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.  

Mediation and the Science of Decision Making Part X: Shift Reference Points And Use The Endowment Effect To Close The Deal.

Very frequently, the parties to a negotiation will set reference points that do not overlap or allow for easy resolution. The plaintiff may have a bottom line of $200,000, while the defendant has a top dollar of $100,000. The likelihood of mutually exclusive reference points is greater in employment lawsuits, which frequently are zero-sum-games. A zero-sum-game is a situation in which the only issue to be resolved is how to allocate a limited resource, in this case money. (Some employment actions are not zero-sum-games, as where the parties will continue to be involved with each other in the future, and there may ways to “grow the pie,” rather than just dividing it.)  

In a zero-sum-game, where the parties’ reference points do not overlap, resolution is possible only if a party accepts a loss relative to his or her reference point. This "loss" may be the plaintiff accepting less than her bottom line or the defendant paying more than her top dollar. Frequently, both parties must accept such losses in order to get a deal done. As we have seen, people have a very hard time doing this. (See People Hate Losing More Than They Love Winning. Losses Loom Larger Than Gains.)  

A skilled mediator can help the parties move toward resolution by helping them shift their reference points. Shifting reference points involves what behavioral psychologist Richard Thaler dubbed the “endowment effect.” Thaler, a collaborator of Kahneman and Tversky, found that, contrary to rational choice economic theory, people frequently like to keep what they have, even when offered a fair price in exchange. This is particularly true for the things that people hold for their own use or enjoyment, things like nice bottles of wine, tickets to a sold out concert, or a coffee mug with one’s college logo on it.  

In mediation, the endowment effect comes into play when the parties begin to see themselves as already enjoying the benefits of a settlement. For the plaintiff, the benefits of settlement may include the peace of mind of not having to testify at deposition or trial or being able to pay off credit cards used for living expenses after a termination. For the defendant, the benefits may include cutting litigation expenses and being able to focus on running the business, rather than defending the litigation. 

The trick for the mediator is to help the parties see the benefits offered by resolution and then adopt those benefits as their new reference points. Once the parties accept the new reference points, they will be reluctant to give them up, making resolution more likely.  

Next time, another useful tool for closing deals: Do The Math, With Pencil And Paper.

Mediation and the Science of Decision Making Part IX: Think Like A Trader

Last time, we looked at one way to use behavioral economics to help our clients make better decisions in mediation by setting reference points before we begin negotiating.  Today we discuss another way to do better in any negotiation: thinking like a trader.  

Most attorneys have a great deal of experience with negotiation and may even consider themselves to be professional negotiators. (Interestingly, Kahneman and Tversky found that even professionals make the same cognitive errors as the rest of us, but we will put that aside for the moment.) 

Most parties do not have the same level of negotiation experience as their lawyers. And even if they do, the stress of litigation and mediation leaves them less capable of making rational economic decisions. Although there are benefits to long days of mediation, experienced negotiators know that 12 or 14 hours of mediation can reduce one’s ability to think clearly and make good business decisions. Especially at the end of a long day, parties need to understand the impact that cognitive errors have on them.  

Kahneman and Tversky tested ways to help people be less sensitive to these cognitive errors. They found first that professional traders in the financial markets – people who make decisions on gambles for a living – are more tolerant of losses and as a result suffer from fewer cognitive errors when making financial decisions. 

Amazingly, one simple way to help people make better decisions is to tell them to “think like a trader.” Participants in experiments become less risk averse, and their emotional reaction to loss (as measured physiologically) decreases when given this simple advice. In other words, simply asking people to “think like a trader” gives them a better framework for analyzing their choices and helps them make better, more rational decisions.   

A simple yet powerful tool that works well when it's time to close the deal. Next time, another tool for closing deals: Shifting Reference Points And Using The Endowment Effect. 

Mediation and the Science of Decision Making Part VIII: Set Your Reference Points Before You Begin Negotiating

We have seen that behavioral economics holds valuable insights into the way that people make decisions. Specifically, behavioral economics teaches that behavioral patterns and cognitive errors play a tremendously important, if seldom recognized, role in decision-making. 

Now we get to the fun part: learning to use behavioral economics to help our clients and ourselves make better decisions, not just in mediation, but in every negotiation.  

Lesson One: Set Your Reference Points Before You Begin Negotiating. 

Reference points are extremely important in every negotiation. They can be the key to an effective negotiation strategy, but they also can stand as an obstacle to a good settlement. Effective negotiators know how to use them to drive negotiations and to help close deals. 

In Thinking, Fast and Slow, Nobel Prize winner Daniel Kahneman explains that people frequently adopt their goals as reference points. In golf, for example, par is a reference point. A birdie (one shot under par) represents a gain, and a bogey (one shot over par) represents a loss relative to the reference point, par. 

We have seen that people dislike losing more than they like winning, and they work harder to avoid a loss than to make a gain. Economists who have studied golf (yes, there are such people) have found that professional golfers prove this point: they do far better when putting for par (avoiding a bogey, which is a loss relative to par) than when putting for birdie (making a gain over par). Whether the putt is easy or hard, at every distance from the hole, professional golfers are 3.6% more successful when putting for par than when putting for birdie. Over the course of a 72-hole tournament, this easily can be the difference between winning and losing. 

Like golfers, parties frequently set reference points prior to a negotiation. Plaintiffs in mediation frequently know the “bottom line” number below which they will not move, and defendants frequently know their “top dollar.” These “walk-away” numbers become the parties’ reference points. A settlement that improves upon one’s reference point creates a gain; one that does not creates a loss. (It may seem strange to refer to a defendant who pays less than its top dollar as experiencing a gain, but remember that we are speaking of results relative to reference points, and even cold water can feel warm to a hand that has been sitting in a bowl of ice water.) 

Because people work harder to avoid losses than to make gains relative to their reference points, all parties should establish their reference points before they start negotiating. Plaintiffs should know their bottom line, and defendants should know their top dollar before the mediation starts. Surprisingly, many parties walk into mediation with no reference points, thinking only that they want to do “the best they can.” 

Experienced negotiators will set not only the walk-away numbers beyond which they will not move, but also goals that are better than those walk-away numbers. Parties who set “shoot-for” numbers as their reference points typically do better than those who only formulate walk-away numbers. 

For example, a defendant who decides that it will not pay more than $100,000 but has the goal of settling for $80,000 will settle for closer to $80,000 than one who only sets its top dollar number. The same goes for plaintiffs: one who establishes a shoot-for that is higher than her bottom line will recover more than one who does not. The reason for this is simple: once the party sets a shoot-for number as her reference point, she will work very hard to defend it, as anything that falls short will be seen as a loss.  

Setting one's reference points before the negotiations start is a simple strategy that will produce demonstrable results in your next mediation. 

Next time: Think Like A Trader. 

Mediation and the Science of Decision Making Part VII: States of Change -- The Possibility and Certainty Effects

Consider this. You have a chance to win $1,000. Your chances improve by 5% in each step below. Is the news equally good in each case? 

Step A: Going from 0% to 5% 

Step B: Going from 5% to 10% 

Step C: Going from 60% to 65% 

Step D: Going from 95% to 100%

The answer of course is no. Step B (going from 5% to 10%) and Step C (going from 60% to 65%)  are merely quantitative in nature, and we perceive them as representing relatively minor incremental gains. (A 65% chance feels the same as a 60% chance, doesn't it?)  

Step A, the change from 0% (no chance) to 5% (a small chance) is far more significant. It creates a possibility that did not exist before, the possibility of winning $1,000. Kahneman calls this qualitative change the “possibility effect.” He explains that it leads people to give highly unlikely events (like the 5% chance of winning $1,000 or the infinitesimally small chance of winning the lottery) greater weight than their mathematically expected value. In other words, the expected value of a 5% chance of winning $1,000 is $50 (5% x $1,000 = $50), but we experience the value as something substantially higher. Similarly for the lottery. The mathematical value of a lottery ticket is less than the $1 we pay for it, but the possibility of winning a huge sum causes many of us to ignore the mathematical reality and buy the ticket.

Step D, the change from 95% to 100%, also is qualitative. It changes the possibility of gain into a certainty. Not surprisingly, Kahneman calls this the “certainty effect.” Like the possibility effect, the certainty effect has a disproportionate impact on decision-making. People give outcomes that are almost certain (like a 95% chance of winning $1,000) less weight than they should using expected values. Thus, the expected value of a 95% chance of winning $1,000 is $950 (95% x $1,000 = $950), but we experience the value as something substantially lower. 

Don't believe it? Try this. Would you pay $925 or $940 for a 95% chance at winning $1,000? It feels too risky, doesn't it? 

(Those who are not afraid of a little math may consider this: the possibility and certainty effects are mirror images of each other. The possibility effect leads us to over-value the 5% chance of winning the $1,000. Given a 95% chance of winning, the certainty effect leads us to over-value the 5% chance that we will not win. In other words, we over-estimate the negative value of the possibility of losing. But they said there wouldn't be math in law school, so I'll move on.)  

How do the possibility and certainty effects impact parties at mediation? Consider again the examples that I gave in my first post.  

Adam has a very small chance of winning at trial, but if he does win, he could recover a substantial amount. He falls victim to the possibility effect, foregoing a reasonable settlement to chase the possibility -- no matter how small -- of a substantial recovery at trial. 

Company C makes a similar mistake. It faces a high likelihood of a very bad result at trial, but it rejects the opportunity to settle in a reasonable range before trial. Instead, it seizes on the possibility -- small though it may be -- of winning at trial.  

Both Adam and Company C make the mistake of over-valuing small possibilities. Like a person who buys a lottery ticket, These mistakes result from a combination of the possibility effect and loss aversion (discussed here).  

Also consider Denise. She accepts an offer that is relatively small, compared to the very high likelihood that she will obtain more at trial. Like Adam and Company C, she is influenced by loss aversion, but for her it is combined with the certainty effect. She gives the likelihood of a favorable result less weight than she should because it is a mere possibility, rather than the certainty that she craves. At the end of the day, she achieves certainty, but she gives up the very likely probability that she would have done better at trial. 

Now that we have seen some of the cognitive errors that affect people when they make decisions, we can turn to the question at hand: How do we use this knowledge to achieve better results in mediation?  Stay tuned.  

Mediation and the Science of Decision Making Part VI: People Hate Losing More Than They Love Winning. Losses Loom Larger Than Gains.

A third principle of Daniel Kahneman’s work, together with the idea that people evaluate losses and gains relative to their reference points (discussed here) and the idea that people have a diminishing sensitivity to losses and gains (discussed here), is the idea that losses loom larger than gains. Kahneman traces this to the evolutionary need to be alert to danger.

Remember how the body reacts to the idea of financial loss? The idea of financial loss induces the classic fight or flight response because we perceive it as a risk to our well-being. The idea of gain, however, does not induce an equal but opposite visceral reaction.  

To illustrate the idea that losses loom larger than gains, ask yourself whether you would take the following gamble on the toss of a coin: If the coin shows heads, you win $150; if it shows tails, you lose $100. Would you take the bet?  

The simple math shows that this is a good bet. You have a 50% chance of winning $150 and a 50% chance of losing $100, so the expected value of the gamble is $25.  Here are the numbers : (50% x +$150) + (50% x -$100) = $75 - $50 = $25. 

Despite the math, most people would reject this gamble. You probably felt this yourself when you considered the gamble, and it made you feel nervous. In fact, most people require a potential gain of more than two times the potential loss in order to accept the gamble. In other words, I would have to offer you $200 or more to get you to accept a 50% chance of winning $100.  In mixed gambles – that is, situations in which both gains and losses are possible – this imbalance causes people to make extremely risk-averse choices. 

Consider a typical business dispute. Each party is making a claim against the other, so each party faces both the possibility of gain and the possibility of loss. The science suggests that both are likely to be relatively risk averse and make more conservative decisions. 

(As you read this, did you think of a notable business lawsuit in which the parties seemed to show no desire to avoid risk? The Bratz dolls case came to my mind as I wrote it. If you had a similar thought, you likely concluded that the science is wrong on this point about mixed gambles. Your reaction is a function of what Kahneman calls "associative memory," a powerful source of cognitive errors that Kahneman discusses at length, but that will have to wait for another day.) 

In contrast to the typical business law suit, in most employment actions, only the employee has claims against the employer. Further, the law typically allows a successful employer to recover its attorney fees in limited situations, if at all. Because the employee typically does not face this type of potential loss, the typical employment law case is not a mixed gamble, and the employee may feel free to make decisions that entail greater risk. 

However, as we will see next time, even an employee in this type of litigation will be influenced by the risk of loss. 

Mediation and the Science of Decision Making Part V: The Greater the Loss or Gain, the Less Any Incremental Change Matters

In previous posts, I've discussed the theory that individuals act rationally and the efforts of Daniel Kahneman, Amos Tversky, and others to disprove that theory. For example, as I discussed here, Kahneman and Tversky pointed out that people avoid risk when they stand to gain and seek risk when they stand to lose -- hardly rational behavior.  And as I discussed here, people evaluate losses and gains relative to their own reference points, which change over time, rather than to fixed reference points that apply equally to all.  

Another key element of Kahneman’s work is the principle of diminishing sensitivity to loss and gain.  The idea is this: the difference between a gain of $100 and a gain of $200 is $100.  The difference between a gain of $10,100 and a gain of $10,200 also is $100, but the incremental gain in the second example does not have the same impact as the incremental gain in the first.  In other words, for most people the difference between $100 and $200 is far more significant than the difference between $10,100 and $10,200.  

For example, Richard Thaler in 1980 posited that people would go out of their way to save $5 on a $25 purchase, but would not go out of their way to save $5 on a $500 purchase. Others have confirmed this in numerous studies in the years since. Kahneman and Tversky found that 68% of people would drive 20 minutes to save $5 on a $15 calculator (when they also were hypothetically buying a $125 jacket), but only 29% would do so to save $5 on a $125 calculator (and they also were hypothetically buying a $15 jacket). 

The total purchase price is $140 in each scenario, and the total savings is $5, but the human reaction is completely different.  That could not be less rational.  

Diminishing sensitivity to incremental change helps to explain the irrational risk avoiding / risk seeking behavior we discussed earlier.  Consider Denise, the salesperson who took the sure thing, even though she likely could have obtained more by taking more risk.  Part of her reason for accepting the settlement may have been her sense that the settlement offered was a large amount of money, and she would not gain dramatically from any incremental increase over and above that amount.  Her sensitivity to any potential increase diminished as her position improved. 

Diminishing sensitivity to loss also helps explain why Company C would choose to take its chances in court. When people face bad situations – for example, when they face a certain loss in settlement, as compared to a larger loss at trial that is not certain but is merely probable – diminishing sensitivity causes them to ignore the greater risk of going forward. In all likelihood, settlement is Company C's best course of action, but its diminishing sensitivity to the potentially greater loss at trial causes it to ignore that greater risk. In other words, it figures that if it is going to lose anyway, it might as well take a shot at trial, where it could lose zero, even if the odds of that outcome are relatively low.   

What all of this points to is this: the diminishing sensitivity to incremental loss and gain has a tremendous impact on the way that people make decisions. Those of us who work to help people resolve difficult situations must understand these cognitive errors in order to do the best job possible for our clients.  

Next time, we will discuss why the difference between a $10,000 loss and an $11,000 loss is much greater than the difference between $10,000 gain and an $11,000 gain:  Losses Loom Larger Than Gains. 

Mediation and the Science of Decision Making Part IV: People Evaluate Gains and Losses Relative to Their Reference Points

I spoke earlier about the idea that individuals act rationally. In other words, they seek to maximize their satisfaction based on their preferences and the information available to them, in a way that changes little over time or in different contexts. One of the reasons that Daniel Kahneman won the Nobel Prize in 2002 is because he and his colleague, Amos Tversky, challenged this idea of rationality.  

For example, Kahneman and Tversky realized that -- contrary to modern economic theory -- gains and losses are not absolute. They are not perceived in the same for all people, and they are not perceived consistently over time. They change depending on one’s circumstances, or reference points. In Thinking, Fast and Slow, Kahneman illustrates this with a simple example. Hold one hand in a bowl of hot water and the other in a bowl of cold water, then put both in a bowl of room temperature water. One feels warm, the other cold. The starting (reference) point for each is different, and so is the perception of the ending point.  

Reference points play a very important role in financial situations. Consider Jack and Jill. Each has $5 million. Yesterday, Jack had $1 million, and Jill had $9 million. Classical economics holds that the $5 million has the same utility for each, and they are equally happy. But are they? Obviously not. Kahneman and Tversky, who brought human psychology to economics, recognized that Jack and Jill’s happiness depends not only on what they have, but also on what they had – their reference points. Jack is happy with his $5 million; Jill is not at all happy with hers.

This simple idea that reference points are relative and may change over time may seem obvious, but it revolutionized economic theory and it plays an extremely important role in understanding both how people make decisions in reality and how to help them make better decisions. 

In later posts, I will discuss the importance of reference points in mediation and the use of reference points to help seal the deal.  Next time: The Greater the Loss or Gain, the Less Any Additional Incremental Change Matters.

Mediation and the Science of Decision Making Part III: People Avoid Risk When They Stand to Gain and Seek Risk When They Stand to Lose

In my last post, I said that Kahneman and Tversky revolutionized economics by showing that people do not act rationally when making economic decisions. As I explained, classical economic theory predicts that people will analyze risk rationally, regardless of the circumstances.  As it turns out, people don't do this. Instead, they try to avoid risk when they stand to gain, but they seek risk when they stand to lose. 

Try this mental exercise, and you'll see what I mean.  

Which would you choose? (A) a sure gain of $750 or (B) an 80% chance of winning $1,000 and a 20% chance of winning nothing?

The rational choice theory predicts that people will choose Option B, which has the higher expected value. The expected value of an 80% chance of winning $1,000 is $800. That obviously is greater than the value of the $750 sure thing. Any rational person seeking to maximize his financial gain should choose Option B.

But if you are like most people, you chose Option A and you didn't even have to think about it. Your automatic reaction was that you would rather have the sure thing than take the gamble. If you did the math, you likely noticed that the gamble offered only an incremental gain over the sure thing, but it also left you with the possibility of getting nothing. You likely saw this and figured, “Why risk it?”

Now try this one. Which would you choose? (C) a sure loss of $750 or (D) an 80% chance of losing $1,000 and a 20% chance of losing nothing?

Here, the rational actor theory predicts that people will take the sure thing, which is more likely to minimize financial loss.  The gamble here, Option D, has an expected value of negative $800, versus the sure thing’s value of negative $750. Taking the risk here is the worse choice, rationally speaking.

But again, if you are like most people, you chose Option D, and again, you didn't even have to think about it. You had an instant and very negative reaction to the idea of losing $750. The thought actually caused a number of physical stress reactions that you probably did not notice: your pupils dilated, your heart rate increased, the hair on your arms rose slightly, and your sweat glands were activated. The gamble offered you the possibility, even if small, of owing nothing, and thinking about this possibility reduced your stress level. You decided to take your chances on the gamble, even if you realized that it was the worse option, rationally speaking.  

Put these two mental exercises together, and you see what Kahneman and Tversky found: when people stand to gain, they prefer to avoid risk; but when they stand to lose, they prefer to take risks.

If you go back to the examples that I gave in my first post, you can see that this risk-avoiding and risk-seeking behavior helps explain why Adam and Company C fail to take advantage of reasonable settlement opportunities. They have no option that leads to gain – or a sufficiently substantial gain in Adam’s case – and they choose to take the risk instead by taking their cases to trial. They do this even though they recognize that the odds of winning at trial are small, and the likelihood is that they will do worse than in a settlement.

This also helps why Denise takes a relatively low settlement offer when she likely could do better. Being in a position of likely gain, she seeks the certainty of the settlement, rather than risk everything at trial.  

Next week: Reference Points.  

Mediation and the Science of Decision Making Part II: People Act Rationally, Don’t They?

You may not have heard of Daniel Kahneman, but his work has had a tremendous impact on the way that we understand human decision making. Kahneman won the 2002 Nobel Prize in Economic Sciences for his work on this topic with Amos Tversky. (Tversky passed away in 1996, and they do not award the Nobel posthumously.) In his 2011 book, Thinking, Fast and Slow, Kahneman explains many of the factors that lead people to make the decisions that they do.

People act rationally, don’t they?

One of the pillars of modern economic theory is the idea that individuals act rationally: they seek to maximize their satisfaction based on their preferences and the information available to them, in a way that changes little over time or in different contexts. 

The “rational choice theory” holds that a person faced with a decision regarding money will choose the option that maximizes financial gain and minimizes losses. For example, given the choice between a gift of $50 and a gamble that offers a 75% chance of winning $100, a rational person should choose the gamble. The value or “expected utility” of the gamble equals the amount of the potential gain multiplied by its likelihood: in this case, the expected utility of the gamble is 75% of $100, or $75. Because the value of the gamble ($75) exceeds the value of the sure thing ($50), rational choice theory predicts that a rational person will choose the gamble. 

In the settlement context, the rational choice theory predicts that parties will evaluate their cases the same way, based on the likelihood of the anticipated outcomes. Remember Adam from last week? Although he had a weak case, he rejected a reasonable settlement offer, took his case to trial, and -- predictably -- lost. 

Adam should have evaluated his case by looking at the judgment that he was most likely to recover multiplied by the likelihood of achieving that judgment. So if he believed that he had a 10-20% chance of winning a $300,000 judgment, he should have evaluated the case as having a value of $30,000 to $60,000. If the defendant offered him a figure in this range, the rational choice theory predicts that he would accept it. 

But human beings in the real world do not make such rational decisions. Kahneman and Tversky revolutionized economics by showing that a number of behavioral patterns and cognitive errors play an important role in the way that people make decisions. Understanding these cognitive errors will improve your decision-making and your results in litigation and mediation. 

Next week, we will start looking at these cognitive errors.  

Mediation and the Science of Decision Making Part I: Introduction

Very frequently in mediation, as in life generally, we observe people making decisions that that seem irrational, overly emotional, too timid, or unnecessarily risky. Why? Why would intelligent, thoughtful, successful people take courses of action that seem to make no sense?

As it turns out, the field of behavioral economics holds a number of extremely interesting insights into these questions, as well practical lessons that we can use in mediation to help people make better decisions.

Over the next several weeks, I will post a series of short articles addressing these issues.

I'll start with some examples. As you read through them, consider whether you think these people are making the right decisions.

Adam files an action for sexual orientation discrimination and retaliation. Both sides agree that he likely has enough evidence to survive summary judgment, but serious problems with his credibility make success at trial extremely unlikely. If he can succeed, he has a possibility of recovering more than $300,000 in damages. Adam's attorneys tell the mediator in private caucus that Adam is a difficult client, and they do not want to take the case to trial. The defendant offers Adam a reasonable amount that reflects both the potential exposure and the small likelihood of such a result. Adam rejects the offer against the mediator's and his attorneys' advice, takes the case to trial, and loses.

Beth works as an executive for Company C, a mid-sized and growing company. After her termination, she files suit alleging quid pro quo sexual harassment, retaliation, and defamation. Beth has not been able to find a new job, and she has evidence that her former employer’s CEO has defamed her to potential employers. Beth has good evidence, including smoking gun emails that the company attempted to destroy. Three years after her termination, her economic damages are in the mid six figures, her emotional distress is well documented and credible, and the company and its CEO have strong financials, making substantial punitive damages a possibility. Beth's final demand at mediation is at the high end of the reasonable settlement range, with an indication of negotiation flexibility. The defendants realize that they face serious risks at trial, but they decide to take their chances, against their attorneys' advice. The jury brings back a seven-figure verdict, including punitive damages against both defendants, and the Court of Appeal affirms.

Denise is a highly-paid salesperson. She does not make policy decisions or supervise other employees. She is paid a salary plus quarterly bonuses (not commissions), and she works 15 to 20 hours of overtime per week. After she leaves the company, she brings a wage and hour claim for unpaid overtime compensation. Her attorneys calculate her unpaid wages at over $200,000. After Denise wins summary adjudication of the defendant’s exemption defenses, the parties engage in mediation. Late in the day, the defendant makes its “last, best, and final” offer of $50,000. Although Denise's attorneys feel very strongly that she will succeed at trial, and her claim (including penalties, interest, and attorney fees) now exceeds $400,000, Denise feels that the best choice is to take the sure thing and she accepts the offer.

Why would Adam and Company C reject reasonable opportunities to settle and instead take bad bets at trial? Conversely, why would Denise take a relatively low settlement figure, rather than pursuing a strong case at trial? 

Next week, we will start looking at the answers to these questions.