I recently wrote about why litigants often make irrational decisions and referred to Daniel Kahneman’s book ‘Thinking, fast and slow’. This week, I am going to concentrate on why people sometimes misunderstand the likelihood of winning.
1 ‘Loss Aversion’ can have a disproportionate effect. We feel the pain of a loss much more than we feel the pleasure of a gain. According to Kahneman’s studies if you lose £10 today, even if you find some money tomorrow, you would need to find more than £20 to make up for that £10 loss. That may help explain why litigants will often prefer to risk incurring greater costs rather than accept the crystallisation of an existing loss.
2. Flaws in comparing costs and losses: People react differently depending on whether a disadvantage is framed as a cost or a loss. Kahneman cites a study where people were offered the choice of a sure £50 loss and a 25% chance to lose £200. 80% of them went for the gamble. However, when the choice was re-framed as paying £50 for insurance against a 25% risk of losing £200, only 35% refused to pay for the cost of protection.
3. ‘Not understanding the odds’. We typically overestimate these in cases involving a chain of events, i.e. where to win, each of a series of events must occur, like in a restraint of trade case for example. We forget that even if each event is very likely, if the number of so-called ‘compound’ events is quite large, the overall probability of success can still be low. Conversely, we underestimate so-called ‘disjunctive’ events, i.e. where a complex system will fail if any of its essential elements fail. The likelihood of an individual component failing may be slight but if many components are involved, the probability of failure can be surprisingly high.
4 Our understanding can be distorted by bias. Like the ‘Present’ bias, which causes us to pay attention to what is happening now and not worry about the future. This may explain why we overeat or have unprotected sex, but also why litigants may escalate disputes in spite of warnings that things might not turn out the way they want.
Another bias that frequently comes into play when dealing with conflict is the ‘Negativity’ bias, the problem being that negative events are remembered much more than positive ones. So much so that it is reckoned that for every argument one has in a relationship, you need to have five positive memories to maintain an even keel – something that might also be worth bearing in mind when framing an apology.
In next week’s blog, I will explain why trying to understand who you are arguing with can be as productive as concentrating on the subject of the argument.