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.
Reading Daniel Kahneman’s book ‘Thinking, fast and slow’ I was struck by how often the Nobel Prize winner’s findings also resonate in a litigation context. Aside from any emotional or financial distortions, here are six things that can affect a litigant’s judgement.
1. ‘I’ve got a strong case’. Once they have been told this, litigants frequently cling to this notion instead of properly analysing what the real odds or financial ramifications are likely to be. Apparently, we become over reliant on how things are described to us, even when we are paying that person to be on our side. Predicting an outcome in terms of the favourability of a description is going to be insensitive to both the reliability of the evidence and the expected accuracy of any prediction.
2. The illusion of validity: We are often overconfident in our own predictions. That might explain why when mediators ask advisors what their client’s chances of winning are, the combined tally invariably exceeds 125%. Or why buyers and sellers may have the same information about a stock tip yet both believe that the current price is wrong and will be corrected in their favour.
3. Hindsight bias: Our overconfidence is fed by our illusory certainty of hindsight. Take the ‘I knew it all along’ effect. Our recollection of what we said or predicted at the time often gets subsequently distorted. If the event then occurs, we tend to exaggerate the probability that we had previously assigned to it. If it doesn’t, we erroneously recall that we always considered it to be unlikely.
4. Outcome bias. We tend to evaluate decisions by whether the outcome is good or bad, not by whether the process was sound.
5. Being blind to the obvious, and blind to our blindness. When we focus intensely on something, it can make us effectively blind. Here’s an example http://goo.gl/s6Nz but it can also apply to a litigant’s case.
6. Impure decision-making. We often make decisions based on our own beliefs and preferences, rather than logic. That is why, for example, an objective improvement can be even experienced as a loss, say where an employee receives a smaller rise than other people in the office. Similarly, our ability to make objective comparisons tends to be skewed by how easily we can recall similar instances, how recently they happened and the impact that they had.
Next time, I will explore why clients may misunderstand litigation risks and why we are much worse than we think at being able to understand someone else’s point of view.
With year-ends approaching and an eye on the bottom line, relationship clients may respond favourably when they see that you are also taking stock of their outstanding disputes in case a litigation can be taken off the books, or an accounting provision can be substantially reduced.
In the wake of the Jackson reforms and the economic climate, judges are making sure that parties get used to the idea that costs need to be kept proportionate to the dispute. Cost capping is clearly here to stay and judges are also increasingly imposing cost sanctions against parties who unreasonably refuse to mediate. The Court of Appeal pushed that boundary further last November, stating that silence in the face of an invitation to participate in ADR is, of itself, unreasonable conduct likely to justify a cost sanction, regardless of whether an outright refusal may have been justifiable. A party can still decline an invitation or suggest that it would be better to mediate at some later time but you need to explain why in writing, preferably based on ‘Halsey’ guidelines, and if you believe a lack of information to be the obstacle, give some consideration as to how that could best be overcome.
Last week, speaking at a dispute resolution seminar organised by the Intellectual Property Office, I got a sense of how positively the judiciary now regards mediation. Our keynote speaker, Mr Justice Arnold spoke enthusiastically about mediation and ADR and concluded by telling the audience
“It works, so go and do it”.
Dismissing the notion that offering to mediate might still be interpreted as a sign of weakness, he suggested that sending someone a double-edged message that you are confident of your legal position and also open to finding a commercial solution is now more likely to be seen as an indication of tactical strength.
If nothing else, it should concentrate the other party’s attention, rather like Arafat’s ‘Don’t let me drop either’ speech at the UN, with olive branch in one hand and machine-gun in the other.
This is the first in a series of occasional blogs I will be writing about dispute resolution. Please let me know what you think, or if you would like me to cover any specific topics.
 PGF II SA v OMFS Company 1 Ltd   EWCA Civ 1288, per Lord Justice Briggs. http://www.bailii.org/ew/cases/EWCA/Civ/2013/1288.html
Deciding when and whether to mediate a client’s case can be a delicate balance. There are times though – and I don’t just mean those occasions where you feel that litigation may not be the best option – when mediation can complement your practice.
For example, when a relationship client is more likely to thank you for avoiding litigation, or where the amounts involved are relatively small and litigating isn’t likely to be a cost-effective option. In those sort of cases, clients will appreciate you delivering a quick, commercial result – just as they will if conventional legal remedies could take too long or don’t offer what they want.
Mediation can also make sense where emotions are involved and the most effective way of sorting out a dispute entails getting to the heart of the problem. Maybe the parties don’t want what, to you, looks like an obvious solution, or despite your concerns about a case, your client wants their ‘day in court’.
Sometimes, part of the problem is that the other side simply won’t listen. Either because they are convinced they are right, or because they don’t understand what solutions are, or aren’t, possible, particularly if they aren’t familiar with your client’s business. If a quiet word with their lawyers doesn’t do the trick, it could be time to introduce someone independent to give them a private dose of reality.
Mediation can also be the answer when a client’s dispute involves overseas parties, especially if the alternative involves suing or enforcing abroad.