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JUDGMENT AND DECISIONMAKING IN AN UNCERTAIN ENVIRONMENT
By: David C. Peterson, Mediator
 

JUDGMENT AND DECISIONMAKING

IN AN UNCERTAIN ENVIRONMENT

By: David C. Peterson, JD, LLM, MDR*

 

INTRODUCTION

 

Uncertainty is an unavoidable aspect of the human condition. Many significant choices must be based on beliefs about the likelihood of such uncertain events as to the guilt of a defendant, the result of an election, the future value of the dollar, the outcome of a medical operation, or the response of a friend. Because we normally do not have adequate formal models for computing the probabilities of such events, intuitive judgment is often the only practical method for assessing uncertainty. (A. Tversky and D. Kahneman [Awarded the Nobel Prize for his research and writings relative to human judgment and decision making under uncertainty], from the book Heuristics and Biases, The Psychology of Intuitive Judgment , p.19 [Cambridge, 2002])

 

This article focuses on Kahneman’s extensive studies and research as reflected in the book referenced above and the research presented in Choices, Values and Frames (Cambridge, 2005). Additional sources are referenced as well. This article represents only a portion of the complex topic of negotiation but highlights the most difficult issues we face.

A group of people will predict different probabilities to the same uncertain event due to their knowledge or biases that affect their decision making. (Supra)  Whenever a judgment is made, our biases and state of mind often render us incapable of performing an accurate analysis. (p.21)  Particularly when we are attempting to predict the behavior or choices others will make, such as a judge or jury, the problem is enhanced. Much of what we do is based upon our stake in the matter and our belief that others will think and act as we do.

We also tend to rely on historical events to anchor ourselves to a certain outcome when in fact a different result may be quite likely. “That’s because the mind tends to overweight first thoughts and underweight subsequent evidence. This phenomenon is called “anchoring bias …. It’s unbelievably powerful.” Making Smart Decisions (Harvard Business School Press, 2006) Too many unique variables exist in every case and in the jury or judge rendering too much reliance on historical events unwise. Each case must be evaluated realistically on its own unique components and qualities. Even then, the more we invest time and the client invests money and emotion, the more biased we become. Frequently we are literally psychologically blinded to the variety of outcomes that are possible in nearly every case.

 

II. BRAIN FUNCTIONS AFFECTING OUR DECISIONS

 

Two attorneys sit at a counsel table reviewing their opening statements each still confident that the outcome will be favorable. If you asked each the percentage of chance they have of winning, the total will well exceed 100%. (This tendency is reflected in Making Smart Decisions, pp.124-125)  As the trial unfolds, finally the light of uncertainty slightly or brightly illuminates the reality that the outcome cannot be as surely predicted as they had thought.

Why does this overconfidence occur? As the attorney and client spend up to a year or more thinking only positively of victory, there is an actual change in the brain pathways. Neurons in the brain build a pathway which closes off the ability to acknowledge possibilities other than those they imagine. This reinforcement of neural pathways is similar to equipment traveling often over a field using the same course. A path and then ruts develop. Those using the path will stay within the rut rather than go a different route. It does not occur to them to do otherwise. When a golfer practices at the driving range to correct the course of his or her drives, they are actually working to undo and replace the neuropathways which developed the flaws.

It takes effort and objectivity to see different potentials than those entrenched in the mind. It’s necessary to do so, however, to avoid over optimism and mistakes in evaluating a case.

 

III. IGNORING THE REALITIES OF RISK - STRUGGLING IN NEGOTIATIONS

 

Some of the best advice given to litigants regarding mediation is from Judge Brown (Santa Barbara Superior Court) who has commented, in effect: “if you don’t settle you will likely wish you had the day of mediation back.” This will certainly apply to one side but could apply to both as well. In the end, even the one who prevails can be disappointed. And yet we at times witness poor decision making in mediation.

Why do some unnecessarily struggle? Here is a common example:

 

‘I only want what is fair’ is a common cry in negotiations, although adversaries who make this claim are not necessarily close to agreement. * * * It is generally accepted, of course, that fairness does not always govern behavior, that the rules of fairness are often ambiguous, and that disputants’ interpretations of these ambiguities are likely to be self-serving. (Messick and Sentis 1983 and Loewenstein 1992). (Kahneman, Supra, p.484)

 

Often offers and counter-offers are made at first that are not only viewed by the other as unfair and disadvantageous, they frequently evoke anger. Historically in these situations, one or both sides have miscalculated the most realistic range of results, the risk of loss as well as the financial and emotional toll to be suffered.  Hidden agendas and bad faith aside, nearly everyone begins with a proposal they know won’t be accepted. That’s normal because of the way we are hardwired to negotiate. It’s nearly always necessary. But starting with an insulting number is counter-productive. Usually true value and risks are not being recognized or hidden agendas and bad faith, are the cause. The first offer and counter offer should at least be in a credible range.

Risk is ever-present but almost always underestimated. I was involved in a trial several years ago where I, my clients, partners and collegues were confident we would win. Judge Fredman heard the case and decided against us. Judge Fredman died just after his decision but before the judgment was signed. We tried the same case again, identically, before Judge Kirkpatrick who found for my clients. In another example, highly respected lawyers went to trial a few years ago before a jury who found for plaintiff. The Judge set aside the verdict. The case was appealed. The same case was tried in front of another jury. The defendant won. Experienced trial lawyers and judges could talk for hours about similar situations they were a part of or know about.

 

IV. THE DIFFICULT TASK OF OBJECTIVE ANALYSIS

 

A difficult task faced by attorneys, litigants and mediators, is to assess risk in an uncertain environment. We have thousands of verdicts and bench judgments to help provide perspectives but at best these present certain trends helping to establish reasonable parameters within which to negotiate. They do not, however, establish certainty of a particular result. The most we can accomplish by this research is to recognize that in similar cases the evidence and law provided an advantage most times to one side. Even in these situations, however, the weaker side may, due to biases, investment, anger, ego, attachment to “principles,” the need to punish the opposition, or other similar factors, render them incapable of rational and sensible evaluation. They will continue to hold onto the belief that the judge or jury will somehow embrace their thinking and beliefs despite odds to the contrary.

It seems that once a public comment is made about one’s view of a case, “we tend to see that choice as more worthwhile than we did immediately before we made the decision. As a result, we close ourselves off from information that suggests our choice may not be the best.” (Harvard, p.13) 

Social scientists have discovered, for example, that one deciding to make a bet at the track is uncertain at first regarding the potential of a particular horse. This feeling dramatically changes, however, once their money and emotion is invested. Suddenly the horse has the best chance of winning. (Harvard, Supra, p.126) On the other hand, Las Vegas “Odds Makers” take a dispassionate and utilitarian approach in assessing the prospects of a win or loss by a horse or sports team. (For Example, see Kahneman, Choices, Values and Frames, p.106) In sports betting, the House even factors in the expected difference in scores and adds that as a part of a bet. The House wins most of the time as a result. The House has acted dispassionately and used detached methods of analysis which provide better odds overall of picking the correct team and margin of victory. We can learn from them.

            Unfortunately, we must first overcome the filters of our minds. “These filters govern which data lands on the active agenda of our consciousness and which gets shuffled off to the mind’s dark corners.” (Harvard, p.72)  This tendency leaves us “with a skewed vision” (Supra, p.73)

 

V. AVOIDING OVERCONFIDENCE – OBJECTIVE ANALYSIS

 

Individuals are mostly affected by psychological biases rather than actuarial or objective evaluation as described above. The reality is that “a sense of confidence in a particular choice does not ensure that the same choice would be made in another frame.” (Supra p.7) In other words, if individuals were to have switched sides or have no stake in the matter, their level of confidence in the outcome would likely be different. Many litigants and lawyers suffer from “pseudo-certainty,” where “an event that is actually uncertain is weighted as if it were certain.” (Supra. P.9)

Theories from these studies have demonstrated that various individuals are better at risk analysis and practical decision making than others. But all must overcome their hard-wired biases in order to make objective decisions. Kahneman observed that:

 

Our review of research on individual risk attitudes suggest that the substantial degree of risk to which individuals and organizations willingly expose themselves to is unlikely to reflect true acceptance of these risks. The alternative is that people and organizations often expose themselves to risk because they misjudge the odds. (Kahneman, p.404)

 

When it comes to organizations, a group within the entity are highly susceptible to what is referred to as “groupthink.”  A group of decision makers “can go very wrong ‘when a we-feeling of solidarity is running high’ … its members fall prey to ‘concurrence-seeking behavior.’” (Harvard, p.138) Decision bias runs highest in this type of circumstance, more so than with individuals. (Supra.)

Nevertheless frequent “cognitive quirks” tend to result in extreme optimism in planning. (Supra) Kahneman refers to two methods of risk analysis. One being referred to as the “insider approach,” that which leads to bias and misjudgment and the other, an “outsider approach;” the inviting and embracing of realistic and objective thought, including the assistance of outside analysis. The outside approach more reliably frames the matter for an objective view as opposed to a group of insiders predicting risk when they are infected with biases. (p.405) “Bad decisions overrely on intuition and emotions” (Harvard, p.83) Nevertheless, many attorneys are prone to reject the outside approach when assessing risk. (Kahneman, Supra, p.407)

Clients and counsel also create perceptions of less risk when they perceive the risk to be vague. To them, uncertainty renders it more likely they have the advantage. Therefore, uncertainty, vagueness and ignorance typically lead to overconfidence. (Supra) 

 

VI. STRONG PSYCHOLOGICAL AVERSION TO LOSS

 

A significant problem arises also in negotiations and mediation due to the investment scenario. It’s similar to one who pays to join a tennis club only to develop “tennis elbow.” He is advised not to play tennis for some time but plays anyway, in significant pain, unable to accept his financial loss. One who thinks in this manner is prone not to settle because comprising when there is a financial and emotional investment represents a “dead loss.” We are hardwired to abhor outright loss and will remain more apt to continue in the financial and emotional pain of litigation rather than recognize the benefit of reasonable compromise or the high risk of additional loss.

To act rationally and reasonably in negotiations and mediation where compromise is bothersome is difficult. It become necessary for that party to “make peace” with reality and approach settlement on an objective basis. As Kahneman points out, unless a person is able to do this, he or she “is likely to accept gambles that would be unacceptable to him or her otherwise.” (p. 41)   For example, a couple must sell a home, for business reasons. It was purchased for $350,000.00. The true market value now is $275,000.00. Rather than accept the true market value and cut their losses, they continue to pay the mortgage payments, taxes, maintenance and other expenses, with the expectation that they will somehow get a higher price. They won’t rent the home because they fear it won’t sell if rented. They accept far more loss despite the very low odds of receiving the true sales value. A practical and “outside” approach would allow them to make better choices.

The same problem arises in negotiations and mediation. Numerous studies show that there is a strong “overestimation” component that comes into play where one will suffer a sure loss or miss that small chance of a large award if they compromise. Under these circumstances, most people will overestimate their chance of prevailing. (Kahneman, Supra, p.36)  The Harvard Business School (Supra) puts it this way: “(T)he decision maker falls into a kind of suck-costs trap-becoming unwilling to pull the plug on a decision she has advocated but that clearly isn’t working. (p.57) It is further observed that: “(B)ad decisions bring you to a place where you have fewer, worse options. (Harvard, Supra, p.90)

 

VII. PUTTING MATTERS INTO PERSPECTIVE

Imagine you are forced to play “Russian roulette” but had the ability to pay for each bullet to be removed, the price going up substantial per bullet. Would you pay all that is required to remove the last bullet, representing the most minimal risk? The answer would be “yes.” You are forced in that situation to realistically face the probability of loss more so than if you are making a business decision.

 

Most times accomplished businessmen and businesswomen, provided they don’t fit the narcissistic profile or have psychopathic tendencies, have the easiest time in negotiations. While they make take a long time to come to agreement due to their toughness, they are usually more analytical and objective in their approach. They are able to make decisions on a more rational rather than emotional basis. They will plan for a result that is most practical. They have been trained or intuitively know that an open mind and recognition of costs and risks, as well as the interests of the other party, must be factored into the negotiations. They don’t view concessions as losses but necessary to accomplish what is best for their business. They can still be adept and tough negotiators but they are rarely unrealistic.

Knowing that perception of loss is one of the most difficult obstacles to overcome it is important for an attorney not to give predictions which may hold out false hope. It renders a practical settlement more difficult. What has been indicated as probable or very possible is typically interpreted by the client as a sure thing. Humans select unconsciously or consciously those particular facts from conversations that conform to what they wanted to hear rather than what may have actually been said. Having extraordinary confidence of a particular outcome, accepting less in negotiation violates the party’s sense of justice and principles and they will see it as losing rather than being in their best interests.

For example, an attorney may build a case that includes a very large sum for future expenses and losses that the client then believes will be awarded. But in reality:

 

A study of court decisions documented … in cases of negligence, for example, compensation is more likely to be awarded for out-of-pocket costs than for unrealized profits [Cohen & Knetsch, 1990]. * * * Because of this asymmetry a decision maker who seeks to maximize the experienced utility of outcomes is well advised to assign greater weight to negative than to positive consequences. (Kahneman, Supra, p.157)

 

Dysfunction to some degree will persist unless the parties are able to get control of their emotional and irrational thinking and open their minds to objective guidance to achieve the most practical results under the circumstances. The “outsider” approach and realistic analysis, including neutral outside assistance, appears to be the answer. John C. Maxwell (Best Selling Author) in his book, Thinking for a Change (Center Street, 2003) observes that: “I’ve known businesspeople who were not realistic thinkers. Here’s the good news: they were very positive and had a high degree of hope for their business. Here’s the bad news: hope is not a strategy.” (p.124)

VIII. RECOMMENDATIONS

 

There are ways to help counsel and the parties to become more objective and realistic in their assessments, avoiding the pitfalls of humanistic traits that prevent objective analysis. “Processing information  effectively also means soliciting the right kind of input from the right people-so you generate the most comprehensive range of options and gain a clear picture of the potential risks and rewards of each (Harvard, Supra, p.3)

 

(Experts in this area) recommended the use of a multi-attribute utility theory … which provides a systematic framework for eliciting and integrating multiple dimensions of complex values. In this way, a … survey would serve as an active process of value construction … (just) as architects, working to build a defensible expression of value. (Kahneman, Supra, p.501)

 

But one must be willing to “genuinely want to hear the answers” to their inquiries when using the outside or objective method of analysis. (Harvard, Supra, p.96)

The circumstances for the parties and to a lesser extent the attorneys, involve not only the potential of a poor result but also necessarily takes into consideration all circumstances which affect the lives of the participants. There are many tangible and intangible variables affecting the choices to be made in mediation or negotiations. For example, studies have shown that individuals having to live under stress for long periods suffer immune deficiencies and their brain functions in the area of productivity and avoidance of depression are compromised. (Coleman, Social Intelligence [Bantam, 2006, New York Times Best Seller]). Others may suffer setbacks in their business, profession and family life as the result of being in lengthy and costly litigation. It is recommended that all relevant factors be weighed when making settlement decisions. “People who are constantly looking at the whole picture have the best chance at succeeding in any endeavor.” (Maxwell, supra, p.67)

The following analysis chart may be a helpful tool to gain a more realistic view of a case and help avoid biases that blind us to realities. Just as a physician must obtain informed consent, lawyers too have an obligation to be direct and open with their clients “as an expert advisor, providing information and counseling” in a realistic manner. This chart is just an example. Attorneys should develop a formula and checklist that best fits their style.

End

*Mr. Peterson is a local mediator and holds an LLM and Master’s Degree in Dispute Resolution from Pepperdine’s Straus Institute for Dispute Resolution. He became a lawyer in 1976 and has been a mediator for over 13 years. For comments, questions or assistance, Mr. Peterson can be reached at (805) 441-5884 or davidcpeterson@charter.net. His Profile can be found on the Santa Barbara Court CADRe web site or Google “David C. Peterson, Mediator.”

 

QUICK GENERAL ANALYSIS OF POTENTIAL IMPACT OF LITIGATION

 

COMMENCE

LITIGATION

 

DISCOVERY

 

MOTIONS

 

EXPERTS

TRIAL

PREPARATION

Client Meetings

Interrogatories

Related to Discovery

Research

Research

Review Documents

Requests for Admission

Related to Experts

Retain

Motions

Research

Depositions

Summary Judgment

Meetings

Exhibits

Prepare Legal Pleadings

Document Demands

Narrow Pleadings

Depositions

Briefs

EXPENSE

$

EXPENSE

$

EXPENSE

$

EXPENSE

$

EXPENSE

$

PRIMARY REASON LITIGATION COMMENCED   ____________________________________________________________________________ ___

 

INTERESTS EXPECTED TO BE SATISFIED BY COMPLETING LITIGATION  _________________________________________________________

 

TOTAL ESTIMATED EXPENSE FROM COMMENCING LITIGATION TO JUST BEFORE TRIAL: $________________________________

 

ESTIMATED LENGTH AND COST OF TRIAL (JURY OR BENCH?)  ________DAYS/WEEKS/MONTHS $ __________________________

 

REALISTIC ESTIMATED COST FOR POST TRIAL PROCEEDINGS (and chance they will occur) $__________________________________

 

REALISTIC RANGE OF RESULTS FROM TRIAL (Including backup and objective reasons) $________________  TO  $__________________

 

REALISTIC PERCENTAGE OF CHANCE OF LOSING ALTOGETHER  _________ % OR OF NOT EXCEEDING 998 OFFER __________ %

 

REALISTIC ABILITY TO RECOVER FEES ______________ % (INCLUDING 998 OFFER ISSUES)

 

REALISTIC ABILITY TO RECOVER COSTS (INLCUDING 998 OFFER ISSUES) ____________ %

 

LENGTH OF TIME BETWEEN COMMENCING LITIGATION AND COMPLETING TRIAL AND POST TRIAL PROCEEDINGS, IF ANY

______________  MONTHS/YEARS

 

NUMBER OF HOURS/DAYS EXPECTED THAT CLIENTS WILL BE PERSONALLY ENGAGED IN VARIOUS ASPECTS OF LITIGATION AND TRIAL ______________  DAYS  _____________ HOURS

 

REALISTIC POTENTIAL CONSEQUENCES OF LITIGATION AND TRIAL

 

PERSONALLY _____________________________________________________________________________________________________________

 

PROFESSIONALLY _________________________________________________________________________________________________________


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