That’s My Money We’re Talking About!

This post is mostly for defense attorneys in tort litigation. Hopefully, however, plaintiffs’ attorneys will also gain some insight from it. It has to do with a twist on the so-called "endowment effect" described by Barry Goldman in The Science of Settlement: Ideas for Negotiators, ALI-ABA (2008), § 2.01(e). In a nutshell, the endowment effect is a quirk of human nature that causes people to dislike losing something they already have more than they like gaining something they don’t have. I.e., all else being equal, folks would rather not lose than win. It has been posited that the effect causes plaintiffs to make larger concessions in negotiation than defendants. See James A. Wall, Jr., & Suzanne Chan-Serafin, "Processes in Civil Case Mediations," 26 Conflict Resolution Quarterly 261, 266 (2009). The idea is that it is easier for plaintiffs to "give up" something they never had than for defendants to pay out something they do have.

Conversely, if plaintiffs have an "ownership interest" in an off-the-wall settlement amount fueled by unreasonable notions of value, they are more reluctant to accept less than otherwise. Smart plaintiff attorneys are aware of this effect and resist the temptation to over sell a case’s value to their clients.

Defense attorneys can take advantage of the endowment effect by making a reasonable offer in advance of mediation. By "reasonable," I mean something at the lower end of the range of values,* but still within the ballpark. See my discussion of so-called "reverse demand letters" in "Preparing (Your Opponent) for Mediation" (May 12, 2008). This offer should be made far enough in advance of mediation that plaintiff’s counsel has the opportunity to communicate some optimism to the client (e.g., "I’m encouraged by this offer; they’re not there yet, but I think mediation is likely to be productive"). Bolstered by the attorney’s qualified optimism, the plaintiff is more likely to start taking ownership of the offer. Given some time, the plaintiff will be inclined to start thinking about what he or she can do with that money. It stops being the insurance company’s money and starts becoming the plaintiff’s new pickup, remodeled kitchen, down payment on a vacation home, or — in some cases — the ability to take early retirement.

Given most people’s preference for not losing over winning, such a mind set is likely to lead to a greater reluctance to walk away from a settlement, even if the amount offered is "not quite there."


* See my post entitled "Ask Not for Whom the Bell Curve Tolls . . .."