On those few occasions – okay, more than a few occasions – when I indulge in the guilty pleasure of watching “Deal or No Deal,” I’m always fascinated by the contestants’ decision-making process when offered the choice of either accepting a large sum of money or opening another briefcase, knowing the offer will go up if the briefcase happens to contain a small denomination. Seemingly oblivious to the fact that the offer will drop dramatically if the briefcase contains a large denomination, contestants routinely ignore the risk and – more often than not – go home with a mere fraction of the best offer he or she had earlier rejected.
A recent study appearing in the Journal of Empirical Legal Studies [Volume 5, Number 3, September 2008] suggests that litigants may well be prone to making the same mistake as the contestants on “Deal or No Deal.” The study, authored by Randall L. Kiser, Martin A. Asher and Blakeley B. McShane, analyzed “2054 California civil cases ultimately resolved through trial or arbitration, following unsuccessful settlement negotiations.”
According to the study, 61.2% of the cases resulted in an outcome in which plaintiff failed to do better than the best offer plaintiff had rejected, while 24.3% resulted in an outcome in which defendant failed to do better than the lowest demand plaintiff had made. In only 14.5% of the cases did both parties “win” – i.e, defendant paid less than plaintiff had wanted, but plaintiff recovered more than defendant had offered.
In opting for trial, defendants made the wrong decision much less frequently than plaintiffs, but the study also found that defendants’ mistakes proved to be far more costly. On average, plaintiffs recovered $43,100 less than the highest offer they had rejected, whereas defendants, on average, paid a whopping $1,140,000 more than plaintiffs’ lowest demand.
One lesson to be learned from the study is that the parties to a dispute must carefully assess the potential upside and the potential downside before rejecting a settlement proposal. Unless the parties are so far apart that both sides are reasonably certain to obtain a better outcome by going to trial, resolution short of trial will always be a better option for one of the parties.
If you and your client cannot predict with reasonable certainty that opting for trial will result in a better outcome, the best advice you can give is to shout “deal” rather than “no deal” when the opportunity presents itself.
As always, it would be my pleasure to assist you and your clients in the dispute resolution process. Please don’t hesitate to contact me if I can be of service.
Best regards,
Floyd J. Siegal
fjs@fjsmediation.com