The Risks of Decision Errors in Litigation and Settlement Negotiations

The Risks of Decision Errors in Litigation and Settlement Negotiations

Randall Kiser, a renowned American lawyer, law professor, and decision science expert, recently joined students in the UNB Faculty of Law Trial Practice and Negotiations courses that Kelly teaches to discuss his groundbreaking research in litigation decision-making.  That research has been published in a comprehensive book, in academic journals, and in the New York Times.

In a 2008 Journal of Empirical Legal Studies article, Kiser’s research into decision-making errors in settlement negotiations analyses 2,054 California civil litigation cases from 2002-2005 where parties rejected settlement offers and proceeded to trial or arbitration. Some of the key findings are outlined below.

Lawyers and their clients make mistakes in settlement negotiations

The research indicates that plaintiffs made errors in 61.2% of cases by rejecting settlement offers that would have been better than their trial outcomes. While defendants had a lower error rate of 24.3%, the magnitude of defendants' errors were much larger, with the average mistake being $1.14 million compared to plaintiffs' average of $43,100.

Key Factors Affecting Decision Errors

Two particularly interesting factors are amongst those considered by Kiser in the research:

1.       When non-calculable losses are at stake (such as prospective, aggravated and punitive damages), defendants seem to be at higher risk of decision errors; and

 2.       When lawyers who have mediation training are involved, lower decision errors occur.

The study builds upon and confirms findings from three previous studies by Samuel Gross, Kent Syverud, and Jeffrey Rachlinski. The authors suggest that improved understanding of these decision-making patterns could help reduce errors in settlement negotiations. They note that the error rates, while better in some contexts like attorney-mediator cases, would be considered unacceptable in other high-skill professions like medicine or engineering.

Based on the article, there are several key factors that contribute to lawyers making erroneous decisions in settlement negotiations:

Framing Effects and Risk Preferences

Several points that are illuminated in the research and that may be useful for lawyers and their clients to understand include:

a.       Plaintiffs tend to be risk-averse while defendants are typically risk-seeking.

b.       Higher error rates were found in cases with contingency fee arrangements (like personal injury and medical malpractice cases).

c.       Lower error rates occurred in cases where contingency fees were uncommon (as in commercial contract law cases).

d.       Lower error rates were found in cases where insurance coverage was available (such as premises damage and personal injury).

e.       Higher error rates occurred in cases where insurance was generally unavailable (bad faith and fraud).

Lawyers’ Cognitive Limitations

 The literature suggests that lawyers often make errors in "negative problem-solving transfer" by inappropriately applying solutions from simpler cases to more complex ones. Additionally, surface similarities between cases may lead to inappropriate analogies and solutions.

 Further, lawyers may have a tendency to overlook or inadequately adjust for non-paradigmatic variables (such as aggravated and punitive damages).

 What can be done to reduce decision-making errors in litigation

 Lawyers and clients should obviously strive to minimize decision errors in litigation.  In order to do so, Kiser’s research offers important insights:

1.       Be wary of conservatism bias.  Lawyers and clients who are strongly wedded to value systems that underlie a claim are more susceptible to decision errors.

 2.       Clients should seek out a lawyer with mediation training, as lawyer-mediators (who have special training in case evaluation and settlement) demonstrate significantly lower error rates.

 3.       Lawyers should pursue additional training in decision science, as the literature indicates that traditional legal training may not adequately prepare lawyers for settlement decision-making.

The VBL Commitment

In our firm, we take decision science seriously and will continue to invest in training and education to improve our decision-making skills.  Additionally, we will maintain our our practice of representing a variety of perspectives in labour, employment, and human rights law cases to reduce our risk of falling victim to conservatism bias.