In the last post, I noted that three different sources of uncertainty affected efforts to appropriately value claims: the amount in controversy, as influenced by the revealed facts and relevant decision makers; the uncertain amount in litigation costs; and the sequential nature and nonmonotonic value of the option to settle. This post focuses on the first–the challenges of gauging the amount in controversy, including but not limited to a potential judgment value.

While even robotic litigants and attorneys would be flummoxed by the challenge of accurately assessing the amount in controversy, given the unpredictability of judicial rulings and juror deliberations, the challenge is made much more difficult by the fact that litigants and their attorneys are irrational, emotional human beings. Behavioral economics offers great insights into just how profoundly litigants’, litigators’, and even judges’ judgments are distorted by classical forms of bias.

For example, the “anchoring” bias is the tendency of people to make estimates grounded in irrelevant starting points. This bias is particularly (though not only) relevant in settlement negotiations, as research documents that people anchor to the opening offer, and thus are more likely to accept a $12,000 settlement when the initial offer was $2,000 than when the initial offer was $10,000. Or consider “hindsight bias,” which is the tendency to overestimate one’s own predictive powers and thus see past events as more predictable than they in fact were. Hindsight bias has been documented as influencing jurors’ liability determinations.

Another bias, affecting litigants and litigators alike, is “egocentric bias,” which is the tendency of people to overestimate their own abilities. This bias not only influences perceptions of claim value and thus litigation decisions at the outset of a case, but also affects how revealed information is processed. As a result, as the case progresses, opposing sides’ views of claim value can become further apart, rather than closer together. Other biases work against settlement as well: the sunk cost phenomenon,subjective psychological costs and litigation fatigue, reactive devaluation, (i.e. the desire to avoid appearing to capitulate to an adversary), and status quo bias.

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Tags: amount in controversy, Litigants, litigation costs