In some ways, the possibility (or even likelihood) that two experienced attorneys can arrive at widely disparate valuations of the same personal injury case is almost inexplicable. But it happens … all the time. Part of it can be explained as each lawyer having self-serving motives. The defense lawyer is trying to save his client some money, and the plaintiff’s lawyer is trying to make some for his client and himself.

Nevertheless, if both parties are privy to the same facts and have a working knowledge of the venue and law, there should seemingly always be an overlap between the parties’ respective valuation ranges that enables the parties to settle (assuming neither party is out for “justice,” not money). Then why is settlement so difficult? Why do the parties so frequently need a mediator or other intercessor to help them find a middle ground?

Note: This is not taking into account the exceedingly difficult occasions when one lawyer doesn’t know what he’s doing or is in the unfortunate position of having a client who hasn’t apprised him of all the pertinent facts. Hopefully, you outgrew the former pretty early on. And if the latter hasn’t happened to you yet, it’s coming. And it’s rough.

An Economic Perspective on Settling Cases

I’ve recently been reading a couple of books that have unexpectedly shed some light on topic of settlement evaluations. In Richard Thaler’s Misbehaving, he explains a principle of behavioral economics in which people find losses about twice as painful as gains are enjoyable. This is called “loss aversion,” which the Interaction Design Foundation describes as follows:

If people were rational then the feelings invoked by losing something or gaining something (of equal value) ought to be the same. We should feel as pleased that our friend has just given us $100 for our birthdays as we feel bad that we have lost $100 when we forgot to take it from an ATM machine.

In reality this isn’t the case. Psychologists and behavioral economists have found that we tend to feel a loss about twice as severely as we experience a gain. Because we find loss twice as painful as we experience gain; people tend to exhibit a behavior known as loss-aversion. That is we will try to avoid a loss more than we will try to pursue a similar gain.

To apply this to the context of settling cases, when a plaintiff comes off his demand $20,000, he experiences twice as much displeasure as when he gets the defendant to raise his offer by $20,000. For there to be an equilibrium on the pleasure scale, the defendant would have to increase his offer by $40,000. In my experience, most defendants are not interested in a 2:1 negotiation ratio.

Thoughts about Settlement from a Sitting Judge

Meanwhile, I’ve also been reading Litigation in Practice by Curtis Karnow, a Superior Court judge in San Francisco. In his book Judge Karnow shares his judicial perspective on courtroom decorum, litigation strategy, and general practice tips. The section of Litigation in Practice I found most utilitarian was his discussion about settlement.

Karnow places significant value on settling cases as early as possible because early settlements “involve lower transactional costs for the parties and courts, and they free up court resources for the cases which must go to trial.” (p.65). However, he also recognizes there is frequently “a minimum amount of information a party needs before it is comfortable engaging in settlement talks.” (p.66). That is certainly true in my practice. I am frequently uncomfortable making more than a preliminary case evaluation prior to taking party depositions. Even then, once the parties have obtained the bulk of the information from one another, settlement can still prove difficult.

Karnow ascribes some of the difficulty in reaching a settlement agreement to “a-rational factors,” in which simply “the parties have a different view of the impact of the undisputed facts.” (p.70)

They know, for example, that witness X will testify and may even have a good sense form a deposition of how X will perform, but their evaluation of the impact of X on the jury may vary dramatically. So too with documents all parties acknowledge will be admitted at trial. Lawyers judge a case by squinting: they have a sense of how all the factors — witnesses, documents, their own presence and that of opposing counsel — will mesh and impress the tribunal. (p.70)

And sometimes it’s just as simple as that – the parties value the case differently. Even when both parties are willing to make concessions, there are plenty of times they still aren’t going to reach an agreement for the simple fact that they aren’t seeing the case through the same lens. And this is to say nothing of the times when lawyers don’t have control of clients, don’t have an adequate grasp of the facts or controlling caselaw, or are just out of their depth.

Photo by Albert.