Thursday, December 10, 2009

Opening bids

It is commonplace advice in settlement negotiations, including mediations, to warn the participants not to be insulted by the other side's opening demand or offer. Those who play the negotiation game often enough know that these opening numbers merely set the parameters for further negotiation, and are often deliberately unreasonable. Whether consciously or unconsciously, parties making unrealistic opening demands or offers are taking advantage of the concept of "anchoring." That theory, which has been validated by some research, holds that people are highly affected by the number, or price, that is attached to something. So theoretically, if one were to conduct two settlement negotiations of the exact same case (let's say this case has an objective value of $50,000), and in the first negotiation the plaintiff's counsel starts by saying his case is worth a million dollars, while in the second negotiation of exactly the same case, the plaintiff's counsel initially demands $100,000, the defendant is likely to end up paying more to settle the case in the first negotiation. The same holds true for defendant's opening offers. If the defendant starts off by offering $5,000, he is ultimately likely to get a better deal than if he starts off by offering $20,000, simply because he undermines the plaintiff's confidence in his own valuation by offering a lower number. Parties therefore have good reason to start a negotiation with an unreasonable number.

How do parties counteract this tendency? First, as suggested by the above example, both parties may have to play the same game. If one side makes an unreasonable demand, the other side is likely to make an equally unreasonable offer, thereby creating equally unfair dual anchors.

Another way is to let everyone know up front that these opening bids should not be taken very seriously. I handled a mediation recently where we had some discussion early in the session about the likely range of outcomes at trial. The plaintiff's attorney acknowledged--in front of opposing counsel--that he had only about a 10% chance at trial of hitting his top valuation. Then he turned around and demanded that amount as his opening bid for the settlement negotiation! We all understood that this wasn't a serious settlement demand; the other side treated his opening bid merely as an invitation to start the real settlement negotiation.

Yet another approach is for parties to ignore the mediator's or their own counsel's advice not to act outraged. If one party in a negotiation has communicated his passion about the case, and appears likely to walk out of the room if the other side insults him with an unreasonable offer or demand, that might cause the other side to think about tempering their opening bid somewhat, unless they want to torpedo the negotiation.

Is it the mediator's job to try to get the parties to be reasonable from the outset? Or is it the mediator's job to help both sides get the best deal they can? I lean toward the latter view. So I would not necessarily counsel parties to start with a reasonable number. I am perfectly willing to communicate an unreasonable number, with the caveat that such a number will probably provoke either an outraged reaction or an equally unreasonable number from the other side. Once we've gotten those anchors on the table, they function as the boundaries of the playing field for the subsequent negotiation. That doesn't mean that the case is going to settle halfway between those opening numbers. It just means that we have gotten the opening mind games out of the way, and can then perhaps start trying to look at the case more objectively.

1 comment:

Kathleen Givens said...

Interesting, Joe. Years ago I took a class on negotiating, during which I was taught that I should use both the unreasonable number tactic, and the flinch, which is a non-verbal way of conveying one's extreme distaste for an offer on the table. I'm quite sure most business people have had similar lessons in negotiating. It appears that the unreasonable approach is here to stay.