|
HANDLING RISK
by Charles B. Parselle
“Freedom’s just another word, for nothing left to lose.” Janis Joplin
The rule is simple. The “haves,” meaning the people with the money, tend to be loss averse. The ‘have-nots,” meaning the people who want the money or the stuff, but don’t have it, tend to be risk averse. Those who have, need to conserve. Those who do not, need to acquire. Although this may seem counter-intuitive, most plaintiffs most of the time will not “bet the store.”
When a plaintiff makes a demand, it might as well be monopoly money; it represents wishful thinking. Defendants are more cautious - they have the money; when a defendant makes an offer, it is real money that the defendant would much prefer not to have to part with. Plaintiffs are hopeful; defendants are grudging. That is because, as we learn from behavioral economics (Exposition on a New Theory on the Measurement of Risk, Daniel Bernoulli, 1738), a person’s sadness at losing $1,000 is twice as great as a person’s happiness at winning $1,000. This tendency to feel the pain of loss more deeply than the joy of gain is called “loss aversion,” and has implication for the manner in which parties negotiate. Defendants are loss averse; plaintiffs are risk averse. However, sometimes plaintiffs will reverse the natural tendency; if angered, they may accept considerable risk.
“One thing I’ve learned in all my years; sometimes you just have to say ‘what the fuck’, and make your move.” Tom Cruise, “Risky Business.”
In Greek classical mythology, Sisyphus, king of Corinth, known for his cunning, managed to cheat Death – for a time. When he finally reached Hades the second time, he was punished by having forever to roll a huge stone to the top of a hill, the stone always escaping him and rolling down again: perpetual labor. Negotiations can seem like that.
Defendants start at the bottom of the hill; with sighs and groans they explain how they just can’t roll the stone – they are not liable, the plaintiff is a rogue, the case is only worth “nuisance value” at best, they refuse to be intimidated, the plaintiff will never be able to prove his case, the legal theories are flawed, etc. Of course, defendants never reach the top because the top is whatever the plaintiff says it is.
Plaintiffs start at the top of the hill, and desperately try to prevent the stone from rolling down. It may seem odd that the plaintiff gets to define the top of the hill, but this is a mythical hill – whatever the plaintiff selects as his opening demand is the top. A plaintiff with an injury worth around $15,000 may choose Mount Everest as his starting point: “The demand is $500,000.” The penalty paid by a plaintiff for choosing to define the hill too high is that his stone (a) is much harder to keep at or near the top (b) his stone has a lot farther to fall.
“Gravity” in this metaphor means the pull towards the natural resting place of the stone. The stone represents the “true” value of the case. A plaintiff may choose any number he pleases, close to infinite, but a defendant cannot fall lower than zero. Defendants always complain about this, gazing in amazement at the plaintiff’s ball so high, so far away: “What’s the point of negotiating at all?” they say. But defendants do not have to start at the bottom; they are allowed to start anywhere on the hill they choose. If they have to push the stone that much further to find the stone’s natural resting place, that was their choice.
Plaintiffs also complain: “Look how far we have moved, yet the defendant has hardly moved at all.” True, but if the matter is worth $25,000, the defendant doesn’t have much room in which to move; if the plaintiff started at
$250,000, he necessarily must move a very long way, and he may pay a price for this in the form of loss of bargaining credibility.
The length and stress of a negotiation depends on how hard the parties want to work, how long they want to
play, but even more depends on how close the parties are prepared to start negotiating somewhere in the vicinity of the natural resting place of the stone. They have an advantage that the mythical Sisyphus never had, and they are not condemned to everlasting hard labor in Hades. Claims have a value, not an exact value, but within a certain range.
|
