Labor & Employment Law

Plaintiffs Stand To Gain More From Settling? New Study Suggests So

A recent New York Times article provides a prelude to a study being unveiled later that examines the psychological issues that clients and lawyers face when deciding whether to take a case to trial.

One of the main findings of the study is that plaintiffs, statistically speaking, stand to gain more in taking a settlement offer than litigating the case.

“The lesson for plaintiffs is, in the vast majority of cases, they are perceiving the defendant’s offer to be half a loaf when in fact it is an entire loaf or more,” said Randall L. Kiser, a co-author of the study and principal analyst at DecisionSet, a consulting firm that advises clients on litigation decisions.

The article also found that defendants made the wrong decision of going to trial (i.e., they plaintiff was willing to take less in a settlement than what the jury eventually found for the plaintiff) less often than plaintiffs. Defendants made the incorrect decision only in 24 percent of cases, according to the study, were plaintiffs were wrong 61 percent of the time. The article states that “[i]n just 15 percent of cases, both sides were right to go to trial — meaning that the defendant paid less than the plaintiff had wanted but the plaintiff got more than the defendant had offered.”

However, the study also concluded that a wrong decision by defendants cost them much more (costing $1.1 million), as opposed to if plaintiffs got it wrong (costing $43,000).

The article also discusses the psychological theory of loss aversion, which could definitely explain litigants’ choices.  The article explains:

The findings are consistent with research on human behavior and responses to risk, said Martin A. Asher, an economist at the University of Pennsylvania and a co-author. For example, psychologists have found that people are more averse to taking a risk when they are expecting to gain something, and more willing to take a risk when they have something to lose.
“If you approach a class of students and say, I’ll either write you a check for $200, or we can flip a coin and I will pay you nothing or $500,” most students will take the $200 rather than risk getting nothing, Mr. Asher said.
But reverse the situation, so that students have to write the check, and they will choose to flip the coin, risking a bigger loss because they hope to pay nothing at all, he continued. “They’ll take the gamble.”

Definitely some food for thought for litigators that have to assit clients in the difficult decision about whether to settle or try a case. 

Full post as published by California Labor & Employment Defense Blog on August 13, 2008 (boomark / email).