When a Negotiated Resolution Appears Premature . . .
. . . understanding cognitive biases can help the parties settle
I've recently helped several small businesses work out the termination or renewal of business ventures in response to accusations of fraud and the usurpation of corporate opportunities. Although none of these mediations has involved Fortune 500 companies, the owners faced potential losses in the hundreds of thousands to millions of dollars.
Because the money expended on lawyers and forensic accountants hits the bottom line of small businesses faster and harder than those spent by larger companies, critical decisions must often be made in the absence of verified accounting and factual information.
When it would cost tens to hundreds of thousands of dollars to conduct the discovery necessary to truly know your best alternative to a negotiated agreement, what negotiation tools might help your beleagured and embattled commercial clients?
First the Hypothetical
With names and facts altered to protect confidentiality, consider the recent negotiated settlement of a corporate dissolution and accounting action.
The owners, Tom Jones and Bob Smith have been profitably importing restaurant equipment from Hong Kong since the early '90s. In the year prior to litigation, their business -- RSI -- began to experience difficulty in acquiring the same quality goods in a similar price range as it had in earlier years. At the same time high quality goods became scarce, Jones entered into a business venture with a restaurant supply wholesaler selling equipment similar to that imported by RSI. Smith had also entered a new business venture with a restaurant equipment retailer.
You don't need to understand the illusory correlation bias to see the lawsuit coming.
The Business Dissolution Litigation
Smith sues for RSI's dissolution and seeks an accounting, accusing Jones of various business torts. Jones files a cross-complaint accusing Smith of diverting to his new retail business imports that would have gone to RSI. The RSI warehouse is currently filled with goods imported from an inferior secondary market. Smith claims RSI will be unable to sell these goods for a profit. Jones claims they can be sold for a $500,000 and $600,000 profit.
The parties schedule an early mediation in an effort to avoid crushing legal fees.
Mediator Intervention
At the commencement of the mediation, each party tells the mediator that he is "absolutely certain" that his valuation of the mechanise is "right."
How do the parties calculate their potential damages (to analyze their Best Alternative to a Negotiated Agreement) or value the worth of the business for mutual buy-out offers in the face of such wildly competing claims?
Cognitive Scientists to the Rescue
Cognitive scientists have identified something they call the "ambiguity effect." The ambiguity effect occurs when decision makers avoid options for which missing information makes future probabilities unknowable. This was the "elephant" in our negotiation room.
To assist the parties in reality-testing their claims, I made the following suggestion: the party who believed the goods to be "worthless" should exclude any dollar value for the goods from his valuation of the business. The one who believed the goods to be worth half a million dollars, should include that figure in his computations.
Reducing Uncertainty
Reduce uncertainty or ambiguity and you increase the odds that the decision makers will do what business people do best and often -- take calculated risks based upon an uncertain future. In an effort to decrease uncertainty, I suggested that the parties make competing buy-out offers contingent on a neutral appraisal of the current market value of the warehoused goods.
While the business people reconsidered their respective evaluations of the goods' value, they both began to exhibit the "just world effect" and "self-serving" bias.
The "just world" effect is our tendency to believe people "get what they deserve" (both negatively and positively).
The self-serving bias is our tendency to claim more responsibility for our (business) successes than our (business) failures.
Faced with an option that might test each party's valuation of the corporate entity, they shifted their attention to the other's misdeeds (leading to the imminent failure of the business) and their own beneficial contributions (accounting for the success the business had experienced in the past).
These cognitive biases threatened to de-rail the interest-based negotiation over price and mire the parties once again in a position-driven dispute that neither party could ultimately afford to litigate.
Give the Alternative a Little Time
Parties too often conclude that a mediation has failed if it does not resolve their dispute in a single day. This is a lot to ask of the presumed alternative to a lawsuit that has been proceeding for many months or years.
Often, the parties to a mediation need time to digest new insights, reassess their positions and perhaps even check the books and records before making a sound business decision. Lawyers and mediators do their clients no favor by pushing for a decision before the business people are ready to make it.
Remember that readiness to make a business decision is as emotional as any other major life decision. I have seen some business people take a day or two to mourn their losses before they are ready to accept them.
One of the (often false) promises of litigation is the hope it keeps alive in the parties that their "position" will be vindicated. Hope that everything will be restored to them at the end of the road. Hope that they will 'win' rather than 'lose.' I have seen grown businessmen shed actual tears (in separate caucus of course) at the moment they realize their losses will never be fully restored to them even if they "win" the litigation.
The need to reassess, reevaluate and yes, mourn business losses, is just one of the reasons why it's best to leave attractive offers on the table for a day or two after the apparent failure of any negotiation or mediation session.
In the hypothetical case discussed here (really the conflation of three separate disputes) all of the parties (with continued telephone and e-mail assistance of the mediator) settled within two weeks of the first day of mediation.
Planning for Success
My good friend Judge Alexander Williams in the Los Angeles Superior Court Settlement Department, always tells the parties to "plan for success instead of failure."
Asking the right questions and setting the resolution process in motion is a plan for success. Keep the faith and stay in the process, remembering that the strongest bias of all business people is to focus on a profitable future rather than upon the unproductive past.
