JAMS ADR Blog by Chris Poole
When parties are faced with an attractive settlement offer, they frequently wish to compare the offer to what they might get at trial, which is the product of the odds of winning times the value of the verdict or award. Naturally, they ask their lawyer “how likely am I to win?”
What kind of answer is called for? Answers to questions like this come in two flavors. Flavor one – you know the odds – is called decision-making under conditions of RISK. Flavor two – you don’t know the odds – is called decision-making under conditions of UNCERTAINTY. The two aren’t at all alike! The first is more like a slot machine or a lottery. The second is more like picking stocks, predicting earthquakes and making most business decisions. Confusing the one for the other can be a disaster.
In his brilliant book Risk Savvy, How to Make Good Decisions, prolific author and scientist Gerd Gigerenzer describes the dangers of confusing one kind of decision with the other. He says risks can be calculated when there is (1) low uncertainty – a predictable and stable situation (2) few alternatives – not too many factors to estimate (3) a high amount of data available to make these estimations.
However, since at least the 1700s, we’ve known that people prefer risky decisions to uncertain decisions – so much so that they will turn uncertain decisions into risky decisions in their minds, even when reality is different. An example of this is the “turkey illusion.”
If you want to figure out what is likely to happen tomorrow, you can look at what’s happened in prior days. If you are in the Gobi Desert and you want to know whether it will rain tomorrow, you can look at the prior day and the day before that, and that data will help you determine tomorrow’s weather. This “rule of succession” means the past is predictive of the present.
But not for a turkey. If every day the farmer feeds and pets the turkey, the turkey could calculate the odds starting with the fourth Friday in November and conclude “I’ve been fed and petted 159 days in a row – the odds of being fed and petted on the 160th day are 160/161 or 99+%.” And that logic will hold true all the way to 364/365…and then Thanksgiving will come and the poor turkey will have logically concluded that morning that it has nothing to fear – because a savvy risk-taker would deem the odds of death as vanishingly small.
Gigerenzer attacks this topic from many vantage points. He analyzes leadership decisions and the work of CEOs (ch. 6), medical decisions and the ploys used by and on doctors (ch. 9), consumer decision-making and the effects of misleading ads (ch. 5) and more. Each time, there are simple tips and rules of thumb to help navigate through these sometimes murky waters.
Can a lawyer predict with accuracy the outcome of a potential case? Let’s analyze that question further, together, in the days to come. For now, I strongly recommend you go out, buy and read Risk Savvy. It might just save your neck come Thanksgiving.