Mediation Message No. 79

MICHAEL D. MARCUS’S MEDIATION MESSAGE NO. 79

SETTLING RATHER THAN GOING TO TRIAL MAKES STATISTICAL SENSE, PART II

In Mediation Message No. 70 (July 2011), I discussed a 2008 empirical study of 2,054 California trials between 2002 and 2005 which concluded there is a high incidence of decision-making error by both plaintiffs and defendants in rejecting settlement proposals and going to trial or arbitration. 61 % of the time plaintiffs received less or equal at adjudication than offered by the defense at the last settlement offer whereas the defense decision error took place only 24 % of the time. However, when defense error occurred, it resulted in a mean cost of $1,140,000 while the plaintiffs’ mean error was only $43,100. The wide variation between $43,100 and $1,140,000 led to the conclusion that plaintiffs are more risk averse than defendants.

Since that Message, I have learned that the study has been expanded to 2,754, cases, and includes reported matters through 2007. The updated results, however, are substantially the same as those originally reported in 2008. Plaintiff decision error in California changed from 61% to 60%, and defense error changed from 24% to 25%.  In only 15% of the cases did both parties obtain a superior financial result by rejecting each other’s settlement proposal and proceeding to trial. The average cost of error increased for both plaintiffs and defendants, although the asymmetry in plaintiff and defendant costs of error remained constant.  Plaintiff average cost of error rose from $43,100 to $73,400, and defendant average cost of error increased from $1,140,000 to $1,403,654.

An analysis of New York cases in the expanded study replicates the California results. Plaintiffs’ decision error rate in New York was slightly lower than in California (56% vs. 60%), but the New York defendants’ error rate was slightly higher than the California defendants’ error rate (29% vs. 25%). Due to these offsetting decreases and increases in error rates, the 15% incidence of “no decision error” is the same for both the New York and California databases.  Plaintiffs’ mean cost of error in New York is $52,183, compared to defendants’ mean cost of error of $920,874, roughly 18 times the cost of plaintiffs’ error.  (In California, defendants’ mean cost of error was 19 times the mean amount of plaintiffs’ decision error.)

The above updated data and conclusions are reported in Beyond Right and Wrong: The Power of Effective Decision Making for Attorneys and Clients (R. Kiser, Springer Science + Business Media, 2010).

Judge Michael D. Marcus (Ret.)

ADR Services, Inc.

1900 Avenue of the Stars, Suite 250

Los Angeles, California 90067

(310) 201-0010

Copyright Michael D. Marcus, September 2012

Please visit my website at www.marcusmediation.com for information about my mediation and arbitration background and experience. Copies of my previous Mediation Messages and Arbitration Insights are available by going to the articles link on the website.

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