Deal or No Deal

The game show "Deal or No Deal" at first seems incredibly cheesy and simple-minded, but in fact can be seen as a fairly sophisticated experiment in the psychology of decision-making. In addition to serving as a psychology experiment, the show also makes a useful analogy to settlement negotiations.

There is some discussion of the show in the book How We Decide, by Jonah Lehrer. Lehrer discusses how the emotional part of the brain complicates what should be a simple rational calculation of the average value of the remaining briefcases vs. the offer by the "bank." One example went something like this: a contestant was offered about $110,000 for a briefcase which could have had a value of either $10 or $5000 or $10,000 or $500,000. The contestant rejected the offer, based on the not-entirely irrational hope (odds were 3 out of 4 in his favor) that one of the low-value briefcases would be eliminated in the next round, and the bank would then increase the offer. What was interesting was that after the next round, when the $500,000 case was sadly eliminated, the contestant could not bring himself to accept any of the bank's subsequent offers, even though the bank was offering much more than the average of the remaining cases. His mind was instead completely focused on the "loss" of $100,000 he had just suffered.

Parties do not act rationally in settlement negotiations either. They bring a lot of considerations to the table that have little to do with the actual options available to them, and these considerations must be addressed before they can make an intelligent settlement decision. Plaintiffs tend to focus on the best case scenario. They discount the cost of getting to trial, and the possibility of getting less than they feel they deserve. Defendants tend to think that any amount paid to the plaintiff is more than the plaintiff deserves. So the plaintiff might think that the amount in his "case" should be $1 million, while the defendant thinks that the amount in the case should be zero. Neither party correctly perceives the values and the odds of the other possible cases.

The process of mediation is designed to enable parties to correctly assess the probabilities of all possible outcomes, so as to enable both parties to achieve a result that is better than the costs and risks of trial. I don't agree with those mediators who say that the test of a good settlement is that it should make both sides equally unhappy. A good settlement should make the parties as happy and relieved as the game show contestant who is jumping up and down with excitement at the six figure offer made by the bank. The reason that contestant is so satisfied is that he finally understands that while his case might be worth $1 million, there is an equally good chance that his case is actually worth almost nothing. The only unsatisfying part of settling a lawsuit is that, unlike the game show, the participants in the lawsuit never get to find out what was in their case.