Cognitive Bias in Mediation: The Endowment Effect

The Endowment EffectPeople tend to process information through some of the same filters over and over again. We call these filters “cognitive biases.” They are hardwired into our brains.

One of these biases is called the “endowment effect”: once people have something, it becomes magically endowed with a sense of “mine-ness.” People often want more to part with it than they would have been willing to pay to acquire it. The endowment effect can make negotiations over what seem to be economic issues surprisingly filled with non-rational elements.

Consider a neighbor dispute over real property boundaries, for example.  These battles sometimes turn on the placement of a 6- or 12-inch strip between two parcels.  The parcel has become “mine” to both sides. When pressed, each party may be willing to pay less to buy out the other’s claim than it wants to receive if it sells its interest.  The same stalemate happens in partnership disputes too, when one or both partners have endowed the partnership with “mine-ness.”

The endowment effect often rears its head when people are getting divorced.  The divorce process itself requires people to sort their personal property into piles labeled “mine,” “yours” and “ours that we have to split.”  Even though the parties may call it sentimental attachment to particular objects, when something falls into both parties’ “mine” piles, the discussion stops being about the value of the object and becomes more of a tug of war.  Unfortunately, some people place all the property in a home into their own “mine” pile.  As a comedian once said, “I get divorced every few years so I get to give give all my stuff away.”

The endowment effect becomes particularly difficult with expectations.  For instance, people might reasonably expect that they will receive an inheritance from their own parents.  It is the ultimate in “mine”: a person who gave one life is passing on the fruits of a lifetime of toil. However, others lay claim to the same interest.  The government wants its taxes paid.  Siblings think they deserve more.  Spouses who have lived for years in anticipation that one day they will receive a little extra cash to spend think they are entitled to a piece, too.  The legal system, which at its best clarifies social rules that supersede individual expectations, is often frustratingly vague.

The answer for the mediator or creative negotiator is to try to bypass “mine-ness.”  Skip a generation and use the funds to pay for children’s education.  Swap something from the “yours” pile for something from the “mine” pile, so both sides will feel that the other has not been unjustifiably enriched (an actual common law legal concept!). If necessary, delve into what it means to parties for something to be “mine” or “yours” – are they objecting to something being taken, or do they feel an entitlement that is wrapped up in other emotions? If none of that works, you may have to take on the brute force challenge of forcing people to accept the unsatisfying reality that, whether by their agreement or law, some of their “mine” pile will be taken from them.  If they decide to agree, then they may at least get to pick and choose from their pile.

Cognitive Bias in Arbitration: Fundamental Attribution Error

People tend to process information through some of the same filters over and over again. We call these filters “cognitive biases.” They are hardwired into our brains.

One of these biases is called “fundamental attribution error.” When something good happens, we tend to overestimate the role of our own effort and intention. For instance, a store manager might say, “The changes I made helped us make more money last year,” even though it happened at the time the whole industry was expanding. On the other hand, when something bad happens, we are tempted to assign blame.  For instance, “I know his job was cut when the company was downsizing, but if he had put more effort in, they would have kept him and let someone else go.” In other words, even though people may think they root for the underdog, they actually have a tendency to congratulate themselves and blame the alleged victim.

Judges gavel on a pile of law booksIn a contested matter, the complainant has been unhappy enough with the outcome of a situation to makea claim.  At some level, the arbitrator must be careful not to have a bias toward blaming the alleged victim or respond to his bias by overcompensating in favor of the alleged victim.  Similarly, he must be careful not to have a bias toward crediting success solely to the effort and general superiority of the party claiming success (although he may need to acknowledge that success in weighing the evidence). He must be conscious of how he is responding at a subconscious level.

The advocate in arbitration can use cognitive biases in her favor by how she spins the story she tells.  For instance, defendant’s counsel can present evidence of the many ways the plaintiff failed to take action to prevent or ameliorate the harm. While the advocate runs the risk of alienating an arbitrator by reiterating evidence too much, she should certainly try to reinforce the arbitrator’s subtle predilection toward assuming fault (and even character flaw).  Likewise, plaintiff’s advocate should consider ways to weaken the other side’s subtle claims of moral superiority. Counsel should plant the seeds of the dark side of a successful defendant’s story, as if defendant were a baseball player who was viewed as a hero because of his prowess on the field until the public learned about his secret steroid use.

While fundamental attribution error comes up more often as an obstacle to mediated resolution, the attentive advocate can also use it to help be persuasive in arbitration.