Cognitive Bias in Arbitration: The Curse of Knowledge

Massachusetts arbitrationPeople 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 “Curse of Knowledge”: the tendency to overvalue information that we already know when making a decision that is also based on new information. On the one hand, it is clearly a survival skill to be able to learn from and utilize a knowledge base. Sometimes people even pick arbitrators based on their knowledge and experience in a particular area, so that the arbitrator has at least a basic understanding of how the matter in controversy works on which to base a decision on the “right” outcome under the circumstances. On the other hand, sometimes people rely on that knowledge base so much that it is hard for them to weigh new evidence properly.

For instance, consider an arbitrator looking at a corporate acquisition gone bad. The arbitrator is a lawyer with extensive transactional experience. As the parties explain the situation, he fits their evidence into a developing fact pattern that is based on the framework of his own deal experience and knowledge of the law. On the one hand, the customs and practices of the M&A industry are familiar, so advocates do not need to explain everything from the beginning. On the other hand, the arbitrator may have been involved in a transaction or a prior arbitration that echoes the experience of one of the parties – not a true conflict of interest, but a pre-formed lattice on which to hang evidence as it is presented. He needs to step back and find a way to be able to listen to everything while still using his knowledge base.

As an arbitrator, be aware. As a party, use this cognitive bias. Research your arbitrator to the extent you can to see if you can glean something from her experience. Consider whether in your case experience is good or bad – as in the choice the Financial Industry Regulatory Authority gives between “public” arbitrators from outside the securities industry and “non-public” arbitrators with industry experience. Build upon familiarity if it helps you and re-build the cognitive lattice with more basic explanations if it does not. If you are in a forum in which the arbitrator can ask questions, do more than just respond to the question: listen for gaps or inaccuracies in the arbitrator’s knowledge base as well as reading the tea leaves about what she is thinking.

Knowledge is a two-edged sword. Try not to cut yourself!