Mediation and the Psychology of Money, Part II

by Andrew Flake

In a prior post, I reviewed a compact and very readable book from Wall Street Journal columnist Morgan Housel, whose thesis, supported by colorful and timely examples from the world of business and commerce, is that our decisions about money are generally driven less by rational economics than by evolutionary psychology.

From a business mediation and dispute resolution standpoint, it offered some rich insight. Here are a few additional examples:

Not Understanding the Idea of “Enough“. What drives an already-successful individual, professionals like Bernard Madoff or Goldman board member and former McKinsey CEO Rajat Gupta, to cross the line, breaking the law in pursuit of additional money when they already have more than the average person could spend in a lifetime? The author describes it as not having a sense of “enough,” quoting Warren Buffett’s description of overreaching risk at the Long-Term Capital Management hedge fund: “To make money they didn’t have and didn’t need, they risked what they did have and did need.

Now an easy move from here, in thinking about negotiation, is the party without well-defined objectives, someone losing sight of what the dispute’s objective is, what constitutes a win, who instead gets caught up in the process itself, thereby leaving a potentially good outcome on the table. It is the client looking to the lawyer post-verdict, with a pained recollection of his counsel’s earlier recommendation to settle.

But I think there is an even more useful insight here as well, one that has to do with the role of the mediator in helping the parties to understand success. Discussing the Gupta case, Housel writes:

Reputation is invaluable. Freedom and independence are invaluable. Family and friends are invaluable. Being loved by those who you want to love you is invaluable. Happiness is invaluable. And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough.

In other words, there are factors beyond the monetary aspect of a dispute that really matter — closure, peace of mind, being able to attend to business again, repaired relationships — and a good mediator can help bring those out. Otherwise, the risk is that parties look only to a dollar figure as the sole measurement of success, or even more harmfully, beginning to score their success in terms of the process of litigation itself, which should only be a means to a well-defined end. And when the lawyers also share this point of view, we see some of the more aggressive tactics of hardball litigation, an approach that seldom ultimately helps the client in terms of desired outcome or efficiency.

The role of the “tail.” The concept of the tail — those outlier results on the bell curve — is a fascinating one. Housel’s point is that the tail, a small handful of decisions, drive a disproportionate number of investment results. This become apparent in studying an aggregate like an index or market, but is also true at the corporate and individual levels. Thus, it may be less important which stocks one adds to the portfolio today, than how she responds in an unforeseeable and rare market event like the Great Depression or the 2008 Recession — or to bring Housel current, we can add, like last year’s pandemic outbreak.

By definition, we don’t predict a black swan event, but they still occur. So how does it help us, to recognize that something we can’t even conceive of now, may occur, and that it may reshape history? Let’s consider our client’s business or livelihood. Litigation, for most clients, is simply not something they saw coming. They did not reckon with the costs, tangible and intangible, in time, in treasure, in attention. So they should be building a business plan that has some margin for error, and that recognizes some kind of tail event could occur.

I had a mediator share once the idea that, in his view, “On your best day, you’re only 80% certain about winning a case.” The outlier events, the black swans, can occur in litigation as in life. How can we acknowledge that and leave the right safety margin in our planning?

Consider giving an arbitration clause real attention, and building in a phased-dispute resolution approach. Even at mediation, acknowledge that a deal might fall apart, and document it the day it is reached, with binding signatures; as inconceivable as yet another dispute may be, consider how it would be handled. Think about your dispute resolution clauses, and how robust they are, and do some testing against various scenarios: What if your client initiates the dispute? What about the other side? What if the business has been sold? What if the client’s market has been totally reshaped? There are lots of ways to come at this, but you get the point: Recognize that the tail event of major legal conflict can occur.

History is not a map of the future. Cautioning against an overreliance on what has already happened, Housel writes about the “historians as prophets” fallacy, an “overreliance on past data as a signal to future conditions.” The lesson to learn from a particular past event, no matter how surprising, is not that it may repeat: It is that “the world is surprising.”

This insight is a harder one to apply, because so much of what we do in the dispute resolution world is forward-looking and predictive. But the mediator has a difference view often than the lawyer. As party-counsel, can we become too wedded to how we think the litigation process works? Certainly, if we gave up using data like case law and our knowledge of decisionmakers, we’d lose an important part of our role in predictive counseling.

Perhaps the lesson in the dispute context is just humility, that while we can make a best prediction, we undestand it is only that. Housel says “Realizing the future might not look anything like th past is a special kind of skill that is not generally looked highly upon by the financial forecasting community.”

The value of control. Here the wisdom of our seniors is compelling: When asked what they value most in life, those at the end of it consistently talk about the value of time, and in particular, having quality time to spend with friends and family, and to devote to ideals bigger than themselves. Taking part in a mediation process puts that same kind of control back in the hands of the parties, not in an arbitrator’s or in a judge or jury’s. I love trying cases, and I certainly recognize that there are cases that simply need to be tried. But there is going to be a winner and a loser, in large part, and someone other than the litigants is making that decision. So as the individual values control over time, which good decision-making and planning can help protect, the litigant and counsel should value control over outcomes. And as I mentioned earlier, getting a dispute off of the docket also has a dividend in real dollars and in time. Savings can give individuals some of that control and flexibility, which Housel terms an “unseen return on wealth.” Consider some of the “unseen returns” of getting a dispute resolved now, rather than in the future, when you can control it and you know all of the circumstances that exist.

Recognizing that others may be playing a different game. We’ve read recently about “meme stocks,” and the online activity that has driven up the share price of businesses like GameStop and of cryptocurrency like the Elon Musk-connected dogecoin. What is going on there, however, doesn’t teach much to the long-term investor. To use the author’s parlance, the involve two groups are playing different games — and trouble occurs when investors don’t recognize that disconnect.

In litigation, this comes up when counsel or client want to employ a playbook that just doesn’t fit the objectives of the case and the parties in the case. So rigorous front-end goal setting and defining — determining what the measure of success is, and just what game is being played — is critical. For the mediator, that same determination becomes important, and the confidentiality of the process gives her a special opportunity to do that. If there is misalignment, for example, one party believing a case will let him drive a competitor out of business, and the other not even wanting to compete, perhaps even to exist the market, the mediator can correct it. This misalignment can occur as well when one party is too focused on the process itself, driving cost up and protracting the timetable.

The difference between the rational and the reasonable. Near the end of the book, we read that “there is no single right answer; just the answer that works for you.” I really appreciate this one, because it allows us to relieve some of the pressure we put on ourselves, and as mediators, helps us understand and help the parties. We are all human, and we can acknowledge, as humans, we are not programmed to be fully rational all of the time.

Going further, we can also take action to help balance and offset this tendency, employing systems and processes that are themselves inherently rational. A robust dispute resolution program, implemented across an organization, with aligned and consistent contract documents, supporting internal programs, and good employee training, is a great example.

If you can think of others, or if any of these insights trigger useful examples of your own, let me know — I’d love to hear about them.

[The book is Morgan Housel’s The Psychology of Money: Timeless lessons on wealth, greed, and happiness.]

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