The importance of taking chances in negotiations
Which is worse: A poker player who almost always folds, or a poker player who almost never folds?
Players who always fold—unless they have a royal flush or something close—will virtually never suffer a costly defeat. They get out early, often, and for the minimum amounts. However, they will bleed chips on every hand, including on many hands that they could win. These players make decisions based on one factor: the cards in their hands. They neither exploit the information disadvantage of the other players—the fact that other players do not know whether they have a better hand or not—nor do they consider the nonverbal signals of the other players. The hand is dealt; the decision is made.
Players who never fold—unless they truly have nothing in their hand—will frequently win chips, despite having the losing hand, simply because the other players are nervous. These players also make decisions based on one factor: the information disadvantage of the other players. The cards in their hands rarely matter, and they do not need to “read” the other players. On rare occasions, they will suffer a crushing defeat that they could have avoided.
Truthfully, it is hard to say which of the two is worse. By committing to a single strategy, both players lose money that they could otherwise keep. What we can say is that players who use all three tools—the cards in their hands, the information disadvantage of other players, and the other players’ nonverbal signals—will typically end the night with a much larger pile of chips. So it is with settlement negotiations.
Most claims professionals have a decent grasp of the liability risks in any given case. These are the cards they were dealt. Plaintiffs also frequently have an information disadvantage, particularly in the early stages of a case, before discovery takes place. Finally, there are always signals from the other side. These signals are especially strong at mediation, despite being filtered through a mediator. Taking advantage of these factors when deciding when to make a settlement offer and how much to offer means taking calculated risks.
There are two parts to calculated risks. First, they are calculated. One of the most frustrating things I realized as a new attorney was that I had to draw conclusions from incomplete data; I never had all the facts that I wanted. The same was true as a new claims professional. Nevertheless, we fill in the blanks with a mixture of experience, deduction, and conjecture, and we make the best decision we can. We play the odds.
In a recent mediation, taking a calculated risk paid off. It was late in the day, and we had offered about $60,000. The plaintiff reduced their demand to about $180,000. They were matching us roughly dollar-for-dollar, and we were trending towards the midpoint of $120,000, but we knew the case was not “worth” this amount. There were also some indications from the plaintiff’s counsel that they were not terribly invested in the case. We decided to take a calculated risk by offering $75,000, with a message that we were nearing our end point. After 30 minutes of sweating, we received their response: $85,000, ultimately agreeing on $80,000. Taking a calculated risk paid off, and it may have saved us $35,000.
However, it does not always go as planned. The other part of calculated risk is that it is a risk. Sometimes, you will regret taking the risk, but that does not mean it was a mistake. Even billionaire investors have made bad investments, and the skillful poker player will still lose hands. Taking calculated risks means accepting the fact that, in most cases, it will be worth it but, in other cases, it will not. If the risks are carefully calculated, though, then in the aggregate you should achieve better results than by favoring any single approach—be it risk-averse or risk-heavy. More importantly, by practicing the act of taking calculated risks, and learning from each experience, you should become better at taking those risks in the future. In other words, you will better know when to fold, and when to hold.
This article is for information and discussion purposes only. Any views or opinions expressed are the author’s; shall not be construed as legal advice; and do not necessarily reflect any corporate position, opinion or view of Great American Insurance Company, or its affiliates, or a corporate endorsement, position, or preference with respect to any contractual terms and provisions or any related issues. If you have any questions or issues of a specific nature, you should consult appropriate legal or regulatory counsel to review the specific circumstances involved.