Forming beliefs about adjudicated outcomes: Perceptions of risk and reservation values

Abstract

In negotiations where impasse is resolved via a dispute resolution mechanism (like the courts or arbitration), beliefs about a potential adjudicated outcome are central in determining the bargaining environment. The present research investigates how negotiators (trial attorneys and students) involved in a hypothetical product liability case use the information ecompassed in damage awards from previous, similar cases in forming beliefs about their own case. In particular, we examine how the parameters of the distribution of previous outcomes (variance and range) affect the expected adjudicated outcome and the parties' reservation values. We find that the range of previous outcomes has no significant effect on subjects' reservation values, but that the variance does have a systematic effect, particularly on plaintiffs' behavior. A pair of separate findings may have important implications for the negotiation process. First, whether or not subjects exhibited risk averse behavior dependend on the role to which they were assigned in a way that is consistent with research in behavioral decision theory that highlights the relationship between attitudes toward risk and how a decision problem is framed. Second, only subjects assigned to roles for which they had extensive experience exhibited over optimism about the likely outcome.