The Effects of Beliefs Versus Risk Attitude on Bargaining Outcomes

Abstract

In bargaining environments with uncertain disagreement or “impasse” outcomes (e.g., litigation or labor strike outcomes), there is an identification problem that confounds data interpretation. Specifically, the minimally acceptable settlement value from a risk-averse (risk-loving) but unbiased-belief bargainer is empirically indistinguishable from what one could get with risk-neutrality and pessimistically (optimistically) biased beliefs. This article reports results from a controlled bargaining experiment where data on both risk attitude and beliefs under uncertainty are generated in order to assess their relative importance in bargaining experiment outcomes. The average lab subject is risk-averse, yet optimistic with respect to uncertainty, which is consistent with existing studies that examine each in isolation. I also find that the effects of optimism dominate those of risk-aversion. Optimistic bargainers are significantly more likely to dispute and have aggressive final bargaining positions. Dispute rates are not statistically affected by risk attitude, but there is some evidence that risk aversion leads to a weakened bargaining position. Though additional research is needed to understand the limits of extending these results, a key implication follows. In uncertainty environments where optimism dominates, increased settlement rates are more likely achieved by minimizing impasse uncertainty (to limit the potential for optimism) rather than maximizing uncertainty (to weaken the reservation point of risk-averse bargainers), as has been argued in the dispute resolution literature.