“If you are asked whether Gandhi was more than 114 years old when he died you will end up with a much higher estimate of his age at death than you would if the anchoring question referred to death at 35.” – Daniel Kahneman, from his book, Thinking, Fast and Slow.
In our article, The Self-Fulfilling Prophecy of Social Inflation, we take the position that “social inflation” is a term of unknown origin that isn’t defined by a single credible source. Nor is its influence on decision making, whatever “it” is, a theory that has been or even could be validated. Despite this, the term “social inflation” is used by clients (whom we will call “decision makers”) and their attorneys when making and defending important choices about valuing that which, by its very nature, is of uncertain value. In short, The Self-Fulfilling Prophecy of Social Inflation stands for the proposition that social inflation is the boogeyman—a figment of our collective imagination that should keep no rational person up at night.
If social inflation is the boogeyman, the anchoring effect is death and taxes. It is real and certain, and it works on our decision making whether we like it or not. The anchoring effect is a cognitive bias that, in basic terms, causes humans to rely too heavily on the first piece of information offered. Unlike social inflation, which lawyers and decision makers decidedly insert into decision making, the anchoring effect exists irrespective of our willingness to accept it as valid. And that is because it is valid. The anchoring effect’s profound influence on decision making is demonstrated by years of study in experimental psychology. Its effect can be reliably predicted when dealing with numbers. The quote at the top of this article is a tested conclusion, not a guess.
What the decision maker does when asked to guess Gandhi’s age at death after being asked whether he was more than 114 years old when he died is to work down from 114 rather than up from zero. 114 seems absurdly old, but if you don’t know the answer, 114 is what you have to work from, and psychology reliably predicts your thought process. You will move away from 114, like a boat from an anchor. And you will continue to work down from 114 until you become uncertain as to whether you’ve gone too far. At this point, you will start to feel the tug back. If you don’t know the answer, this will be the way you approach the problem regardless of whether you have studied the anchoring effect or endorse its validity.
One of the biggest anchoring effect challenges faced by civil defense attorneys comes at jury trials in jurisdictions where plaintiffs’ lawyers are permitted to mention a specific dollar figure in voir dire. If permitted by the court, plaintiff’s voir dire number will be the de facto anchor. While there are methods to deal with this, they are subtle, imperfect, and will not be revealed here.
Another significant challenge faced in civil litigation is managing the anchoring effect’s influence on decision makers in settlement negotiations. When demands are conveyed before independent case valuation is made or even possible, the anchoring effect goes to work and influences the lawyers and decision makers whether they want it to or not. It is easy to say that an absurdly high demand can be ignored and valuation conducted without influence, but can it? Even though you might reject outright 114 as Gandhi’s age at death and lop years off in chunks, 114 still serves as an anchor. Say for instance you reject 114 out of hand and start your work at 99. Why did you pick 99 and not 71, or zero, or as the problem posits, 35? Because of 114. The anchoring effect is sly like that.
So how do you deal with the anchoring effect as a civil defense attorney in settlement negotiations? First, value your cases as soon as reasonably possible. Certainly, don’t wait for a demand to serve as the catalyst to undertake your valuation.
Second, don’t use an additur for social inflation. The anchoring effect is a sufficient influencer in poor decision making, so don’t throw the boogeyman’s fuel into the fire.
Third, when valuing a case, always start from zero and never down from a demand (initial or otherwise). Any time discussion about decision making reveals working down from a demand, go back to working up from zero. Lawyers, partner with your decision makers in this regard. Decision makers, do the same with your lawyers. It is much easier to observe the anchoring effect’s influence on others than to notice its influence on one’s self.
Finally, formulate a risk policy that can be articulated and understood by its simple terms rather than merely described in its application to specific examples (real or hypothetical). A good policy will consider the biases at work on decision making when the policy is being applied in practice and create a balance of cognitive biases, if not an elimination of them.