But how can you tell when people are bluffing?  In poker there is a significant literature on “tells” the physical signs that might reveal deception.  These might include whether or not someone is flushed, shaking, how they are breathing, the pitch and tone of their voice, the way they look at or handle chips, their body language, eye contact and  so on.  Indeed, the revered “poker face” is the classic strategy for avoiding detection.  However, away from the world of poker, in study after study, Dr Paul Ekman, a professor of psychology in the School of Medicine at the University of California at San Francisco, and his colleagues have demonstrated that most people perform miserably in tests to detect deception, scoring at chance levels or only slightly higher.  Usually the best guide to veracity is history.  Looking at what bids your rivals have made before, how have they reacted to your offers and their overall rate of change will give you good information about whether their current bid matches the historic pattern or seems a little odd.

In poker you can always call someone’s bluff, but this will cost you and, if you are wrong, may be expensive.  In negotiation, if you feel someone is bluffing, the first best response is to ask for more evidence that can support their position – what mediators call “reality testing”.   Your next step will then depend on the strength of the evidence.  You have three options.  Normally, you will put in a counter offer.  The size of your bid will depend on the history of bids to date and your beliefs about their offer.  Sometimes, if the other side’s evidence is good, you don’t think there is more room for manoeuvre and their offer is better than what you might expect by going to court, you might accept. Finally, you might decide that their offer is unpalatable, yet you can’t improve your offer, in which case you are off to court or whatever the alternative is to doing a deal.

In poker, bluffing is an accepted facet of play.  In negotiation on the other hand, if a party is caught out lying, this will usually have very bad implications for the chances of settlement.  By all means give yourself wriggle room, but outright deception carries significant risks, especially if your alternatives to settlement are poor.

The flip side of detecting deception is that it is equally important to detect the truth.  Lie catchers can sometimes err on the side of distrust, overestimating the frequency of lying and missing instances when the truth is told. In another study, Dr Ekman and his colleagues found that the groups who did best in detecting lies were less effective in identifying truth tellers, scoring not much better than chance, and not significantly better than other groups.  To be good in poker and negotiation you need to develop skills at detecting both lies and truths.

One similarity between poker and, for example, a mediation is that you are asked to make a decision under conditions of uncertainty.  In poker, when faced with a decision to fold, call or raise you assess several factors, but one critical factor is calculating how good your hand is relative to the other players and whether or not the return (what you’ll get from the pot) justifies the risk.

Similarly, there comes a point in all mediations where the parties need to decide whether or not to accept an offer.  To make that decision they need to compare the offer on the table with what would happen if they rejected the offer.  Rejection usually means going to court.  Going to court means risk and uncertainty.  No matter how bullish the advice a party receives, there is always a chance that a judge may see things differently.  So, in both poker and mediations you have to make decisions with uncertainty.

There are various tools to help put a value on an uncertain future event.  At the heart of most approaches is the notion of “expected value”.  Calculating expected values is what you need to do in both poker and mediations.

If I toss a fair coin with £10 on heads and nothing on tails, then the expected value is £5.  This is calculated as (£10 x 0.5) + (0 x 0.5) = £5.  Similarly, if your chances at court are 50-50 and you get £10m if you win and nothing if you lose, then the expected value is £5m.  If the offer in the mediation is greater than this, say £6m, then it is clear that you should accept the offer rather than go to court: £6m is better than £5m.  You use the same logic in poker when you assess the chance that the other player has a better hand than you.

Things are often a little more complicated. For example, it is rare that you won’t end up paying anything if you lose in court.  Extending the 50-50 example above, consider if you lose you have to pay £2m (in costs and legal fees, for example).  Now the expected value is (£10m x 0.5) – (£2m x 0.5) = £4m.

You could also change your estimates of success in court.  You may think that your chances are better than 50-50, say 80% chance of winning.  Now the expected value is (£10m x 0.8) – (£2m x 0.2) = £8m – £0.4m = £7.6m.  If the offer is still £6m you would have to think long and hard about the £1.6m discount you were giving to the certain £6m offer versus the uncertain, but expected £7.6m if you reject the offer.

Just as in poker, you can use this simple logic to help you decide whether or not the offer on the table is a good one.  Indeed, you can put yourselves in the shoes of the other side and work out what you think their expected value is.  In these circumstances, you are calculating the other side’s bottom line – a powerful piece of intelligence in any negotiation.

All good poker players calculate expected values in their play.  If you don’t you may get lucky, but over time you’ll lose.  Likewise, there are many advantages to doing this kind of simple analysis before or during mediation.  The main downside is the risk of garbage in meaning garbage out if estimates of costs, awards or probabilities are wrong.  However, 5 minutes calculating an expected value will undoubtedly help you clarify your thinking when it comes to accepting or rejecting that offer either at the poker table or in negotiations and mediations.

If this behaviour becomes more widespread and accepted, it could change the nature of some negotiations.  Mediations for example often start with a statement of issues and positions by two parties and then rapidly move to shuttle diplomacy.  Most mediators know that if you can keep that initial exploration of the issues going in a reasoned and civil fashion for longer, the greater the chances of finding mutually acceptable solutions quicker.  Having parallel conversations going on via text might encourage longer initial meetings.

So far I have only heard of this happening in the Asia and the Far East.  I haven’t seen much evidence of it in Europe yet.

What do you think?

It is rare in a dispute for some persons’ feelings not to have been hurt. For example, in construction disputes there is often unfinished or poorly finished work that has raised the emotional temperature. In employment disputes perceived discrimination may have cause offence. Divorce and community disputes almost always contain real and perceived injustices. In medical negligence, disputes involve physical harm or even death. More generally in the process of mediation or negotiation, we all say things we’d like to take back. The test of true character rests not with what was said, but rather the nature of the response. Saying sorry – the S word – is often a critical part of the settlement or process towards it.

Much has been written about the power and importance of apology in mediations and negotiations[1].What can apologies achieve? Apologies can improve understanding if they help explain previous actions, sometimes even an underlying altruistic motive. They can ameliorate bruised emotions. Ultimately, and most importantly from the success driven mediator’s perspective, a good apology can improve negotiation outcomes.

This was demonstrated in research by Jennifer Robbennolt[2]. In two studies, participants, ages 21 to 70, read a scenario describing a pedestrian-bicycle accident. They were asked to take on the role of the injured person and evaluate a settlement offer from the other party, based on information about the injuries, the other party’s conduct, and each party’s responsibility for causing the accident.

Professor Robbennolt found that when a full apology was given, 73% of the respondents would accept the settlement offer. When no apology was given, 52% would accept, but when a partial apology was given, only 35% would accept. Even when she changed the scenario and made the evidence of fault less clear, a partial apology was still often perceived no different to no apology at all. Results also showed that the severity of the injury mattered: the more severe the injury, the more the need to fully apologize.

Apologies are often hard to offer because the giver may feel vulnerable, blamed, or shamed. Indeed they may feel they deserve to get an apology more than give one. Denying the incident, justifying behaviour or making light of the situation (“it wasn’t as bad as you make out”) only exacerbates feelings of injustice, as the results above suggest. To rebuild trust, you must sincerely admit that you are sorry for the hurt caused.

Maurice Schweitzer, Jack Hershey and Eric Bradlow[3], professors from the Wharton School of the University of Pennsylvania, have identified seven elements that can comprise an apology. Effective apologies can include some or all of the following:

1. An apology statement: “I’m sorry.”

2. An expression of remorse: “I feel awful!”

3. An offer to help:“I will do whatever is possible to rectify this situation.”

4. Self-castigation: “I can’t believe these words even came out of my mouth.”

5. A direct request for forgiveness: “Please forgive me.”

6. A promise regarding future behaviour: “In the future, I promise to think before I speak.”

7. An explanation: “I was frustrated and I took my frustrations out on you, which was totally inappropriate.”

These Professors argue that effective apologies should include some or all of these components. The more serious the violation, the greater the need to use more of these apology components.

Because saying sorry is often a costless gesture, it is frequently dismissed by economists as “cheap talk”. And rarely is an authentic apology issued because it was demanded. I see it in my own children and remember my own feeble begrudging apologies when they were demanded by my parents.Apologies therefore need to meet certain minimum “quality” criteria. The key is sincerity.

Tomlinson and Lewicki[4] found that apologies containing internal attributions (eg “it was my fault”) were regarded as more sincere than external (eg “not me, market conditions were bad”). Clearly, sincerity is associated with expressing an apology in person, with emotion and when it is conveyed with a sense of personal responsibility and remorse. Of course, prior deception or misleading will significantly reduce the credibility of an apology. Great care therefore needs to be taken over apologies. If they are perceived as insincere, a false apology may inflame passions, heightening barriers to settlement, rather than smoothing the passage to resolution, as the Robbennolt numbers suggest.

When lawyers are present in mediation it is generally more difficult to apologise. Lawyers are long trained in the role of guarding against their client’s unwittingly giving away legal entitlements. They want to see their clients apologise in a way that admits no liability or fault. Of course, in the “without prejudice” context of mediation this should not be a problem. However, old habits die hard…

In summary, using the S word can materially affect the outcomes of negotiations. However, apologies have to be delivered sincerely and will only be effective if there is no history of deception. Mediators should encourage parties to look for opportunities for sincere and heartfelt expressions of apology as part of the route to successful resolution.

[1] See for example www.dcbar.org/for_lawyers/resources/publications/washington_lawyer/june_2007/apology.cfm

[2] “Apologies and Settlement Levers,” 3 Journal on Empirical Legal Studies 333 (July 2006)

[3] http://knowledge.wharton.upenn.edu/paper.cfm?paperID=1332

[4] http://researchnews.osu.edu/archive/bustrust.htm

We all know that at the end of a tough mediation we frequently need a good glass of wine. However, I want to argue today that similarities in the production of fine wines and the process of mediation bear closer examination.

Wine tasters define terroir as the specificity of place, which has come to include not only the soil in a region, but also the climate, the weather, the aspect of the vineyards and anything else that can possibly differentiate one piece of land from another. The terroir is critical in determining the quality of wine you will eventually produce. For a given location, terroir is hard to change, although modern wine making technologies can help. The nature of the terroir creates a range of likely outcomes. The specific quality of the wine within this range will then be affected by the skills of the wine maker.

And here is how wine production is similar to mediation or negotiation. The structure of a mediation will determine the range of likely dynamics and final outcomes[5]. The precise outcome will be determined by the mediator and parties on the day.

So what are the structural factors, features that are hard to change once in mediation, that determine the type of dynamics you are going to get? A good list to start with is: people and parties, issues and interests, linkages, options and timing factors. Together these give you the memorably naff acronym: PILOT.[6] Let me explain how each of these structural factors affects the dynamics of a mediation.

People

There are many ways in which people and parties determine the parameters within which a mediation will pan out. Here are some critical ones:

• Nature. Are the people you are dealing with co-operators, free riders or reciprocators? Co-operators will co-operate however you behave. Free riders will take you for a ride if they can. Most people are reciprocators. If reciprocators feel you are being co-operative they will reciprocate with co-operation. If they feel you are being a free rider they will reciprocate with hostile and negative behaviour[7].
• Number. Many mediations are between two parties. However, with more than two parties you are immediately into a different structure in which coalition behaviour will be a critical component.
• Authority. This always crops up in mediation. You need to ensure that the people you are negotiating with have the authority to do a deal.
• Agency. Agency issues can occur when one party, as agent, has different incentives to the ultimate client with regards to settlement. This can be a legal advisor, but also a relation or even one part of a commercial organisation with different incentives to the overall body.

Issues

Unless you know what your key issues are and those of the other side you can’t begin to get towards a satisfactory settlement. I have been in many mediations in which parties haven’t fully sorted out what all their issues are, let alone understand those of the other side. In terms of structure, a key differentiator is between negotiations over one issue and those over many issues. If there is just one issue, then the mediation will tend to be more competitive. What one side gains, the other side loses. With multiple issues, however, the chances are for a more co-operative approach as both sides seek to trade where they have different valuations for different outcomes. Mediators should establish early one what the complete set of issues is and, as far as possible, what values parties place on them.

Linkages

Linkages between the current negotiation and future negotiations will affect behaviour today. In a one off situation people will tend to negotiate harder than if there are future rounds of negotiation. For example, often if there is an ongoing business relationship, behaviour will be modified with a view to not souring inevitable future negotiations. This is not a hard and fast rule. Sometimes, parties will negotiate harder, precisely to establish a reputation for tough dealing in future rounds. As a party or a mediator you should understand the nature of any linkages and their likely effect on the dynamics of the mediation.

Options

Parties should be very clear and comfortable with how far they are prepared to concede to get a settlement. They need to understand the value of their alternatives to reaching a mediation settlement. If they don’t know this, how can they know whether or not settlement is the right decision? Typically in commercial mediation this will involve assessing the expected value of going to court. This in turn requires at least a rudimentary understanding of probability (“what are your chances of winning in court?”). Lawyers need to give realistic forecasts of chances in court and parties need to factor in hard to quantify issues such as the stress and opportunity cost of going through prolonged court proceedings. As a mediator and as a party, understanding the value of your own and the other side’s non-settlement options is vital.

Timing

Before going into mediation, it is worth checking whether there are any timing factors that will affect parties’ behaviour. External deadlines can include things like getting a settlement claim into quarterly results, or time limits set by banks. If credible, such time catalysts can be used both positively and negatively by negotiating parties to achieve their own ends.

*****

People, issues, linkages, options and timing are all factors that will affect the behaviour in and outcomes of mediations and negotiations. Mediators need to understand the position of all parties in advance of mediation; the parties themselves would be well advised to prepare where they stand on each of these structural factors and where the other side(s) stand as well. If you use a PILOT to guide you through the maze of mediation you are more likely to enjoy that post deal glass of wine.

[1] Common Sense and Nuclear Warfare, Bertrand Russell, 1959

[2] This list is draws heavily on Dixit and Nalebuff’s excellent book “Thinking Strategically”

[3] Ironically, from a Bleak House perspective, I have successfully used this game teaching negotiation theory to some of London’s leading law firms! It has failed once with a group of mediators when one leapt straight to a £20 bid.

[4] This has yet to happen to me.

[5] The game theorists amongst you will recognise this type of thinking as a two stage game.

[6] Apologies. In a previous incarnation I was a management consultant. Sometimes the past resurfaces…

[7] Recent experiments have suggested that the evolutionary stable population levels are 13% co-operators, 20% free-riders and 63% reciprocators.

Dickens’ Bleak House is a great book combining detective fiction, romance, melodrama and satire. One of the key themes is a critique of the law and its practitioners in Dickens’ time. Towards the end of the book, the narrator states: “The one great principle of the English law is, to make business for itself.” This is certainly well illustrated in the book, where the central dispute over the Jarndyce estate is so prolonged that the entire estate is swallowed up in legal fees.

Anyone involved in mediation will be familiar with the Bleak House situation in which legal costs are of the same order of magnitude, if not greater, than the original claim. It is possible (heaven forfend!) that there are lawyers in the world who would rather extend a case – against the interests of their client – than settle it. However, it is also possible that the structure of the negotiation situation is such that this whittling away of the settlement pie is inevitable. An essential feature of the legal negotiations that lead to mediation is that time is money. When the negotiations become protracted, the pie begins to shrink. I have been in many mediation situations where payment of legal costs is at least as important as the claim itself. It is this type of problem that I want to look at briefly today.

Frequently in game theory – the branch of economics that deals with interactive decision making – “bare bones models” are used to demonstrate a particular point in a very simple way. One such model that illustrates the kind of negotiation structure that can lead to a Bleak House outcome is the £20 auction.

The rules are simple: I have a £20 note to auction. If you win the auction you will get the £20 note and pay me your bid price. So if the winning bid is £5, the winner gets net £15. The slight twist is that the second highest bidder also has to pay. As the auctioneer, as long as I get two bidders I know I am onto a good thing.

What typically happens (I have repeated this experiment many times[3]) is several people initially bid for the prize. At about the £10 stage most bidders drop out and I am left with two people bidding. Say Alex has a bid of £15 and Bob has bid has bid £12. At this point Bob usually says that he doesn’t want to play anymore and that he’ll let Alex win. I point out that this is fine, but irrational, since if he bids higher than Alex he will only get a few pounds, but this is better than paying out £12. He usually agrees and, not wishing to appear irrational, ups his bid. This continues until they reach £19 and £18. At this point, it is again rational for Alex to increase her bid from £18 to £20 ie the choice for her is between nothing or paying me £18 and nothing is better. By this time the non-bidders are usually enjoying the spectacle and cheering every move. The bidders are looking distinctly uncomfortable. Of course, each time being goaded by the desire not to appear “irrational” bidding continues upwards. Often the bidding ends in the high £30s or £40s. The lessons from the experience are: don’t bid; every round of bidding the potential profit gets smaller (or loss gets larger); and the auctioneer usually wins.

Cleverer players would want to break the implicit competitive dynamic and seek a co-operative solution: “Let’s both stop now and share what ever profit we make out of that miserable auctioneer!” [4] There is then the interesting sub game of how that profit should be split, but I leave that for a future quarterly. The fact that this doesn’t happen can be put down to bidders not having worked out quite what sort of a game they are playing.

The parallels with some legal cases are not quite direct, but they are not far off either. Each round of bidding could be a new piece of legal haggling or disclosure. In the £20 auction you have not yet had to pay anything, whereas in a legal dispute you have paid, but with the hope that you will recoup costs (less some irrecoverable element) on judgment. As in the £20 auction, it is entirely likely that even the most sophisticated disputants have not properly understood the dynamics of the situation they find themselves in. One critical difference is that (despite Dickens tale) most legal cases do have a finite horizon.

The solution to such problems is simple (at least to articulate!): it is to look ahead and reason backwards. If the end point is a trial, this requires making a robust and realistic probability assessment of your chances at court. Working backwards, the parties need to estimate how many steps it will take to get to trial and the likely cost of each step. Both of these key sets of information are usually best estimated by the legal advisors. Which leads us back to the issue of appropriate incentives for lawyers! From a game theoretic perspective, client-lawyer incentives will be better aligned if there is an ongoing relationship. Let us assume that not all lawyers have the high levels of integrity of those reading this article. The small number of unscrupulous legal advisors will be more likely to gouge their clients in a one off case, than where they want to have a good long term relationship. In one off cases, regulatory and reputation effects are the best mechanisms for aligning client-advisor objectives.

As I have already mentioned, with the appropriate communication mechanisms (mediation perhaps…) it should be possible for the “bidders” to seek a co-operative solution and exit the unpleasant situation they find themselves in. However, to do this they need to recognise the nature of the situation they find themselves in from the outset.

The simple model laid out here is just that: simple. On top of this simple structure you can add misperception of the other side’s motives, third party complexities, personality clashes and suspicion that the other side is not behaving in good faith, the introduction of multiple issues and so on. However, next time you are mediating or in a mediation, bear in mind the lessons of Bleak House and the £20 auction.

A few years ago Thomas Schelling was awarded the Nobel Prize in economics. He is the most recent of a number of game theorists to be given this honour. In the late 1950s and early 1960s Schelling did seminal work in the field of conflict and strategy. In the context of nuclear war he has as much claim as anyone to have helped prevent Armageddon. He helped to prevent “hot war” because he understood it and explained it brilliantly to others, changed the intellectual climate, and inspired a generation of strategic thinkers.

And what has nuclear war got to do with mediation you are asking yourself? Game theory is the science of interactive decision making. Mediations are in essence an interactive decision making process. Much of Schelling’s influential book “The Strategy of Conflict” is given over to discussion of commitments, threats and promises. Who hasn’t been in a negotiation or mediation where commitments, threats and promises haven’t played a critical role? It might not be nuclear war, but the work of Schelling and his peers can throw light and yield insights into the mediation process.

In this brief think piece I want to look at how Schelling’s insights into commitments, threats and promises can help us understand the dynamics of mediation and negotiation.

Let me outline some principles. In the tit for tat of mediation and negotiation, a threat or a promise is a strategic move intended to elicit certain behaviour from the other side. Threats and promises are conditional moves: if you do something I will do something in return. A threat is a response rule that punishes others who fail to co-operate with you. A promise is an offer to reward someone who co-operates with you. Schelling described two flavours of threats and promises: compellent (persuade the other side to do something) and deterrent (persuade the other side not to do something). The table below summarises examples of threats and promises of both flavours that might typically occur in an employment mediation:

As you can see from the table, the distinction between threats and promises can easily become blurred. The key feature about threats and promises is their credibility. If a threat or a promise is not credible than it is ineffective since the other side does not believe you will do what you have said you will. In the example above, is it really credible to threaten to go to Tribunal when you will incur both cost and publicity?

As Schelling teaches, the only way to make good on a threat or a promise is to make some kind of credible commitment. A credible commitment is an irreversible action that will prevent you from going back on your word.

Perhaps one of the most celebrated descriptions of commitments in the game theory literature comes about in the game of chicken. Bertrand Russell described the game in a book also examining the international arms race: ‘[Chicken] is played by choosing a long straight road with a white line down the middle and starting two very fast cars towards each other from opposite ends. Each car is expected to keep the wheels of one side on the white line. As they approach each other, mutual destruction becomes more and more imminent. If one of them swerves from the white line before the other, the other, as he passes, shouts “Chicken!” and the one who has swerved becomes an object of contempt….’ [1] You win the game if you drive straight and the other person swerves. There are many situations in which the game of chicken neatly describes the situation mediation parties find themselves in: for example, unless one of us gives way, we will both end up in court paying much more in legal fees than the original claim was ever worth. In advance of playing chicken, the promise will be to always drive straight. The threat is mutually assured destruction. Possible commitment tactics[2] to make these threats and promises credible include:

• Build reputation. A reputation for never swerving is helpful. If you have played chicken a lot before you can build such a reputation. In mediation, certain clients and indeed certain law firms may build reputations for following through on threats and promises.
• Block communication. In the game of chicken one possible move is to ensure the rival driver sees you putting a brown paper bag over your head: you cannot see what the other driver is doing and you are committed to your course. In mediations, I have seen one side threaten to leave the room if certain subjects are brought up, effectively blocking communication.
• Burn bridges. In 1066, William the Conqueror burned his own ships, thereby making a visible and irrevocable commitment to fight rather than retreat. In the game of chicken such moves include throwing your steering wheel out of the window. In mediation, for example, making public something that the other side assumes you don’t want in the public domain is such an irrevocable commitment.
• Benefit from brinkmanship. For Schelling, brinkmanship is the deliberate escalation of risk. The metaphor used is that of “rocking the boat.” One person threatens to rock the boat if the other doesn’t row; obviously the rocker of the boat doesn’t want to capsize the boat, but by rocking it, they increase the risk that it may well capsize. This should scare the other person into agreeing to row the boat. Nuclear escalation is what happened in the cold war. In the game of chicken, attaching explosives to the outside of your vehicle increases the shared risk. In mediation, irrational and erratic behaviour may actually be “rational” as it persuades the other side that you might just be crazy enough to go through with your threats and promises.

As parties to a negotiation or mediation you should be looking to increase the credibility of your own commitments and weaken those of your opposition. As a mediator, you should be aware of the possible dynamics that could arise from this type of behaviour. Mediators should be sure to test parties as to the credibility of their threats and promises. Schelling’s thinking, which stemmed from the analysis of nuclear war, can be applied in many arenas, not least the limited conflict that can be mediation and negotiation.

What will the growing acceptance of mediation as a dispute resolution mechanism do to the number and nature of commercial disputes? I want to argue here that not only will the number of commercial disputes increase, but the advent of mediation will also lead to significant shifts in the structure of the commercial litigation market. There will be winners and losers as a result.

One of the central claims of the mediation lobby is that it is cheaper. Most research supports this. Although some mediations don’t settle, most do, avoiding costly further litigation and potential inefficiency for all concerned. So on average, the cost of entering into a legal dispute, has fallen as a result of the introduction of the mediation process. As someone with a background in economics, you won’t be surprised to hear me argue that if something gets cheaper, in general⁶, more is consumed. So if it is now, on average, cheaper to have a litigious dispute, more people will do it! This may be problematic for some mediators and indeed government policy makers who will shudder at the thought that rather than contributing to increased peace and harmony in the world, mediation will actually increase the number of disputes being litigated. But the net effect of an increase in litigated disputes is not “bad” per se. An unresolved dispute is not necessarily a good thing. What is clear though, is, all other things being equal, the introduction of mediation means more disputes litigated.

So in this world of increased disputation who are the winners and losers? Part of the answer to this question depends on whether mediation is a substitute or a complement to litigation. Another part is to do with where scarcity lies and who controls that scarcity.

First, let me briefly divert you into the economics of substitutes and complements. A classic example is razors and razor blades. When I go to the supermarket I see lots of razors for sale. These different brands are all direct substitutes for each other. If one day I see a particular razor for sale at a massive discount I might drop it in my shopping trolley. This is a substitute for my existing razor. However, next time I am in the supermarket I will be buying more blades for that razor brand. The blades are a complement to my new razor⁷. If the price of a good goes down, the demand for its substitute goes down and demand for its complement increases. In the world of disputes, mediation has features of both a substitute and a complement to litigation⁸. If the price of mediation goes down, the demand for traditional litigation goes down. However, the demand for specialist mediation lawyers will increase. If you combine this feature with the increase in disputes argued above, it seems to me unlikely that lawyers will lose out. However, it will be a different type of lawyer who gets the work, which brings me to the issue of scarcity and who gets what.

Profits go to those who control a scarce asset in demand. You need look no further than the owners of oil assets and PC operating systems to see that. But where does scarcity lie in litigation and mediation? Prior to mediation, because of the winner takes all nature of litigation, there was a star system: star barristers commanded the highest fees. Law firms with star solicitors got the juiciest cases. Here the scarce asset is talent: these people are the David Beckhams of the legal profession. The same is likely to happen in mediation. The problem (as described in the article above) is judging who is a good mediator.

Already law firms (the main buyers of mediation services) have their lists of star mediators. Some of these were people were early mediation pioneers and use an extensive track record to demonstrate their credentials. Most are lawyers⁹. Of the lawyers, there are an increasingly disproportionate number of barristers. Barristers will tend to be dominate for three reasons: first, they are less prone to conflicts of interest problems than employees of law firms; second, their economic structures are built around individual earning power, whereas law firms tend to use a leveraged team business model; finally, many buyers hope for a mediator who will give an “opinion” on the case in their favour, something barristers are good at.

There have been recent attempts to create exclusive groupings of mediators and hence scarcity. At this early stage of mediation’s evolution this makes sense: it is difficult, except through repeated exposure, to determine who the truly good mediators are. An overarching brand of quality could be useful. However, the owners of that brand need to be sure they have the real stars playing for their team. At this stage in the mediation industry’s development the stars are those with most experience – a significant first mover advantage. This will change as buyers become more sophisticated in analysing the quality of mediators. Criteria other than longevity will come to the fore.

Whilst determining who the star mediators are will take time, lawyers will always be needed to support clients through the commercial mediation process. However, these will not necessarily be the adversarial creatures of the winner takes all world of traditional litigation. These lawyers will have to be well versed in negotiation analysis and the subtle skills of face to face interaction, rather than the world of documentation and the courts. The skills needed to be a successful mediation lawyer are not the same as those of the successful traditional litigator.

In the typical life cycle of professional service industry evolution, mediation is at a relatively early stage. The sector currently has many players with overlapping and conflicting roles. There is fragmentation in some parts and concentration in other parts of the sector. This will change over time. In the long term the commercial mediation industry might evolve as follows:

• Mediators. There will be a top tier of star mediators who are approached directly by leading law firms, and possibly in house lawyers. The majority of the stars will be barristers or ex barristers. Sadly, non lawyers will be rare. There will be a middle tier of mediators who have some direct referrals with other work coming through exchanges.
• Exchanges. Currently there are multiple competing exchanges and panels with different quality standards from which mediators are “chosen” through a largely opaque process. This is confusing for buyers. Over time it is likely that quality criteria will standardise and mediator exchanges will merge into one or two low cost, transparent operations. Specialist panels will continue to thrive.
• Lawyers. Most litigation departments already describe themselves as dispute resolution departments. These will grow in number and size. The skills of the lawyers in them will shift from expertise in adversarial dispute to mediation and negotiation capability.
• Trainers. As with exchanges, there is a buyer led clamour for increased standardisation of mediator certification and qualification. There will continue to be multiple providers of training, but the examination and certification will most likely be authorised and overseen by a single, independent governing body.
• Governance. Many professional services industries have independent trade bodies that govern qualification standards and ongoing professional development and are accepted and authorised by the whole sector. Mediation being close to the legal profession is likely to end up being regulated like it. Such an independent body does not yet exist in the UK, although there are a number of candidates evolving.

In conclusion then the impact of mediation on the world of commercial litigation is, and will continue to be, significant. Lower costs mean increased volumes of litigated disputes. The dispute resolution departments of law firms will go from strength to strength as a result. Barristers, rather than solicitors will come to dominate the mediator profession itself. Along the way there will be challenges and set backs. Whatever the outcome, the journey should be very interesting.

1. An added complication is that some mediators don’t know how to value an uncertain alternative to settlement. The simple tool of decision trees is rarely taught in entry level mediation training.
2. More often than not, this type of reality testing will help bring about settlement, bringing parties closer, rather than further apart.
3. See R Trivers, Social Evolution, 1985 for notions on reciprocal altruism
4. Of course, money, as a concrete token of a reciprocal debt, helped formalise such relations!
5. If one side has absolute bargaining power, there is no need for negotiation or going through a process of reciprocal concessions.
6. There are some rare exceptions to this, a typical example being where price is a signal of quality, so demand goes up if price is higher. Some barristers might fall into this category.
7. Guess where all the money is made… There are many examples of this kind of pricing: disposable cameras and developing; mobile phone hand set prices and monthly tariffs, for instance.
8. Any comparison between litigation lawyers and razor blades (a sharp implement from which you can receive a painful wound) is unintentional.
9. Whether lawyers make the best mediators will be the subject of a future quarterly article.

Reciprocity is hard wired into our psyches. It is only with great effort, or a mistake in the wiring, that we can overcome it. The reciprocity rule says that we should try to repay, in kind, what another person has provided to us. For example, you buy me a drink with the expectation (albeit unconscious) that at some point in the future I will buy you one in return. Equally, for most of us, if I hit you, it takes a severe effort of your will for you not to hit me back (if not now, then at some point in the future). Confucius is supposed to have said: “There is one word which may serve as a rule of practice for all one’s life – reciprocity.”

Evolutionary biologists have noted how this rule, hardwired via our DNA, has provided human societies with the mechanisms to have trusting relations and co-operative partnerships³. Arguably, barter, trade and much more stems from the evolutionary innovation that allowed one person to give something away in the expectation that something would be returned in future⁴. It is often genetically advantageous to look behave altruistically towards kin (reciprocal altruism). Reciprocity is reflected in our language where the phrase “much obliged” means “thank you”. It is also reinforced culturally where we are all taught the social sanctions and derision that are associated with those that violate the reciprocity rule.

Unfortunately, a glance at global politics suggests that reciprocity can also lead to more destructive patterns of tit for tat behaviour: you bomb us and we’ll bomb you. Perceived slights are reciprocated with actual slights and before you know it the whole situation has escalated into a wholly damaging, self-reinforcing negative pattern. The reciprocity rule pertains in the bedroom, the boardroom and beyond.

Of course, understanding reciprocity is critical in mediation and negotiation. A positive pattern of reciprocal concessions is how people get to a settlement point. Equally, a negative pattern of reciprocal insults and aggression is how people get entrenched in their positions and hard to move to settlement. So what can thinking about reciprocity teach mediators?

First, mediators need to ensure both sides have scope to reciprocate. In other words, generally⁵, they need to ensure that both sides have room to manoeuvre. An opening offer from Adam of “this is my first and final offer” is not usually helpful. If Bob responds with a concession, he expects Adam to reciprocate. If parties don’t leave themselves any room to play the reciprocity game, they risk upsetting the whole negotiation, because they will be perceived as being “unfair”. Equally, they need to ensure that parties reciprocate in an “understandable” fashion. This generally means concessions come in ever decreasing steps towards a final settlement point. Sometimes parties don’t do this and it can lead to confusion and misunderstanding.

Second, mediators need to watch out for abuse of the reciprocity rule. Generally, abuse of the reciprocity rule usually involves a small favour or concession producing a sense of obligation to agree to a substantially bigger return favour. There are several related negotiation ploys. One is to begrudgingly concede something of no value in return for something of real value. For example, one party might agree to drop a claim on IP infringement (which they know, because of currently private information, will fail in court) in return for an increased license fee. Another is to ask for something big, retreat and expect a reciprocal concession to a “smaller” request. How many times have you heard in mediations or negotiations “Look, we’ve moved significantly from our original [bogus] position, and we want to see the same sort of movement from the other side.”

The problem for the parties in these cases is that they can either accept and be taken to the cleaners, or reject and have to suffer from deeply conditioned feelings of “fairness” and obligation. The mediator’s role is to ensure that the parties are making informed and rational decisions, ie decisions that are not affected by reciprocity tricks. To do this the mediator needs to help the parties understand the true nature and value of offers so they can reply appropriately.

Finally, mediators have a vital role in modifying communication between parties so as not to elicit a negative reciprocity pattern. Instead of repeating verbatim “You can tell that [choose your own expletive] so and so that I’ve had enough of him and his smarmy ways and that I’m prepared to go to £y and no more.” Mediators can pass on a modified communication that gets across the message without unnecessarily inflaming the other side. People will get angry – anger is a “natural” reaction to a perceived unfairness. However, the mediator needs to help people step back from their anger and reach a place where they can make rational judgments about the situation they find themselves in. Modifying communications between parties is, of course, a tricky path to tread. To be fully informed, parties need to know emotional content as well as pure informational content. However, the skill of the mediator is to impart both without initiating an unnecessarily destructive cycle of reciprocity.

In summary, although not yet identified with a particular set of genes, the rule of reciprocity is probably a hard wired component of human nature. Mediators and parties in negotiation and mediation need to recognise this explicitly and understand how reciprocity can be both used and abused. Given where we are today, it might not be a bad idea if our global leaders and their advisors also thought more clearly through the likely reciprocity dynamics their actions might initiate.

Settlement rates are a key performance indicator in the world of mediation. The higher your rates of settlement, the better a mediator you are.

Or are you? Is it possible that mediators are bullying parties into settlements, encouraging them to make ill informed and irrational settlement decisions, all because the higher the mediator’s settlement rates, the more “successful” a mediator they will be? More “successful” mediators command higher fees.

Let me step back a moment. There are two outcomes from mediation: either settlement or no settlement. The outcome can be either a “good result” or a “bad result”. As the table below shows, there are two types of “bad result” or errors. Error I is the one mediators are all familiar with – it should have settled, but it didn’t. Error II is when a party agrees to settle, when they would probably have got a better deal by going to court.

Mediation Outcomes

These distinctions are fairly fundamental and go to the heart of what mediation is all about. I think a mediator’s objective is to help disputants make rational and informeddecisions. It may be that the rational and informed decision is not to accept the final offer of the other side. Some people think that the goal of a mediator is to get settlement, come what may. One problem we have today is that a “good mediator” is one with high settlement rates and therefore has an incentive to make plenty of type II errors, even if it is not in the best interest of one or other of the parties.

The key metric for whether or not a decision to settle is good or bad is thevalue of the alternatives.

For example, an elderly couple, Dr and Mrs Smith, have to decide whether or not to accept a final settlement offer from an oil company for the pollution caused to their property by the adjacent petrol station. The company have offered £200,000. This sounds like a lot of money to the Smiths. The alternative is going to court. The only way they can really work out whether or not the offer on the table is a good one is to compare it with how much they can expect to get if they go to court. They know they might be awarded more at court if they win (about £500,000). They also know that if they lose, not only will they have to pay their own costs, but also the other side’s (total £100,000). This is a very worrying figure for them. The mediator, seeing them waver, and keen to keep up his or her success rate up, persuades the Smiths to accept the offer. At no time does the mediator sit down with the Smiths’s and work out exactly what they might expect to get from going to court in any sort of detail.

Here it is worth stating the obvious: a decision to settle is bad if the alternative to settlement is better. Extraordinary as it may seem, many mediators do not carefully examine the value of alternatives with parties¹. They say things like “I don’t want to move them away from settling.” Or,“If I do that, it might entrench their position.” Hang on a minute! You don’t want to give them all the information because, fully informed, there is a risk they might decide not to settle?? This is where seeking settlement is in direct conflict with helping the parties make a rational and informed decision.

In the example above, both sets of lawyers think the Smiths stand a 75% chance of winning. The risk neutral observer would estimate the expected value of going to court in thousands of pounds as 500*75% – 100*25%= 350. It is true there are complicating factors such as risk preferences and the Smiths’ own time and effort in going to court. But are these really worth £150,000 (the difference between the offer and the expected value of going to court.)? Even if they are, surely the mediator needs to sit down with the Smiths and make this calculus explicit?²

Of course, it is always going to be difficult to get an objective assessment of whether or not a mediation should settle when so many of the critical factors depend on subjective assessments by the parties. There are some mediations that are never going to settle. These usually involve some strategic or reputation imperative on behalf of one or both of the parties. One of the parties might want to create a precedent, for example a regulator, or a firm wishing to clearly establish ownership of intellectual property. If a party wishes to create a reputation for fighting to deter future speculative litigation, they are unlikely to settle. Finally, there may be wider strategic reasons, for example, embroiling a takeover target in a legal wrangle to reduce share price.

There are some mediations that might settle, but depend on overcoming information differences between the parties. If those information differences can’t be resolved in the process of mediation then the answer necessarily is for a judge to decide. There may be differences in understanding of the facts, especially if one party has private information. There may be differences in perceptions of the same facts. There will certainly be different assessments of the law and its application. There will be different assessments of awards, costs and the probabilities attached to each. The mediator’s job is minimise these differences as far as possible because these are the sources of the gaps between parties. However, this won’t always be possible.

The normal struggle of the mediator is to bring the parties closer to settlement. The risk, if settlement is within grasp, is that the mediators will push for settlement, without ensuring that this is an informed and rational decision for both parties involved. Because we measure mediators on how many cases they settle, there is an incentive for mediators to push for settlement when it is not always appropriate. Let me assume that you buy this argument. The next question then is: what should be the key performance metric for mediators?