Forming Beliefs about Adjudicated Outcomes: Risk Attitudes, Uncertainty, and Reservation Values

Abstract

In negotiations where disputes are resolved via adjudication (as in 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 information about adjudicated outcomes regarding the amount of damages in 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) contribute to the differences between the expected outcome and the parties’ reservation values. We find that the range of earlier 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 depended on the role to which they were assigned in a way that is consistent with the risk attitudes and framing notion implied by Kahneman and Tversky’s prospect theory (1979). Second, only subjects assigned to roles for which they had extensive experience exhibited over-optimism about the likely outcome.