The vast majority of cases settle. So for most probate litigants the question isn’t am I going to settle, but when. If we were all the type of rational actors assumed by classic economic theory, knowing when to settle would be easy. All you have to do is get far enough along in the discovery process to accurately run a cost-benefit analysis and voila! the ideal settlement point would be obvious.

But we all know it’s never that easy. Why? According to behavioral economists it’s because most of us make decisions for all sorts of reasons that often have nothing to do with cold, hard reason. Makes sense to me, especially in the probate litigation context.

Which is why an article in this month’s Estate Planning Journal by Chicago, Illinois attorney Howard M. Helsinger entitled Advising the Trust or Estate Litigant: When to Raise or Fold caught my attention. Drawing both on his own experience in the trenches and an impressive grasp of economic theory, Mr. Helsinger does a great job of applying behavioral economics to the dynamics at play in most contested probate proceedings (especially settlement negotiations). Good stuff; highly recommended for the practicing probate litigator. Here’s an excerpt:

Lessons from behavioral economics

The conventional mode of valuing a case … presumes an economically rational actor…. But behavioral economists have for a while now been demonstrating that, in many cases, people do not act like the “rational person” of classical economics. They engage in behaviors that fail to maximize their utility. Various factors discussed in the economics literature are relevant to the situation of estate and trust litigants.

Endowment effect. The value people assign to an item is often exaggerated by what is known as the “endowment effect.” Individuals tend to overvalue what they already possess. Assume, for example, that half of a class of law students is given a coffee mug bearing the university’s logo. It costs $8 at the university bookstore, and the sticker bearing the price is still on the bottom. Assume also that we know from prior study that the average price people would pay for this coffee mug is $5. Repeated studies have demonstrated that those students who receive this coffee mug will demand more than $5 to part with it, even though they would probably have been willing to pay no more than that to acquire it.

Although an individual might be willing to pay no more than $100 for a ticket to a Chicago Bears game, the same individual will demand more than that to sell the ticket he or she already possesses. Indeed, Duke University students who were fortunate to win a ticket to a Duke basketball game after camping out for a week demanded at average of $2,400 to sell it. Other students, who had also camped out, but had not won a ticket, would pay only $170 to acquire one. Ownership itself clearly enhances the perceived value of possessions. Indeed, even anticipated ownership may increase their value. The longer an auction participant is the high bidder, the greater he or she is likely to value the object.

Passions. Passions also distort judgment. Dan Ariely, for example, describes studies demonstrating, not surprisingly, the distorting impact of sexual arousal on the judgment of young males. That is an unlikely factor in trust and estate litigation, but we should expect similar distortions as a result of grief, sibling rivalry, and the other passions with which we are familiar in decedent’s estates.

Undervalue costs. A third significant factor distorting the judgment of litigants is a tendency to overly discount the likely future cost of litigation. Quite independent of the distortions of passion, anger, and possession, people tend to underestimate and undervalue future costs.

Self-serving bias. A fourth factor is known as “self-serving bias.” Its effects are probably familiar to all of us: “[W]hen married couples estimate the fraction of various household tasks they are responsible for, their estimates typically add to more than 100 percent.” Well over half of us think we are better than average as drivers, better than average as managers, in better than average health, more ethical than the average. Empirical studies also demonstrate that “people tend to arrive at judgments of what is fair or right that are biased in the direction of their own self-interests.” The result, in litigation, is likely to be that “[e]ven when parties have the same information, they will come to different conclusions about what a fair settlement would be and base their predictions of judicial behavior on their own views of what is fair.” …

Practice tips

How then should attorney respond to these irrationalities? Estate and trust litigation is so often carried out in the context of grief, mourning, guilt, jealousy, and anger, that it may be that irrationality is its dominant characteristic. Attorneys advising in such circumstances have an opportunity to temper those distortions….

An especially suggestive study indicates that in confronting self-serving bias, it is not sufficient to merely make litigants aware of the existence of such biases. They are likely to assume that the other side may be subject to such biases, but not them. What has been shown to be effective, however, is asking the litigant actually to list the weaknesses in his or her own case. We lawyers should be aware of such weaknesses—asking our clients to make such a list would be an easy way of enhancing their awareness and perhaps reducing their self-serving bias. Of course, we lawyers, if we are to make effective use of techniques such as this, need to be aware of our own self-serving biases and sensitive to the countervailing temptations we may ourselves face to fan the flames of litigation.