Buyers snatched up a weathered house on my street late last year, and I soon learned they intended to remodel and “flip” it for a profit. A couple of weeks ago, the house, completely remodeled with the addition of a swimming pool, went on the market for a price that frankly stunned many of us in the neighborhood. Naturally, everyone likes to make a profit, particularly if the whole point of buying the house was to fix it up, turn around and sell it. But, these “flippers” had set the asking price at a fantastic 3½ times the home’s original sale price, well outside what any of us thought was reasonable.

This was running through my mind when I came across an article in last Friday’s Wall Street Journal about the wisdom of pricing real estate too high or too low. The article cited a recent study in the Journal of Economic Behavior & Organization addressing the notion of “anchoring.” Discussing this study, the WSJ article said:

“The research explores a behavioral trait called ‘anchoring.’ That is a common tendency to rely on the first piece of information offered (the ‘anchor’) when making decisions. Once buyers have an anchor, they typically interpret other information involved in the sale around it.”

It struck me that this “anchoring” phenomenon must have some application in other corners of the negotiation world, including what I do, settlement negotiations. We toss around terms like “low ball” and “inflated demand,” but I’ve never given too much thought to the deeper psychological implications of the launching point for negotiations.

I decided to solicit some thoughts on this point from experts, so I asked two prominent Los Angeles neutrals, Mark Loeterman (mlmediation.com) and Jeff Kichaven (jeffkichaven.com), for their view on the notion of “anchoring.” First, though, I reflected how I receive an extremely high asking price when shopping to purchase a piece of property or commencing a settlement negotiation. I’ve never had the experience of shopping for real estate without some kind of budget. If a house is priced outside that budget, even factoring in some cushion for negotiations, I won’t even look at it.

In the context of settlement negotiations, a ridiculously high demand can have a similar effect. While I don’t usually have the luxury of passing or ignoring a settlement demand, an outrageously high demand can have the effect of “anchoring” in my mind the notion that the case probably won’t settle, at least until something drastic happens to force my opponent to be reasonable.

Both neutrals I spoke with echoed this as a legitimate concern when dropping anchor. Jeff Kichaven pointed out that, “Sometimes opening numbers are so high, or so low, that they seem untethered to the realities of the negotiation, and are dismissed out of hand.”

What to do? If anchoring works because it sets the stage for all negotiations that follow, but must not be so overreaching that it “alienates” (my term) the parties, then it makes sense to push the envelope, but not too far. As Mark Loeterman remarked, “For anchoring to work, set initial offers and demands at the far edge of the credible zone so they can be rationally defended and invite further bargaining.”

Otherwise, it is not clear whether an overly aggressive opening demand or offer can be forgotten or cloud the entire negotiation. As Jeff Kichaven pointed out, “The interesting question to which I do not know the answer is whether “absurd” numbers also influence the later negotiations, or whether they are truly forgotten, and forgiven, as the negotiation goes on.”

So, when commencing negotiations, drop anchor, but do it with care, lest you do more harm than good.

I asked several top Southern California mediators I know personally or by reputation to share their best “tip” for success at mediation. In exchange for their labors, I promised the prestige and notoriety of being featured on this humble but aspiring blog. Several neutrals cheerfully responded and provided some great tips. The following are the best 6 responses I received:

Jeff Kichaven (www.jeffkichaven.com): “Prepare, prepare, prepare.  Get your brief to the mediator a week before the mediation.  Give the mediator time to read it, think about it, read it again, and call you to discuss it.  That phone call – 10 to 20 minutes at most – can be the most important time in the whole mediation process.   Be sure to discuss:  (1) What are your biggest challenges in the mediation?  (2)  What are your expectations of the mediator?  (3)  What should the mediator know about the personalities of the participants?  (4)  Is an Opening Joint Session a good idea?  And, (5), What should happen if you or the mediator think that the other has a “blind spot” or just doesn’t get something?  The answers can vary widely from case to case!  Once the mediator knows your thinking on these subjects, he can prepare for the “people issues” as thoroughly as he can prepare for the legal and factual issues.  The mediation will be specially designed to meet your needs, and the needs of your client, in this particular case.   This kind of preparation will help get the mediation off on the right foot, and almost always lead to greater client satisfaction with the result, with the process, and with your performance as counsel.”

Mark Loeterman (www.mlmediation.com): “Information translates into power, both in litigation and at mediation. The careful use of information is an integral part of your bargaining strategy. At the outset, it is important to plan what information you need to obtain from, and provide to, the other side so the parties can have a meaningful negotiation. Lawyers are guarded about the information they reveal. They fear giving up some advantage or losing the opportunity to surprise an unsuspecting witness. Here are some practical steps for handling information most effectively. First, solve the information gap. Ask the other side questions that are designed to buttress your position or better evaluate risks. Next, consider offering discreet information which shows strength and confidence in your case, such as an analysis of damages or a case citation that supports a decisive legal principle. On the other hand, negotiators must understand how they can protect their most important and sensitive information. If you want to learn how to perfect these “blocking” skills, simply watch a politician being interviewed. Adroit politicians use a range of techniques to avoid answering even probing questions. Information is a valuable commodity. Thoughtfully timing and presenting select pieces can yield significant concessions from your adversary. The mediator can arrange an exchange of information that is orderly and reciprocal, and can clarify the positions being taken, assuring that no party feels vulnerable and manipulated by a one-way disclosure.”

Michelle A. Reinglass (www.reinglassadr.com): “Some parties have difficulty giving up their lawsuit. If asked, “Are you ready to settle and put it behind you?” they may answer “yes”, but their actions belie that. The plaintiff may have difficult letting go of the one thing that has kept him/her going-the chance to get redemption, or revenge. The defendant may not want to let go because of the fear of looking weak, or setting precedent (despite promises of strict confidentiality with “teeth” for a breach). Fortunately most cases do settle, but for those that can’t, I follow them until the “end”, which is too often predictable. So, how can a party going to mediation wean themselves away from the lawsuit? First is getting reality checks about the merit, value & risks of their position. For most that will require “processing” to reach that understanding. Second, is seeing the positive picture of their life without the lawsuit as a major part of it, draining (more like “sucking out”) their energy and good health. It helps to focus on their positive goals beyond “revenge”, giving themselves their own redemption, not relying on someone else such as a judge or jury, to give it to them, which will often be disappointing; or focusing on getting a job, or performing better in their personal and business lives, or putting their energy back into running their business without employees distracted by depositions , “gossip”, or their own fears. I have often said that litigation is negative energy. I enjoy mediating for the opportunity to bring people and businesses back into the positive energy of life, rather than the drain of a lawsuit.”

Jan Frankel Schau (www.schaumediation.com): “Be prepared to be flexible. You can’t map out your strategy until you know what or who is driving the conflict, what path will work best for an exchange of communication and until the necessary emotion and anger and disappointment is expressed–to somebody–even if indirectly to the other side of the dispute.”

Mike O’Callahan (www.mocadr.com): “My single best tip for a successful mediation is for counsel to budget and make time and properly prepare for a pre-mediation call with the mediator. The call is independent for each party involved in the litigation and lets them know you have read their brief and you can question specific areas without the posturing that some lawyers feel they must do in front of their clients. Too many times counsel submit their briefs less than 5 days before and throw something together at the last-minute or they send a 160 page brief the night before the mediation. Either way the brief is not very useful. An opportunity missed to educate the mediator by counsel. The mediator has to be proactive and make sure the parties know there is a deadline for the briefs to be submitted that will allow the mediator time to review before the pre-mediation call. The call can then be used to determine what, if any, settlement discussions have taken place and the potential range of exposure for the parties before they walk in the door for the mediation. Also, it allows the mediator to ask for supplemental information before the mediation and focus on common ground to form a global resolution at the mediation.”

Hon. Michael A. Latin (ret.) ([email protected]): “The mediation, though designed to bring the parties together, is still part of an adversarial process. Therefore, appear fully armed and loaded with all of your ammunition. Bring all of your critical reports, documents, deposition transcripts, and even a critical witness if necessary. Remember, that while you have been living with this case for a year or more, the mediator has very little concrete information when the mediation begins. Often, the two sides give completely opposite versions of the state of the evidence on the same issue. One side may be more truthful than the other or there may be information gaps that prevent one or more parties from making a fair evaluation of their case. If the mediator doesn’t have anything tangible in front of him or her to evaluate the relative strengths of the parties’ positions or representations, resolution becomes problematic – particularly where one side is either incorrect or misrepresenting facts. Give the mediator the tools to flush out those issues during the mediation by bringing everything you have in your possession that may refute misrepresented or contested facts. This includes documents and information that has not yet been turned over. Your opponent cannot evaluate those things about which he or she is unaware. I have had several cases that have settled because one side, which had information about which the opponent was unaware, decided to share the information at mediation. Appear with all your ammunition!”

Even though you tuned in to hear from experienced mediators, I’ll add my own three cents. First, I completely agree with the suggestions that counsel take advantage of the opportunity to have a meaningful pre-mediation call with the neutral. This can be HUGE. Second, if there is a way to create and communicate to the opposition the illusion that you are fully prepared to start trial tomorrow, this can create leverage. (Obviously this is not possible in a pre-suit mediation, and difficult if there’s no joint session.) Third, unless and until you really know and trust the mediator (or settlement conference judge/magistrate), I would resist requests to prematurely share your final, bottom line offer or demand. The neutral’s top priority is to reach a compromise, not to act in your client’s best interests (that’s your job); unless you know from experience you can trust his or her promise to keep your final number confidential, I wouldn’t risk sharing it.