Too many negotiators go into a negotiation or mediation not realizing or thinking about their risk tolerance or that of their client. Understanding how much risk you, but more importantly your client, can tolerate is an important part to understanding your negotiation strategy and when you want to walk away from the deal or when you want to keep at it. Also, you as a lawyer may have a different risk tolerance than your client, so you both need to be on the same page.
All negotiation involves work, discovery and a certain amount of risk taking. The person more willing to suffer uncertainty has a better chance to tip the balance of power in their favor than those less bold. The question becomes how good a chance is acceptable?
Every course of action carries with it a degree of financial or emotional risk. Most of us prefer security over uncertainty. This spills over into negotiation and leads most people to fear negotiating or giving up before they should.
The Risky Business of Negotiation
People fear deadlock. They prefer the deal in hand to the one that might be. While walking away may result in a better offer, on the other hand, they might lose what they’ve already gained, or, even worse, have to start all over again. Given such a choice, most people prefer to settle once they have spent time negotiating for a significant period of time and take the risk that by ending negotiations they could lose a better deal.
Risk tolerance not only depends on one’s personality but the situation as well.
In an article discussing risk tolerance in the context of employment negotiations, Jennifer Loftus writes that studies have shown that if someone receives an offer at or near what they think they’re worth, they because less risk averse, compared to if that person receives an offer far less or (perhaps counter intuitively) more than their perceived value.
Loftus states that in studies of “deal or no deal” situations, during business negotiations, this would mean that an offer perceived as a “lowball” or an offer way above the candidate’s expectations, will make the person more risk-seeking. Loftus writes, “A person who gets an offer around what they think they are worth is much more likely to accept it, or at least will be less risky in their negotiating, knowing that you have aptly priced them in the market.”
Perhaps the lesson to be learned is to have the best chance of obtaining a resolution offer a fair, realistic offer, rather than trying to get your client out of the case “on the cheap” or encourage your client to “swing for the fences” because offers on both ends of the spectrum encourage risk taking.
Ultimately the decision to accept or reject an offer is up to the client. The attorney’s role is to offer advice and do what can be done to make sure the client receives the best, most fair resolution. To lessen the risk of a failed negotiation, advising the client to take a middle of the road approach might be the best way to go.