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The Sunk-Cost Fallacy – Why More Discovery May Backfire

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The Sunk-Cost Fallacy – Why More Discovery May Backfire BBARAR BBULLETINULLETIN This is a reprint from the King County Bar Association Bar Bulletin February 2018 Time Is Money The Sunk-Cost Fallacy – Why More Discovery May Backfire By Hon. Kim Prochnau (Ret.) successful claims — your client will not capital punishment was a deterrent to In economics, a sunk cost is any cost be reimbursed for the work expended serious crime inasmuch that those states that has already been paid and cannot on any unsuccessful claims. Moreover, that enacted capital punishment experi- be recovered. The sunk-cost fallacy is a the judge or arbitrator may discount the enced a decrease in the crime rate. The mistake in reasoning in which the sunk fees expended on the successful claims second study showed capital punishment costs of an activity are considered when based on his or her views of the time and to be associated with higher crime rates, deciding whether to continue the activity. expenses that are reasonable.2 again focusing on those states that had This is sometimes called “throwing good abolished the death penalty. money after bad,” because the money and Why More Discovery May Lead Although the fictitious studies were time spent have already been lost and to Less Light and More Noise carefully constructed to employ the same will not be recovered, no matter what Exhaustive discovery also increases methodology, the pro-capital punishment you do now. the chances that the clients (and some- subjects discounted the study showing The sunk-cost fallacy makes it more times the lawyers) may become more an increase in crime and overemphasized likely that a person or an organization entrenched in their positions and may the study tending to show a decrease in continues with an activity in which they make it more difficult to settle. We tend crime while the subjects opposed to capi- have already invested money, time or ef- to think of discovery as a search for the tal punishment came to the opposite con- fort. The greater the size of the sunk in- truth that will lead the parties to more clusion. Even though objectively the two vestment, the more people tend to invest reasoned positions and effectuate a fair studies tended to cancel each other out, further, even when the return on added settlement. However, not only does more many of the subjects became even more investment appears not to be worthwhile. discovery mean more sunk costs, but convinced of the merits of their opinion This may be why parties continue to it may perversely impede settlement after being exposed to the two studies. litigate a dispute concerning homeowner by making the parties’ positions more Exhaustive discovery may also lead assessments or a boundary dispute even intractable. to overconfidence. Research has shown though the attorney fees may dwarf the Several psychological phenomena that the more information acquired, even amount of the claim.1 It is also why con- are responsible. In addition to clients if irrelevant, the more likely a person will ducting more discovery in a lawsuit may (and attorneys!) mistakenly factoring in believe that they can predict the outcome backfire. The more time, money and the costs of discovery already incurred of an event. In a study of the NFL draft, energy spent on conducting discovery, in the evaluation of a settlement offer, researchers found that professional teams the harder it may be for the client (and research has shown that people tend to place too much value on early picks, in lawyer) to settle the case. interpret new evidence as confirmation large part because smart scouts delude A common reaction of clients in of their existing beliefs or theories, par- themselves into thinking that they can evaluating a settlement offer is, “I can’t ticularly where such beliefs are emotion- forecast the next superstar. The more settle now — I have too much money in- ally charged. This is sometimes referred information teams acquire about play- vested in the case!” This, even though the to as “confirmation” or “my side” bias. ers, the more overconfident they will client is unlikely to recover all incurred An early research study illustrates feel about their ability to make fine dis- fees and costs. this phenomenon. Researchers first iden- tinctions — even though a professional Even where there is a fee-shifting tified the subjects as either being in fa- football player’s career is highly variable provision in the contract, governing doc- vor or opposed to capital punishment. and subject to unforeseeable injuries. uments or law, the judge or arbitrator will The subjects were all given two fictitious We know that it is difficult to predict normally award fees incurred only on the studies. The first study tended to show how a judge or arbitrator will view the evidence and law, and even more so to website accessible by the homeowners. protracted litigation that meet the needs predict how a jury will evaluate a case. Not only would this lessen attorneys’ of all parties. The more witnesses who are deposed, fees incurred in assembling these docu- While a sunk cost can seem like a and the more paper generated in discov- ments in response to discovery, but the frustrating position to be in, it doesn’t ery, the more overconfident you and your greater transparency tends to dispel any have to be a total waste. Using other client are likely to be as to your ability notions that there is a “smoking gun” to tools such as mediation or early neutral to predict the outcome at trial — even be found through discovery. evaluation can make the most of a chal- if much of the discovery is irrelevant. Should a dispute proceed to litiga- lenging situation. tion a lawyer is well advised, at the very Remediation least, to have another attorney in their Hon. Kim Prochnau is a former King To avoid “sunk costs,” consider pro- firm look at the case with fresh eyes. (Al- County Superior Court judge and visions for early mediation in the ini- though if your firm has sunk significant commissioner, who mediates and tial documents such as the real estate time and costs into the case, your partner arbitrates disputes as a neutral with JAMS in Seattle. contract or covenants. For example, the may also suffer from “sunk-cost” fallacy.) contract could provide that discovery An even more effective solution is 1 Other emotional factors affect the resolution of disputes be submitted to a mediator to use a third-party neutral to help you property disputes, particularly the tendency to accord a higher value to property already in one’s posses- for decision. Homeowner associations evaluate the evidence and law objec- sion, i.e., “the endowment effect.” could avoid expensive discovery requests tively, before the client sinks money and 2 A group of experienced real estate attorneys was recently informally polled by the author. They by posting relevant documents such as time into expensive discovery. A good unanimously stated that they have rarely, if ever, been minutes of board meetings on a private neutral can also suggest alternatives to awarded all incurred fees by a judge or arbitrator. 2.
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