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Cognitive dissonance, risk aversion and the pretrial negotiation impasse

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  • Eric Langlais
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    Abstract

    There exist evidence that asymmetrical information do exist between litigants: not in a way supporting Bebchuk (1984)’s assumption that defendants’ degree of fault is a private information, but more likely, as a result of parties’ predictive power of the outcome at trial (Osborne, 1999). In this paper, we suggest an explanation which allows to reconcilie different results obtained in experimental economics. We assume that litigants assess their estimates on the plaintiff’s prevailing rate at trial using a two-stage process. First, they manipulate the available information in a way consistent with the self-serving bias. Then, these priors are weighted according to the individual’s attitude towards risk. The existence of these two different cognitive biases are well documented in the experimental literature. Within this framework, we study their influence in a model of litigation where the self-serving bias of one party is private information. We show that the influence of the former is consistent with the predictions of the "optimistic approach" of trials. However, we show that the existence of risk aversion and more generally non neutrality to risk, is more dramatic in the sense that it has more unpredictable effects.

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    File URL: http://www.univ-nancy2.fr/CEREFIGE/realisations/cahiers/cahier2008/E%20LANGLAIS%202008%2006.pdf
    File Function: First version, 2008
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    Bibliographic Info

    Paper provided by CEREFIGE (Centre Europeen de Recherche en Economie Financiere et Gestion des Entreprises), Universite de Lorraine in its series Cahiers du CEREFIGE with number 0806.

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    Length: 28 pages
    Date of creation: 2008
    Date of revision: 2008
    Handle: RePEc:fie:wpaper:0806

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    Related research

    Keywords: litigation; pretrial bargaining; cognitive dissonance and self-serving bias; risk aversion;

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