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Forming Beliefs about Adjudicated Outcomes: Risk Attitudes, Uncertainty, and Reservation Values

Author

Listed:
  • Linda Babcock

    (Carnegie Mellon University)

  • Henry S. Farber

    (Princeton University)

  • Cynthia Fobian

    (Starr Litigation Services)

  • Eldar Shafir

    (Princeton University)

Abstract

In negotiations where disputes are resolved via adjudication (as in the courts or arbitration), beliefs about a potential adjudicated outcome are central in determining the bargaining environment. The present research investigates how negotiators (trial attorneys and students) involved in a hypothetical product liability case use information about adjudicated outcomes regarding the amount of damages in previous similar cases in forming beliefs about their own case. In particular, we examine how the parameters of the distribution of previous outcomes (variance and range) contribute to the differences between the expected outcome and the parties' reservation values. We find that the range of earlier outcomes has no significant effect on subjects' reservation values but that the variance does have a systematic effect, particularly on plaintiffs' behavior. A pair of separate findings may have important implications for the negotiation process. First, whether or not subjects exhibited risk averse behavior depended on the role to which they were assigned in a way that is consistent with the risk attitudes and framing notion implied by Kahneman and Tversk's prospect theory (1979). Second, only subjects assigned to roles for which they had extensive experience exhibited over-optimism about the likely outcome.

Suggested Citation

  • Linda Babcock & Henry S. Farber & Cynthia Fobian & Eldar Shafir, 1994. "Forming Beliefs about Adjudicated Outcomes: Risk Attitudes, Uncertainty, and Reservation Values," Working Papers 704, Princeton University, Department of Economics, Industrial Relations Section..
  • Handle: RePEc:pri:indrel:325
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    File URL: http://dataspace.princeton.edu/jspui/handle/88435/dsp01q237hr93q
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    References listed on IDEAS

    as
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    5. Joshua D. Angrist & Alan B. Keueger, 1991. "Does Compulsory School Attendance Affect Schooling and Earnings?," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 979-1014.
    6. Bekker, P.A., 1992. "Alternative Approximations to the Distributions of Instrumental Variable Estimators," Papers 512, Groningen State, Institute of Economic Research-.
    7. Sargan, J D, 1974. "The Validity of Nagar's Expansion for the Moments of Econometric Estimators," Econometrica, Econometric Society, vol. 42(1), pages 169-176, January.
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    More about this item

    Keywords

    dispute resolution; litigation; uncertainty; risk;

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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