People make judgments by deliberation or intuition. Deliberation means we systematically analyze a problem, collect facts, examine our assumptions and reach a reasoned conclusion. Intuitive judgments are quick and almost effortless. Intuition makes use of cognitive heuristics to simplify the judgment process. These shortcuts allow us to make reasonably accurate judgments quickly, using minimal information. Both deliberation and intuition can be wrong if judgment biases get in the way.
There are several cognitive biases that influence choices. Chief among them are optimism, anchoring, mental accounting, confirmation bias, herd behavior, loss aversion, contrast, and compromise effects.
Optimism happens because people believe things will work out for the best. Under ordinary circumstances being optimistic is a good thing—it gets us up in the morning, helps us imagine a better future, and allows us to reach our goals. Optimists work longer hours, save more money, take better care of their health, and generally live longer than pessimists. However, in a collaborative divorce, where important rights and large sums of money are at stake, being too optimistic about your case can create problems and hinder settlement.
Anchoring happens because people attach their settlement expectations to a reference point formed during the opening stage of a collaborative divorce. Often, after prolonged bargaining, settlements end up near the midpoint of the first reasonable offers. If the opening offer is low, it may be interpreted by the other side to mean you are not serious or it may make the other side lower their settlement expectations. Overly high or low opening offers may trigger an anchoring effect and delay settlement.
Mental accounting is the tendency of people to separate assets into different accounts based on psychological factors, such as source of the money or purpose of the account, rather than treating all assets as money equivalents. For example, some clients attribute special importance to their house, even though it’s just money if the property is sold. Many clients find it difficult to separate their emotional attachment to the house from its dollar value.
Confirmation bias is the tendency of people to search for and believe facts that support their opinions and ignore facts that contradict their beliefs. For example, if one member of a divorcing couple has decided he deserves spousal support and a larger share of the community estate, he will selectively listen to and believe facts and comments that support his beliefs and ignore facts and comments that contradict his wish to receive spousal support and over half of the community estate.
Herd behavior is a tendency to copy the actions of others. There are at least two reasons for herd behavior. First is social pressure to conform because we want to be part of a group rather than an outsider. Second, a large group may know things we don’t. However, it’s often not a good idea to follow the herd because they may be headed toward a cliff.
Loss aversion means people value assets they already own and will be reluctant to trade them for other assets of similar value. A loss creates a strong negative reaction compared with the feeling created by a similar gain. This means individuals are reluctant to choose settlements that require them to give up a significant asset they already own.
Contrast effects occur when a person has two options that resemble each other but one is inferior. The contrast with the inferior option tends to increase the attractiveness of the better option. For example, consider a dispute over a piece of land. Generally, the individuals will sell the property and split the proceeds or one person will buy out the other owner by paying cash for her half of the land. However, suppose there is a third option where the money to buy out the other owner is paid over time rather than in a lump sum. Unless the interest rate is high, the pay-out over time is generally considered inferior to the cash payment and may make keeping the land more attractive.
Compromise effects occur when an extreme option is placed among several alternatives. Since most individuals tend to avoid extreme choices, the middle options will appear more attractive. Retailers take advantage of the compromise effect all the time by adding an extremely expensive item to their line of goods so that customers will buy the next less expensive item on display.