Become a “Mediation Freak”: Understanding the Role of Incentives in Mediation

In their recently published book Think Like a Freak, Freakonomics authors Steven Levitt and Stephen Dubner offer a simple set of rules to explain the role of incentives in many forms of financial and non-financial interactions.

1. Figure out what people really care about, not what they say they care about.
2. Incentivize them on the dimensions that are valuable to them but cheap for you to provide.
3. Pay attention to how people respond; if their response surprises you or frustrates you, learn from it and try something different.
4. Whenever possible, create incentives that switch the frame from adversarial to cooperative.
5. Never, ever think that people will do something just because it is the “right” thing to do.
6. Know that some people will do everything they can to game the system, finding ways to win that you never could have imagined.

I love Freakonomics and listen regularly to their podcasts. Reading this new book – there is a whole chapter on the role of incentives and their often unintended consequences – got me thinking about how these simple rules provide a particularly insightful way to think about mediation.

All of the actors in a mediation – the parties as well as their counsel and other advisors – are responding to particular known and unknown incentives. One of the mediators’ most important roles is to help the participants discover or better understand those incentives and how to respond to them.

Don’t forget the mediator has incentives, too!

Parties and mediators should think carefully about their incentives, and those of the other participants, both before and during the mediation. And if the mediation doesn’t immediately lead to settlement, think about these rules and reconsider the incentives.

Figure Out What People Really Care About

A couple years ago, Freakonomics ran an episode (available on their podcast) about how much people lie to pollsters, and themselves, about their future intentions – everything from voting, to quitting smoking, to saving the planet.

When questioned about positions, beliefs, or intentions, people will often tell the interviewer what they think he or she wants to hear. Or they will give a socially-acceptable answer. The same is true in a dispute.

You often hear: “It’s a matter of principle.” What they really mean is: “I just want to make that SOB suffer.”

Parties often have undisclosed interests and incentives in a dispute. At times, they may not even recognize those interests and incentives themselves.

While there may be strong financial incentives to settle a dispute, there may be stronger emotional or psychological incentives to keep fighting. A party (or their counsel) may not want to appear weak in even agreeing to discuss settlement. Or they may be looking for a way to save face, rather than admit making a mistake.

What people say is often at odds with what they do. To better understand interests and incentives, examine their actions and responses to questions or suggestions.

Think About the Relative Value of Incentives

This is one of the fundamental rules of the “win-win” approach in classic texts such as Getting to Yes. Take the example of the cooks arguing over a crate of lemons. One wants the juice for a salad dressing; the other needs rind for baking. Each can have what she wants at no cost to the other.

Life is never that easy, but it is true that parties to a dispute generally value incentives differently. The challenge is to discover and take advantage of those differences – a kind of “settlement arbitrage”.

The mediator’s method is to ask questions, probe for each party’s interests and explore options. What do the parties really value, and why?

Learn from People’s Responses

The only way to learn whether particular incentives have value is to ask questions and make offers. Watch how opposing parties react to those offers.

Are they angry? Insulted? Surprised? Interested?

More importantly, why did they react as they did? If you are you surprised by that reaction, perhaps you don’t fully understand the incentives that have been offered.

Something that one party believes is a strong incentive (from their own perspective) may have little or no appeal to the other party. Even worse, it may be seen as a disincentive to settlement.

Switch the Frame from Adversarial to Cooperative

This, too, is the holy grail of dispute resolution, particularly mediation. Like the other rules, it is usually easier said than done. There is a psychological tendency to demonize the other party to a dispute; to attribute evil intentions where none exist.

For many people – organizations, too – it takes a great deal of psychic energy to engage in a dispute. There must be a strong incentive. So there must be an even stronger incentive to back off and be willing to cooperate in pursuit of a resolution.

Don’t Assume People Will Do the Right Thing

There are many studies that show that “doing the right thing” is a very weak incentive compared to such things as personal benefit, social stigma, or peer pressure.

I recall an earlier Freakonomics story, where an energy conservation program looked at homeowners’ responses to various incentive campaigns. A brochure that talked about how saving energy was good for the environment had almost no effect. One that said how much money a homeowner could save was much more effective. But so was one that showed how much the homeowner was saving compared to their neighbors. I suppose it’s some kind of reverse “keeping up with the Joneses.”

Another Freakonomics podcast explored how peer pressure – and good, old-fashioned shame – can push people to do the right thing. But so can offering them the right incentives, whether financial, social or psychological.

Expect People to Try to “Game The System”

The rule says “some people”, but I think it’s safe to assume everyone does this.

Consider the story of co-author Steven Levitt’s three-year-old daughter. The offer of a candy reward was a perfect incentive for potty training – for a few days, until she learned to “game the system” by heading to the toilet several times an hour. Lessons learned: everyone responds to incentives and everyone quickly figures out how to use them to their advantage.

In another example, when Mexico City imposed traffic restrictions which prohibited driving on specific days, according to the car’s license plate number, a World Bank study showed that those who could afford it went out and bought a second car which enabled them to drive on the remaining days. The result was an increase in total driving and, because the second cars tended to be older and less fuel efficient, an increase in the city’s air pollution.

Those involved in resolving disputes – or designing dispute resolution systems – also need to be aware of potential ways parties can game the system to try to gain an advantage. Look for hidden incentives to act a particular way.

For more Freakonomics, go to their excellent website for blogs, podcasts, and links to interesting stories.