Wednesday, February 18, 2015

Beware of the Ultimatum Game

Although the situation between economically distressed Greece and its European lenders changes daily, in the runup to one deadline, European leaders gave Greece an ultimatum: Agree to an extension of the bailout program or lose the funding Greece needs to avoid default and exclusion from the Eurozone.   They made a vague promise to renegotiate the original terms of the austerity program at a later date, but it was essentially a take it or leave it offer.  

Rather than acquiesce, the Greek finance minister reacted angrily: “…nothing good has ever come out of ultimatums. I have no doubt that in the next few days any notion of an ultimatum will be withdrawn.”  The new Greek government maintains that the austerity demanded of its people in exchange for the original bailout devastated the Greek economy and imposed untold social damage. It argues that if the European Union wants a chance of recovering its loans to Greece, it must loosen the austerity terms so that the economy can grow again.

But why would Greece reject the European lenders’ commitment to distribute billions  of of dollars of desperately needed funds when the alternative is bank runs, bankruptcy, exclusion from the Euro zone, and possible social chaos? At first glance, the Greek response doesn’t seem rational: the proposal provides needed breathing room and a commitment by the European lenders to alter the austerity terms in future negotiations.  While the reasons for the Greek reaction are politically and economically complex, the simple explanation is that the Greek government views the European lenders’ proposal as too unfair. 

So what does this have to do with lawyers negotiating a divorce or couples pursuing an uncontested divorce online  It’s the issue of fairness, or at least what the parties perceive as fair, and how it can propel or stall a negotiation. 

Using an experimental procedure called the Ultimatum Game, social scientists have demonstrated that people’s perception of unfairness will lead them to turn down a sure gain.  Here’s how it works: the subject must decide whether to accept or reject an offer for a portion of a fixed amount, say $100, which is to be split between the subject and the offeror.  The offeror decides how the money is to be split, but if the subject rejects the offer, neither receives any money.  There is no second round, that’s the ultimatum: take it or leave it.  The offeror might propose a fair split (e.g., $50 each), or an unfair one (e.g. $95 for the offeror, $5 to the subject).  In either case, the subject receives more than he or she had at the beginning of the exercise. $5 is better than $0. Right? 

Actually, no.  The results of these experiments show that even though getting a small amount is better than getting nothing, the rejection rate for offers perceived as unfair (generally 30% or less of the total amount being distributed) is very high. 

Why?  Because humans value more than economic return.  Civil conduct, following social norms, and reaching social agreement are important to a society’s and an individual’s well-being.  From that perspective, turning down an unfair economic offer is not irrational at all; it is saying that there are other interests at work which the offeror must also take into account. 

The Ultimatum Game being played by European lenders and Greece on the international stage rather than in a social scientists’ laboratory provides a lesson for divorcing spouses:  In instances when there is no Plan B or rejection of a take-it or leave-it offer will lead to dire circumstances (e.g., litigation), an offer  that leaves your spouse better off but is perceived by him or her as unfair is likely to be rejected, even when considerable cost attends the resulting outcome.  If you plan to make an offer, anticipate what he or she is likely to perceive as fair and be prepared to explain why your offer is, indeed, fair.  And if it’s not, change it.

Monday, February 9, 2015

If you are getting divorced, don't let the tail wag the dog

Almost any family law attorney can describe a case wherein a couple spent hundreds of thousands of dollars to settle issues of asset division, alimony, child support, and custody.  In other less costly instances, the money spent still far outstripped the value of the issues at stake.  In one case, a father wanted to set his child support obligation $200 per month lower than the state guideline. When the mother balked and mediation did not resolve the matter, the father took it to litigation.  The Judge subsequently ruled in the father’s favor, saving the father approximately $16,000 between then and when their child turned 18. Their legal fees, however, totaled $65,000.  Not a financially smart way for either parent to resolve this impasse.  

Not every divorce costs $65,000 to settle one matter, but it is not uncommon for everyday couples with modest financial estates to pony up $15,000 to $20,000 in lawyers’ fees to settle what could have been an uncomplicated divorce.  Can couples reach agreements and get divorced without draining their accounts? In a word, yes.  But it takes common sense, a commitment to fair-minded agreements, and a willingness to set aside emotional payback as the goal.
First, divorcing couples must remember not to let the tail wag the dog.  They, not the lawyers, decide how the divorce will proceed: contentiously (with the associated legal expense) or civilly (which leaves little for a lawyer to do but fill in the documents).  In fact, couples who are the most committed to saving money and time, settle their divorce without any lawyers at all by using an online divorce service that provides the information and guidance they need to reach fair agreements and complete the necessary documents—at a reasonable cost.

Whether a couple uses lawyers or does their divorce on their own, here are five frequent mistakes that can drive up the cost.

1. Being dishonest about financial matters, including withholding information.  When one spouse learns that the other is not providing complete, accurate financial information, mistrust poisons every subsequent discussion. Lawyers have solutions when this occurs: depositions, discovery, and testimony. These tactics are effective, but expensive, time consuming, and intrusive. Don’t kid yourself: Hiding or misrepresenting assets is likely to cost you more in the long run than being transparent from the outset.

2. Using lawyers to settle inconsequential issues.  It’s important that couples avoid heedless concessions just to get divorced. But do you really want lawyers, at their hourly rate, to go back and forth about who will take the children to and from soccer practice or how the kitchen utensils will be divided?  They didn’t go to law school to settle such trivial issues; and it’s not what you had in mind when you originally hired them.   

3.  Being stubborn and inflexible.  When emotions run hot, it’s easy to dig in one’s heels to make a point: “I won’t be pushed around.” But make sure your heels aren’t digging too deep a hole.  Spending thousands of dollars in legal fees to make your spouse responsible for the cost of summer camp is not the best use of community assets. 

4. Seeking vengeance, rather than a legal settlement.  Divorce is first and foremost, a legal process with a legal outcome.  When couples decide to use that process for non-legal purposes, such as to get revenge or publically humiliate the other, the divorce will get very messy and very expensive, very fast.  Interestingly, research in this area has found that getting revenge feels very good for a very short period of time; then it doesn’t feel good at all. 

5. Refusing to communicate in a civil manner with the other spouse.   A divorce requires couples and their representatives to communicate: information exchanged, requests conveyed, proposals submitted, tradeoffs suggested, offers accepted.  This process becomes terribly difficult and inefficient when straightforward communication is replaced by argument and conflict. The goal of divorce is to reach a legal agreement, not to replay everything that went wrong in the marriage.