Sunk Costs

I recently had a conversation with a potential first time client who requested a proposal, a request I granted as always. I followed up with a call and the discussion quickly moved to the price. That’s not uncommon. But, what struck me in this conversation was that he stated that he, and his partners, had spent so much money on this potentially multi million dollar case that he was not sure he could get the partners to agree to put more money into it. As we discussed the situation, in which they represent the plaintiff who is seeking a multi million recovery, I gathered that it was not that they thought the case was bad, but that they were looking at what had been spent as an obstacle to spending the money necessary, in my opinion, to ensure that their money was well spent, and that would maximize the recovery via settlement or at the impending trial. That caused me to have a flashback to several of my economics courses and the concept of sunk cost. As I recalled, general microeconomic theory says that one should not consider the costs previously incurred, or sunken, in a project, endeavor, or whatever, when deciding about future costs to be incurred in making the project a success. It would be like ending construction on a house before the roof was on because of how much it cost to pour the foundation and frame the house because the roof was going to cost more money. I understand that mock trials are expensive, relative to some measure, and that not all cases are “winners.” Sometimes you have to cut and run. But, that is not what I heard in this discussion. It was, we have already spent “a lot of money” and don’t want to spend more. (It may have been that they simply could not afford to do so. But as with any discussion of economics, we have to assume, for the sake of this post, that the case was not a bad one, and that money was available if they would only spend it.) The point I try to make when this situation arises is that the cost of mock jury research should not be framed in relation to what has already been spent, but in terms of what it will take to get a good outcome. That is, I believe, money spent on mock jury research ensures that one gets the best return on what has been already spent as possible. And, it confirms settlement and other related decisions for clients so that they understand both the upside and downside possibilities. If one has a nice car, which is running well, and it needs new tires, one doesn’t say, “I’ve already spent thousands on this car, I’m not buying new tires.” If the car is worn out, maybe it is time for a new car. The point is that the relevant variable is what does it take to keep the car, or the case, viable? Much research has been undertaken on the concept of sunk costs. One thing that comes through repeatedly is that, in the business world, sunk costs often create mental hurdles and faulty reasoning (check Wikipedia for a quick indoctrination). The point I unsuccessfully tried to make with this prospect was that, if things were as he told me, if it was a good case, etc., then factoring what had already been spent was not the appropriate way to decide whether to do a mock jury project. If they could not afford it, fine. Instead, it seemed he and his partners were unwilling to do what it takes to achieve the best result for the client.

When attorneys, such as the one David has described, contact us about the possibility of retaining us, I believe they should understand there is a cost of doing business with us. (The old biker saying is applicable to many things in life, including working with a trial consultant: No one rides for free.) It astounds me, time and time again, that some attorneys contact us, then balk at hiring us because they don’t want to spend any money. Why contact us to begin with? Of course we are going to charge for our services! Attorneys certainly don’t work for free! Attorneys who advance costs, such as plaintiff’s personal injury attorneys, don’t work for free; in fact, their percentage of the amount they recover on behalf of their clients are, in some people’s opinion, exorbitant. My landscaper doesn’t work for free either. If I ask him to trim trees, in addition to mowing the grass, I expect to pay more for his work than if he merely mows the grass. If I ask for cheese on my hamburger, I expect to pay for it. As David says, the concept of sunk costs is not understood by the average person, nor, it seems, by some attorneys. They wrongly reason that, “Because I have spent $100,000 on experts, testing, etc., on my case, I have spent enough, such that Magnus should, out of the kindness of its corporate heart, work for nothing or close to nothing.” Think about the logical fallacy involved in this type of reasoning. If one has already spent X dollars on something that, by spending X plus dollars would result in 100 times more money than what was spent, why stop now? In the example above, if this attorney has spent $100,000 preparing his case, but, by retaining Magnus to unlock the keys to a successful outcome, could obtain $10,000,000 for the client, what is the downside of spending a relatively insignificant amount of money to hire us? I just can’t think of the downside in this scenario. This proves once again that not all attorneys are equally committed to doing everything it takes to ensure their clients’ successful outcome.

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