Legal Cost Specialists

Success fee trickery

My further adventures into the outer limits of the legal costs world continues with another idea inspired by Kevin Dutton’s book Flipnosis.

Readers will be familiar with the tactic of retailers selling goods at £9.99 or £9.95 instead of £10, in the hope that we will consider this to be more of a bargain.

Although there are a number of possible explanations put forward for why this might work, one of the most convincing is that put forward by Chris Janiszewski and Dan Uy from the University of Florida.

They undertook experiments where a group of volunteers were told to imagine they were buying an item at a particular retail price. One group were told the price was $5,000, a second that it was $4,988 and a third that it was $5,012.

They were then required to guesstimate the wholesale cost to the retailer.

Those who were given a price tag of $5,000 estimated wholesale prices significantly lower than those given more precise figures. Further, those given the $5,000 label were more likely to estimate the wholesale price in round numbers.

Dutton summarises the conclusions of Janiszewski and Uy as to why this should be as follows:

“To explain their results, Janisewski and Uy speculate as to what the brain might be doing when it calculates such differentials – the precise anatomy of the comparison procedure. Or, more specifically, its units of measurements. Could it be that these units of measurement are variable, and contingent on certain characteristics of the initial price? Let’s say, for example, that we go into a shop and spot a clock radio on display for £30. On seeing the radio we might well think to ourselves: that radio is really worth around £28 or £29. Whole numbers. On the other hand, if we see it retailing at £29.95 we might still believe that its worth less than the asking price – but the yardstick we use to evaluate the disparity is different. This time its intervals are smaller. Rather than thinking in whole, round pounds we think, instead in loose change. We consider, perhaps, £29.75 or £29.50 as the “true” wholesale value – less of a differential than if we were thinking in whole numbers. Which makes it more of a bargain.”.

To test their theory, Janisewski and Uy did a real-life study comparing the asking prices of houses with the amounts they actually sold for. Just as they had predicted, those who put their houses on the market for a more precise sum (eg $596,500 as opposed to $600,000) got consistently closer to their asking price than those who sold their houses for a round-number. When there was a slump in the market, those houses priced in round-numbers depreciated more than the “precisely-tagged” homes. This happened over a time-span as short as a couple of months.

So, what lessons are there here for solicitors, law costs draftsmen and the like?

If this theory is correct, and a costs judge on detailed assessment is faced with a non-fixed success fee in a public liability claim of, for example, 80%, what might he allow if he considers the amount claimed too high? It seems likely the reduction will be in round numbers and a figure of 60%, 50% or 40% might be allowed.

On the other hand, what might be allowed if the success fee was claimed at 79%? A figure much closer to the “asking price”, say 75%?

A second reason why such an effect might be seen, and this is simply my own theory rather than backed up by empirical evidence, is that a figure of 79% has, assuming it has not simply been produced by the ready-reckoner, the appearance of being carefully, and in some obscure sense “scientifically”, calculated. On the other hand, an 80% success fee looks somewhat arbitrary with no more than a round-number in its favour.

Based on the above theories, I would put good money on solicitors who set their success fees at 79% recovering more, on average, than ones setting their success fees at 80%.

Costs judges need to be on their toes not to be caught out by this little psychological trick.

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