New Zealand Law Society - Pricing and the ‘Dunning-Kruger Effect’

Pricing and the ‘Dunning-Kruger Effect’

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When working with partners to assist them on a specific pricing proposal, all too often the conversation goes something like this;

“So what levels of resourcing will be required for this and how long do you think it’ll take?”

“Well, with a fair wind and assuming all goes well and the other side isn’t difficult and my client takes a reasonable position, and if Halley’s Comet doesn’t strike…”

“Stop, stop; when has anything ever gone well in your entire career?”

“Well, now that you mention it, never!”

Why the perennially ebullient display of optimism?

Part of the explanation lies in the partner’s inclination to avoid a price, which is sufficiently high that they are unlikely to get the particular piece of work.

However we have never felt that this was the whole of the explanation but we think we may have stumbled across another piece of the puzzle – Dunning-Kruger Syndrome. At first blush, it does rather look like a rare and malevolent strain of pathogen but happily it is rather more benign.

David Dunning and Justin Kruger of the Department of Psychology at Cornell University first observed the phenomenon in a series of experiments in 1999. The study was inspired by the case of McArthur Wheeler, a man who robbed two banks after covering his face with lemon juice in the mistaken belief that, because lemon juice is usable as invisible ink, it would prevent his face from being recorded on surveillance cameras.

This pattern of over-estimating competence was seen in studies of skills as diverse as reading comprehension, practising medicine, operating a motor vehicle, and playing games such as chess or tennis. Dunning and Kruger proposed that, for a given skill, incompetent people will:

  • fail to recognize their own lack of skill,
  • fail to recognize the extent of their inadequacy,
  • fail to accurately gauge skill in others,
  • recognise and acknowledge their own lack of skill only after they are exposed to training for that skill.

However, it is the other aspect of their finding that may go some way towards explaining why some lawyers approach pricing the way they do – and that is that high-ability individuals may underestimate their relative competence and may erroneously assume that tasks that are easy for them are also easy for others or at least are likely to be perceived by others as being easy.

This often leads to practitioners making comments like, “Oh, it should only take me a couple of hours so perhaps $700-$800”.

There are two problems with that mindset:

  1. Displaying all the characteristics of Dunning-Kruger Syndrome, the partner convinces themselves that the piece of work is not a big deal as they can knock it out in a couple of hours or so because (for them!) it is relatively straightforward. This ignores the fact that it may only be relatively straightforward for them because they are expert in the field and have 25 years’ experience of that issue.
  2. With this mindset, despite the potentially significant value that that piece of work might deliver to the client in both financial and non-financial terms, the partner has artificially proscribed their pricing parameters by reference to the time/production cost.

This issue is at the heart of the distinction between value pricing and cost plus pricing. While we continue to content that it is essential to understand one’s production costs at a practice area, fee earner, client and matter level, the imperative to move towards value billing continue to gain momentum, particularly with the advent of increased efficiency technology. The issue brings to mind a delightful line from a New Zealand High Court decision:

“If counsel is entitled to say ‘I have reached some degree of seniority and therefore I am entitled to X number of dollars for every hour that I am professionally engaged’, then the incompetent will be encouraged to be prolix and dilatory and the efficient and truly skilled will be inadequately rewarded.”
- Holland J in Re JBL Consolidated Ltd (in receivership) (1982) 1 NZCLC 98,424.

Former New Zealand lawyer Richard Burcher is managing director of London-based legal services pricing consultancy Validatum.

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