Question: What’s the best way to minimize the risk of long-term financial commitments and wrap up a win-win negotiation?

About a decade ago in Hollywood, many negotiators thought the answer to that question was “slate deals.” In the early and mid-2000s, hedge funds and other large investors streamed into Hollywood, persuaded by the major studios that they could minimize the inherent risks of investing in films by backing a slate of several dozen movies rather than just one, write Ben Fritz and Erich Schwartzel in a recent article in the Wall Street Journal.


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A Bad Bargain and Sluggish Revenues: Hollywood’s Slate Deals

But slate deals turned out to be much less of a sure thing than predicted. Sluggish DVD sales, a studio trend toward risky blockbusters that often flopped, slow-flowing revenues, and other factors led to disappointing returns for many investors. Some of the investors walked away chastened by their Hollywood experience, but others chose to take their grievances against some of the major film studios, including Sony Pictures and Universal Pictures, to court.

In New York last month, four investors who put up $40.1 million as part of a $231 million deal to co-finance a slate of films from Paramount Pictures were engaged in a bitter court battle with the studio. The slate deal had included films such as the comedy “Mean Girls” and a remake of “The Manchurian Candidate” starring Denzel Washington, plus many box-office bombs. This is the fourth lawsuit Paramount has faced from investors in slate deals from the 2000s; it settled two out of court and won a third case.

The plaintiffs in the current case, including a unit of German insurance giant Allianz, allege that Paramount lied about the terms of their slate deal. They say that Paramount had promised it would sell foreign rights to the films involved in the deal before their release. Instead, they say, the studio quietly began cutting back on so-called “foreign pre-sales” around the time the deal was signed, a practice that reduces risk but limits returns, according to the Wall Street Journal. Paramount says it did not make any promises to the investors regarding pre-sales.

Slate deals flamed out after the financial crisis of 2008 and 2009. Interestingly, however, they are making a comeback. In the past two years, every major film studio except Walt Disney Co. has signed or renewed at least one significant co-financing deal. The investors behind the deals insist they learned from the failures of the 2000s and are taking on less debt and choosing management teams and films more carefully.

But as Fritz and Schwartzel note in the Journal, “such claims have been made in the past as studios have gone through one wave of financiers after another.” One plaintiff in a Paramount suit, film financier David Molner, said that slate deals are “littered with the remains of investors who thought they understood the transaction” based solely on their success in other industries.

The story of investors discovering a new type of “low-risk” deal, being burned by unexpected losses, and then throwing caution to the wind once again after a period of time has passed is not unique to Hollywood. It’s a business trend that can be found in almost any industry and any country.

Such repeat failures can be traced back to certain cognitive biases—errors in our thinking that are based on our tendency to take mental shortcuts. One common cognitive bias that has clearly been a factor in Hollywood slate deals is overconfidence. Ample research has shown that most negotiators bring excess confidence in their abilities or instincts to the table. Overconfidence tends to emerge when we are facing moderate or difficult issues, such as choosing long-term investments or planning long-term partnerships.

In negotiation, our overconfidence often manifests as inaccurate, overly optimistic estimates of risk and other unknown quantities. Overconfidence causes us to downplay the inherent uncertainty of our negotiations. The insidious nature of overconfidence is illustrated by the fact that investors are returning to Hollywood slate deals despite that they have proven unprofitable over time.

A tendency to engage in short-term thinking that overlooks long-term risks can also lead us to reach deals that fall apart over time. In particular, negotiators often get into trouble when they agree to long-term contracts for complicated, risky ventures. That was the case in 1998 when the U.S. spy satellite agency, the National Reconnaissance Agency, awarded Boeing a $5 billion, five-year contract to build two different complex satellite systems. Six years later and billions over budget, NRO fired Boeing for failing to deliver.

In general, rather than committing to a slate of complex projects, it’s wiser to negotiate one project at a time. Before making deeper investments, require those who will be implementing the deal to provide evidence that they are making incremental progress.

Related Article: Beware Your Counterpart’s Biases


Discover how to handle complicated, high-level business negotiations in this free report, Win-Win or Hardball? Learn Top Strategies from Sports Contract Negotiations, from Harvard Law School.

Originally published in 2014.