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Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
Decision Trees- a tool for better decision-making
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Decision Trees - a tool for better decision-making

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Uploaded on behalf of Rebecca A. Bowman. Presented at the ABA Annual Meeting, Toronto, on August 4, 2011

Uploaded on behalf of Rebecca A. Bowman. Presented at the ABA Annual Meeting, Toronto, on August 4, 2011

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  • 1. Decision Trees -- a tool for better decision-making Rebecca A. Bowman, Esq., P.E.
  • 2. Why is litigation decision-making difficult? <ul><li>Complexity </li></ul><ul><li>Uncertainty </li></ul>
  • 3. Complexity <ul><li>Facts </li></ul><ul><ul><li>What actually happened? </li></ul></ul><ul><ul><li>What evidence is there? </li></ul></ul><ul><ul><li>Can evidence be acquired? </li></ul></ul><ul><ul><li>Is the evidence admissible? </li></ul></ul><ul><ul><li>Is the evidence believable? </li></ul></ul>
  • 4. Complexity <ul><li>The Law </li></ul><ul><ul><li>Statutes </li></ul></ul><ul><ul><li>Best precedents </li></ul></ul><ul><li>Liability </li></ul><ul><ul><li>Will there be liability? </li></ul></ul><ul><ul><li>Under which statutes? </li></ul></ul>
  • 5. Complexity <ul><li>Damages </li></ul><ul><ul><li>What types of damages? </li></ul></ul><ul><ul><li>What evidence/documentation is available? </li></ul></ul><ul><ul><li>Is the evidence/documentation persuasive? </li></ul></ul><ul><ul><li>Punitives? </li></ul></ul>
  • 6. Complexity <ul><li>Other factors – almost all involve uncertainty </li></ul><ul><ul><li>Direct cost </li></ul></ul><ul><ul><li>Impact of the trial on business </li></ul></ul><ul><ul><li>Impact of outcome on business </li></ul></ul><ul><ul><li>Value of injunction </li></ul></ul><ul><ul><li>Importance as precedence </li></ul></ul>
  • 7. Complexity <ul><li>Other factors – almost all involve uncertainty </li></ul><ul><ul><li>Time to judgment </li></ul></ul><ul><ul><li>Time to end of appeals </li></ul></ul><ul><ul><li>Time value of money </li></ul></ul><ul><ul><li>Attitude toward risk </li></ul></ul>
  • 8. Intuition <ul><li>Uncertainty and complexity usually dealt with intuition </li></ul><ul><li>Intuition includes bias </li></ul><ul><li>Intuition may not suggest alternatives/answers </li></ul><ul><li>Can’t document/assess/audit </li></ul>
  • 9. Systematic Approach <ul><li>Deal with complexity </li></ul><ul><li>Understand factors of uncertainty </li></ul><ul><li>Explicitly account for uncertainty </li></ul><ul><li>Language to deal with uncertainty - probability </li></ul>
  • 10. Estimating probability <ul><li>Min Max </li></ul><ul><li>“ Very likely” _____ _____ </li></ul><ul><li>“ Probably” _____ _____ </li></ul><ul><li>“ Almost certain” _____ _____ </li></ul><ul><li>“ Likely” _____ _____ </li></ul>
  • 11. Disclosure of unasserted claims <ul><li>Possible claim – no disclosure </li></ul><ul><li>Probable claim – disclosure </li></ul><ul><ul><li>Reasonably certain </li></ul></ul><ul><ul><li>Extrinsic evidence strong enough to establish presumption </li></ul></ul><ul><ul><li>Prospect of non-assertion slight </li></ul></ul>
  • 12. Probability <ul><li>Expert subjective judgment </li></ul><ul><ul><li>Based on experience and information </li></ul></ul><ul><ul><li>Don’t know? 50-50 </li></ul></ul><ul><li>Expected value – not precision </li></ul><ul><ul><li>Characteristics of alternatives </li></ul></ul><ul><ul><li>Potential outcomes </li></ul></ul><ul><ul><li>Likelihood of outcomes </li></ul></ul><ul><li>Value of uncertainty </li></ul><ul><ul><li>Attitude toward risk-taking </li></ul></ul>
  • 13. Judgment <ul><li>If you judge by outcomes, </li></ul><ul><ul><li>Decisions will be made </li></ul></ul><ul><ul><li>to pursue lowest probability </li></ul></ul><ul><ul><li>of bad outcome </li></ul></ul>
  • 14. A Good Decision <ul><li>Logically consistent </li></ul><ul><li>with knowledge </li></ul><ul><li>and preferences </li></ul>
  • 15. Logic for Decisions <ul><li>Alternatives “What can I do?” </li></ul><ul><li>Information “What do I know?” </li></ul><ul><li>Values “What do I want?” </li></ul>
  • 16. Value Considerations <ul><li>Dominated by litigation uncertainties and monetary outcomes </li></ul><ul><li>Only obvious when quantified explicitly </li></ul><ul><ul><li>i.e. impact on sales from negative publicity </li></ul></ul><ul><li>Which outcome do I really prefer? </li></ul><ul><li>How much do I prefer that outcome? </li></ul>
  • 17. Logic for quantification <ul><li>Break problem in simple pieces </li></ul><ul><li>Delete unimportant factors </li></ul><ul><ul><li>Use judgment </li></ul></ul><ul><ul><li>Use sensitivity analysis </li></ul></ul><ul><li>Focus on the few, critical issues </li></ul>
  • 18. Risk Management Process <ul><li>Structure the problem </li></ul><ul><li>Assess probabilities </li></ul><ul><li>Assess outcomes </li></ul><ul><li>Analyze the structure </li></ul><ul><li>Evaluate the probabilities </li></ul><ul><li>Iterate if necessary </li></ul><ul><li>Decide </li></ul>
  • 19. Case I: Assembler v. Parts <ul><li>Assembler is suing Parts </li></ul><ul><li>Alleged defective components from Parts </li></ul><ul><li>Caused high return rate of Assembler’s products </li></ul><ul><li>Direct damages (value of parts) = $1M </li></ul><ul><li>Consequential damages (returns, repairs, damage to reputation) = $3M </li></ul>
  • 20. Case I: Assembler v. Parts <ul><li>Finding of no liability means no consequentials </li></ul><ul><li>Negative outcome would have adverse publicity which would cost Parts a pending contract worth $1M of profit </li></ul>
  • 21. Objective <ul><li>Projection of net present value of trial outcome. </li></ul><ul><li>What would you ask a fortune-teller if you could? </li></ul>
  • 22. Step 1 Establish a discount rate <ul><li>For our case study, we’ll use 10% </li></ul><ul><li>$1 paid out in is = X$ today </li></ul><ul><li>1 year $.91 </li></ul><ul><li>2 years $.83 </li></ul><ul><li>3 years $.75 </li></ul><ul><li>4 years $.68 </li></ul><ul><li>5 years $.62 </li></ul>
  • 23. Step 2 Identify significant factors of uncertainty <ul><li>Finding of direct liability </li></ul><ul><li>Finding of consequential liability </li></ul><ul><li>Business losses </li></ul><ul><li>Litigate or settle </li></ul>
  • 24. Step 3 Build a decision tree Decision Direct Consequential Business Loss Liability Liability ($3M) ($1M) ($1M) Yes Yes No Yes Yes Litigate No No No Settle
  • 25. Step 4 Assign probabilities Decision Direct Consequential Business Loss Liability Liability ($3M) ($1M) ($1M) Yes Yes .6 .6 .4 No Yes Yes .6 .6 Litigate .4 No .4 No .4 No Settle
  • 26. Step 5 List net outcomes Decision Direct Consequential Business Loss Outcomes Liability Liability ($3M) ($1M) ($1M) Yes $5M Yes .6 .6 .4 No $4M Yes Yes $2M .6 .6 Litigate .4 No .4 No $1M .4 No $0 Settle ?
  • 27. Step 6: Evaluate from the left the left to get expected values Decision Direct Consequential Business Loss Outcomes Liability Liability ($3M) ($1M) ($1M) Yes $5M Yes .6 x $5M=$3M .6 x $4.6M =$2.76M .4 x $4M=$1.6M $4M Yes Yes $2M .6 x $2M=$1.2M .6 x $3.4M .4 x $1.6M Litigate =2.04M =$0.64M .4 x $1M=$.4M $1M $2.04M .4 x $0 = $0 No $0 Settle <$2.04M
  • 28. Step 7: Evaluate from the left to obtain probability distribution Decision Direct Consequential Business Loss Outcomes Probability Liability Liability ($3M) ($1M) ($1M) Yes $5M .6x.6x.6 Yes .6 x $5M=$3M =.216 .6 x $4.6M .6x.6x.4 =$2.76M .4 x $4M=$1.6M $4M =.144 Yes Yes $2M .6x.4x.6 .6 x $2M=$1.2M =.144 .6 x $3.4M .4 x $1.6M Litigate =2.04M =$0.64M .4 x $1M=$.4M $1M .6x.4x.4 $2.04M =.096 .4 x $0 = $0 No $0 =.400 Settle <$2.04M
  • 29. Step 8: Plot sensitivity to find impact of critical factors 25% 50% 75% Probability Value -0.4M -0.8M -1.2M -1.6M -2.0M
  • 30. Step 8: Plot sensitivity to find impact of critical factors 25% 50% 75% Probability Value -0.4M -0.8M -1.2M -1.6M -2.0M Settlement of $.8M Settlement of $1.4M
  • 31. Case 2: Driver v. Machine <ul><li>Driver is suing Machine for personal injury </li></ul><ul><li>Machine failed to provide safety guard </li></ul><ul><li>Workers’ comp claim settled </li></ul><ul><li>Settlement offer of $1.5M </li></ul><ul><li>Low liability estimate of $2M </li></ul><ul><li>High liability estimate of $5M </li></ul><ul><li>Best guess is $4M </li></ul>
  • 32. Step 1 Establish a discount rate <ul><li>For our case study, we’ll use 10% </li></ul><ul><li>$1 paid out in is = X$ today </li></ul><ul><li>1 year $.91 </li></ul><ul><li>2 years $.83 </li></ul><ul><li>3 years $.75 </li></ul><ul><li>4 years $.68 </li></ul><ul><li>5 years $.62 </li></ul>
  • 33. Step 2 Identify significant factors of uncertainty <ul><li>Finding of direct liability </li></ul><ul><li>Amount of damages </li></ul><ul><li>Litigate or settle </li></ul>
  • 34. Step 3 Build a decision tree Decision Liability Damages Hi ($5M) Yes Med ($4M) Lo ($2M) Litigate No Settle ($1.5M)
  • 35. Step 4 Assign probabilities Decision Liability Damages Hi ($5M) .2 Yes Med .6 .5 ($4M) Lo .3 ($2M) Litigate .4 No Settle ($1.5M)
  • 36. Step 5 List net outcomes Decision Liability Damages Hi Outcomes ($5M) $5M .2 Yes Med $4M .6 .5 ($4M) Lo .3 ($2M) $2M Litigate .4 $0 No Settle ($1.5M) $1.5M
  • 37. Step 6 Evaluate from the right to get expected values Decision Liability Damages Hi Outcomes ($5M) $5M .2x$5M=$1M Yes Med $4M .6x$3.6M .5x$4M=$2M ($4M) =$2.16M Lo .3x$2M=$.6M ($2M) $2M Litigate .4x$0=0 $0 No Settle ($1.5M) $1.5M
  • 38. Step 7 Evaluate from the left to obtain probability distribution Decision Liability Damages Hi Outcomes Probability ($5M) $5M .6x.2=.12 .2x$5M=$1M Yes Med $4M .6x.5=.30 .6x$3.6M .5x$4M=$2M ($4M) =$2.16M Lo .3x$2M=$.6M ($2M) $2M .6x.3=.18 Litigate .4x$0=0 $0 .4 No Settle ($1.5M) $1.5M
  • 39. Step 8: Plot sensitivity to find impact of critical factors 25% 50% 75% Probability Value -0.4M -0.8M -1.2M -1.6M -2.0M
  • 40. Step 8: Plot sensitivity to find impact of critical factors 25% 50% 75% Probability Value -$1M -$2M -$3M Settlement of $1.5M

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