Using litigation decision tree analysis to better understand and manage the risk of litigation and, additionally, control costs.

1. Litigation
Risk Management
Institute
Improving Litigation Decision-Making &
Managing Litigation Costs by
Acknowledging Risk
Bruce Beron, Ph.D., President
34 Coquito Court, Menlo Park • California 94028 • Phone 650.854.1914 • www.litigationriskmanagement.com • bruceberon@lrmi.com

2. Management–
the act, art, or manner of managing, or handling,
controlling, directing, etc.
Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
Decision
making
Implementation
Most of us are taught implementation (how to take a deposition
or write a brief). If we are really good at it, we get promoted to
decision-making, which is a different set of skills.
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3. Strategic decision-making requires a different mind-set
For strategic decision-making, we need to focus on those
uncertainties that can change the decision.
Most operational/implementation issues are unimportant for
strategic decision-making.
These operational/implementation “details” may be very
important and must be taken into account once the decision
has been made and is being implemented.
Litigation
/ perspective from operational decision-making.
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
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4. Risk —
the chance of injury, damage, or loss; dangerous
chance
The art of business-like decision-making is the art of
balancing risk and reward.
Few lawyers or business people understand Risk.
It requires a statement of likelihood like:
Could
Might
Will
Or, most effectively, a probability (quantitative)
And requires a statement of consequence:
We define Risk as Uncertainty
And that doesn’t necessarily imply a chance of loss
It is risky if you get $5M when you might have gotten $100M
Litigation
Risk Management
Institute
Hit by a car
Lose our shirts
Or, most effectively, lose ten million dollars (quantitative)
© Bruce Beron 2014 LRM Brief Intro / Costs
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5. Most attorneys and business people do not think
properly about the rewards either.
We almost always focus on the risks, the downside.
• There is someone’s name on the check.
• The accounting system knows exactly how much was misspent.
The potential upsides are never precise or well defined.
• Very few people get fired for increasing sales by 30% when they
should have increased them by 40%.
• Very few attorneys are criticized for settling a case for $20M
when the expected loss was $10M.
The upside too requires a statement of likelihood and a
statement of consequence.
Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
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6. What is Litigation Risk Management?
Litigation
Risk Management
Institute
A way to understand risk
A way to make good decisions
In order to make good decisions,
we must understand uncertainty!
© Bruce Beron 2014 LRM Brief Intro / Costs
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7. Let's consider a simple litigation example where we
are the defendants.
Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
Liability
No Liability
0.3
0.7
Damages
$100,000
$0
For simplicity's sake, let's ignore litigation costs.
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8. The Expected Loss is defined as the sum of all
the outcomes times their respective probabilities.
Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
Liability
No Liability
0.3
0.7
Damages
$100,000 x .3 = $30,000
$0 x .7 = $0
$30,000
$30,000
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9. Expected Loss represents the average loss if we
could run the litigation many times.
•It is a good starting point for settlement value
•But it doesn't take risk into account.
Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
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10. What is our maximum settlement value for this
litigation?
• The difference between this maximum settlement value and
the Expected Loss is our risk premium.
• If our maximum settlement value is $40,000, then our risk
premium is $10,000 ($40,000-$30,000).
• This means we are willing to pay an extra $10,000 to avoid the
chance of the bad outcome.
This is our reservation price.
- If we can settle for less - we will take it .
- If we can't - we are willing to take our chances in court.
• There is no right answer, but there is a right way to think
about this value. Only three things should be considered:
Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
- Probabilities
- Outcomes
- Risk Attitude
• Avoid sunk cost thinking!
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11. Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
Let’s consider the probabilities
Liability
No Liability
0.3
0.7
Damages
$100,000
$0
$30,000
Where do they come from and what do they mean?
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12. A probability is the quantification of judgment,
based on knowledge and experience.
• The trial outcome will only happen once, and we will win or
lose.
• The question we want answered is
• “Will we win or lose?”
• The probability reflects our best judgment as to how likely
winning is, to help make decisions.
Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
• There is no right answer!
• If the original judgment of win is 95% and we lose, that does not
mean that the 95% judgment was wrong!
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13. A probability is the quantification of judgment,
based on knowledge and experience. (continued)
• Do not confuse probability with frequency
• Frequency is what is taught in classical statistics
• Frequency of heads in a coin toss is 50%.
• Frequency is accessible for a coin, not for a unique case.
• Correct probability is an accurate reflection of judgment.
• Not always easy to assess.
• We all have biases in thinking about probabilities.
• Probabilities change with new knowledge
• Quantification does not imply precision
Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
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14. Would it be a good decision to settle this case for
$35,000 if we could?
Litigation
Risk Management
Institute
Yes, because we are settling the case for
$5,000 less than the maximum settlement
we would be willing to pay.
Expected Loss of $30,000
Risk Premium of $10,000
© Bruce Beron 2014 LRM Brief Intro / Costs
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15. We should distinguish between decisions and
outcomes.
Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
•Good decision
-Consistent with knowledge and preferences
•Good outcome
-One we want
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16. We should distinguish between decisions and
outcomes.
Litigation
If you judge people by outcomes, they will make those
decisions that have the lowest probability of a bad
outcome, not the highest expected outcome.
Risk Management
Institute
•Know what you can
control and what you
can't.
•If you don't analyze
decisions, you can only
judge on outcomes.
© Bruce Beron 2014 LRM Brief Intro / Costs
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17. What tools do we have to manage the trade-off
between litigation risk and litigation cost?
•We can calculate the value of imperfect control.
-How much would we pay to incrementally decrease the
likelihood of a bad outcome?
•How much would we pay to decrease the probability
of liability by 10% back at our simple example?
Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
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18. We put in the new probability, calculate the Expected
Loss, and then subtract the original Expected Loss, to
get the incremental value.
Liability
No Liability
0.2
0.6
Damages
$100,000 x .2 = $20,000
$0 x .6 = $0
$20,000
$20,000
New Expected Loss is the Value With Imperfect Control -$20,000
- Original Expected Loss -$30,000
Value of Imperfect Control $10,000
Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
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19. There is always risk in litigation! The best you can
do is to minimize those risks in a cost effective
manner.
•Acknowledge explicitly the risks/uncertainty in
litigation.
•Judge counsel on the quality of their decisions, not on
their outcomes.
•Control costs by making explicit trade-offs between
litigation risk and litigation cost.
Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
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20. Litigation Risk Management is a necessary
supplement to your intuition.
An effective, efficient decision insurance policy
When intuition doesn't work or you are not quite
comfortable with your decisions
When you need to justify or explain your decisions
Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
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21. Litigation Risk Management is a process for making
good decisions.
Litigation
Risk Management
Institute
© Bruce Beron 2014 LRM Brief Intro / Costs
It is a process, not a product.
Characterized by:
•Decision focus
•Do enough analysis to make decision
•Balance between:
•Paralysis by Analysis
•Extinction by Instinct
The real product is not the numbers but a state of
satisfice in mind of decision makers.
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22. Litigation
Risk Management
Institute
If a man will begin with certainties he
will end with doubts, but if he will be
content to begin with doubts he shall
end in certainties.
-Francis Bacon
(1561-1626)
© Bruce Beron 2014 LRM Brief Intro / Costs
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