TUTORIAL
FOUR
DECISION
TREES FOR LAWYERS
By
Michael D. Freeborn
Congratulations! By getting to this point, you have already
mastered enough of the basic concepts of decision analysis to dramatically
improve the quality of your decisionmaking. And you've been able to do
it with nothing more than simple arithmetic. With this experience, in
the future you might even be able to visualize simple decision trees and do
the arithmetic in your head.
Going to Tutorial 4 and beyond, you will see that no matter how
complex the problem, the arithmetic remains the same. It is only because
of the sheer number of arithmetic calculations that we resort to
use of decision analysis software. But as we do so, don't forget -- no
matter how many dozens, hundreds, or even thousands of paths or branches may
be involved in a decision tree -- each one involves the same kind of simple
arithmetic. Knowing what you know now, you could do them with a paper
and pencil.
Let's go on to the next example.
In our case, the pleadings just got more complicated. Now there is a two-count
complaint, and the second count alleges that in addition to the breach of
contract claim in count one, the company has also been negligent.
Count II seeks $3 million. Although we think there's only a 10%
chance that negligence will be proven, if the plaintiff succeeds there is a
range of potential verdict amounts, unlike the single liquidated figure of $1
million we assumed for the breach of contract case.
Here, if the plaintiff succeeds in proving negligence, we believe there is
a 25% chance of the negligence verdict being $1 million; 50% chance of $2
million; and 25% chance of $3 million.
Armed with his new negligence count, the plaintiff has doubled his
settlement demand to $1.2 million. Also, the incremental costs of
defending the negligence count are additional legal fees of $300,000.
Do
we litigate or settle? The decision tree at right shows one way to
structure the problem.
Note that the number of branches is now becoming so large that, for ease of
displaying the structure on a single page, we use a symbol -- like a small
"a" in a circle -- to indicate where entire substructures of the
tree are replicated. This eliminates the need for repetition.
However,
when we run the decision analysis software, all the branches of the
tree can be shown, along with probability and cost data at each
node.
(To save on space, scientific notation is used to display some numbers
without all the zeros. Scientific notation indicates the number of digits
which must be placed to the right of the decimal point. For example,
1.07+e006 says that the number has six digits to the right of the
decimal. This example, in scientific notation, is
1,070,000.)
Since the expected cost of "Litigate" is $1,070,000 and the cost
of "Settle" is $1,200,000, we choose to litigate.
Cool, isn't it?
Ready for Tutorial 5?
Or would you like to go back?
Introduction
Tutorial 1
Tutorial 2
Tutorial 3
Copyright © 2001 Michael D. Freeborn. All rights reserved.
