DECISION TREE EXAMPLE 1

Decision Trees and Risk Analysis ExamplesDECISION TREE EXAMPLE 1

Your client has been defrauded of a large sum of money. You are pursuing the bank which paid the money out. You and the team have spent a lot of time assessing the pros and cons of your case and going through spreadsheets of numbers, accounts and money trails. The time has come to decide whether or not to accept the settlement on offer. The other side has offered to settle for 8m You feel if you go to court you have an 80% chance of winning. If you win, there are a range of payments the court might make: You estimate the best outcome would be 20m (after irrecoverable costs), but you think the chances of this are only 20% Most likely is 16m, with a 60% probability You think the chances of a low net payment of 12m are about 20% If you lose you estimate youll have to pay about 2m in costs.

Should you settle at 8m? If not, what should you settle for?

SOLUTION 1:

12.4m is significantly bigger than 8m, therefore, go to court.

DECISION TREE EXAMPLE 2

You have reappraised the situation. You have determined that winning in court depends on two decisions by the judge: Whether he allows the evidence your private investigators gathered as admissible; Whether he finds the bank dishonest If he allows the evidence, then there is an 80% chance he will also find the bank dishonest and you win. If not, then it is only 50-50 he will find the bank dishonest. You currently believe there is only a 20% chance the judge will accept the evidence. The payoffs are the same as before.

Should you accept the offer?

SOLUTION 2:

8.1m slightly greater than 8m. Therefore, with risk aversion, accept certain settlement rather than go to court

Dr John Clark 2005For further information see www.mediation-negotiation.com