Decision Analysis in Litigation

Decision analysis should be in every litigator’s toolbox. It helps both the client and the litigator better understand and communicate process, choice and risk. To anyone in the legal design community looking for a new project, decision analysis could do with a make-over to bring its accessibility and style into the 21st century.

What is decision analysis?

Decision analysis is a umbrella term. It includes decision trees and expected value. Decision analysis is unique because it is both a visual and a numeric tool combined.

A decision tree is a graph of decisions and consequences. In the litigation context, these decision points might represent a finding by the Court – was there a duty of care, or was there not? The consequences might represent the outcome for the client – the plaintiff is awarded $100,000 in damages, or the plaintiff’s case fails and is awarded nothing.

Expected value is a term borrowed from probability theory. In the litigation context it represents that client’s net position, on average, if the litigation were repeated multiple times. It can be thought of as how much the case is ‘worth’. To a litigator, it might reflect their intuition of what a client might reasonably settle a case for. For example, if a client’s claim for $100,000 turns on a 50:50 question, the expected value of the case may be $50,000.

Decision analysis is neither novel or complicated. It has been used for years in general business applications. A number of consultancies use it in the litigious context, it is used in-house by some large corporations to assess litigation portfolio risks and is referred to in the literature of some international litigation firms. However its use appears limited in the context of lower value, private litigation.

Decision analysis in litigation

There is no interaction so jarring to an ordinary citizen as becoming embroiled in litigation. For parents, neighbours or colleagues going through a bitter divorce, a property dispute, challenging a will, appealing a migration decision or fighting an insurer, this will often be the toughest period in their lives. Litigation can drain life savings, cause years of lost sleep and ruin personal relationships. It is also the litigious experience which most shapes someone’s view of lawyers, courts and the law – often in deleterious ways.

Although decision analysis has great potential to communicate legal process to ordinary citizens during that time, its use in that context does not appear widespread. That absence is unfortunate – decision analysis adds both a visual and numeric tool to a litigator’s arsenal to help communicate litigious processes to clients, to think rigorously about each step in a case and give a realistic estimates of the client’s net position upon judgement. It is a great tool for validating a settlement proposal. It is a great tool for communicating litigation procedure and how its associated costs can affect the client’s net position upon judgement.

Decision Tree and EV in Litigation

An example of a decision tree with associated expected value calculations. This example follows a hypothetical case with a preliminary hearing and a range of damages assessments if successful at the main hearing. It also includes a deduction for estimated legal costs of the other party. I have recreated this decision tree here, where users can manipulate these inputs and see how they affect the overall expected value.

At the end of this post, I set out some of the literature on decision analysis – how to prepare a decision tree, how to calculate expected value and, importantly, the limitations and correct use of decision analysis.

If you’re a litigator wanting to find a edge with your clients then you should consider investing a little time to learn the basics of decision analysis. You don’t need to master sophisticated software – a basic decision tree can be drawn by hand on the back of a pad. You’ll see the maths is not that hard – it can be done in a simple spreadsheet. (I’ve built a prototype, online, malleable example here to assist in getting a grasp on some of the basics.) Once you understand the basics, the value add comes from your deep understanding of litigious process and measured judgement calls on likelihood and value of winning or losing an argument. What will have changed is that both your client and you will have more clarity and a more robust basis for your intuition.

Using EV in Settlement Negotiations

An expected value calculation can be used as an starting point for settlement negotiations in litigation. It supplements, rather than ignores, other ‘intangible’ considerations such as broader strategy, reputation and stress.

Designing better decision analysis with #legaltech #legaldesign

I want to encourage anyone in the legal design community looking for a new project to consider looking into decision analysis in litigation and developing tools to bring its interface and usability into the 21st century. Start by doing an image search of ‘decision tree in litigation’. The results look very 1990’s. They look like they belong in a statistics journal, not something you would give to a client to provide guidance and simplify a complex, stressful process. They could do with a make-over.

I have built a simple online tool to illustrate some of the concepts with a malleable example. On that page the user can manipulate the damages, the award and the probabilities and see in each instance how that affects the expected value of the litigation. I hope it can be a useful tool for lawyers first learning about expected value.

My prototype also has a ‘toggle’ button. Although rudimentary, it is an example of the type of dynamic interaction that a lay client could have with these decisions trees. By clicking it, the client is progressed through the litigation and can see how the expected value changes as the procedure moves closer and closer to judgement. Whilst in a settlement negotiation the client could, for instance, hypothesise about the risks they face now, versus the risks they might face after the next hearing – “should I make that offer now, or should I wait a month and make a higher offer then?” Hopefully similar functionality could be embedded in a more sophisticated decision tree tool.

But more importantly, I hope the prototype can be a taster for someone more adept at product development than I, to develop it into something truly useful and beautiful. Hopefully that new tool can make the decision tree mapping and calculation analysis straightforward for the lawyer. The client will be better informed earlier in the litigious process. It can encourage settlements, crystallise strategy and generally make the litigious process far less daunting for its participants.

Background reading on decision analysis

There is lots of literature available on decision analysis in the litigious context. Here are some starters:
Settlement perspectives: A beginners guide to setting up a decision analysis. The site includes a series of articles on decision analysis.
Aaron & Brazil: Their paper includes a good discussion about humility, being realistic with inputs, being aware of lawyer bias, some basics of probability theory and quantification, including costs, and an appreciation of intangible factors in litigation.
Lewis and Rocca: Includes a sample decision tree analysis, more depth on the maths and a warning about ‘garbage in – garbage out’.
Litigation Risk: More in depth analyses, including its use by large corporations and in-house to assess litigation cases and portfolios.

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