Plaintiff Does Not Litigate
Earnings
15,000
Plaintiff Litigates
Plaintiff Wins
Verdict
22,000
Costs
3,000
Expenses
(5,000)
Outcome: Gain
20,000
Plaintiff Loses
Plaintiff’s Costs
(6,000)
Defendant’s Costs
(4,000)
Outcome: Loss
(10,000)
Figure 9.8 Application of Expected Value to Decision to
Litigate
Step 4: Determination of the Probability of Outcomes
Estimate (probably by intelligent guesswork) the probability of each outcome.
Assume that the probability of the plaintiff winning is 20% and of losing 80%.
Step 6 Calculation of Expected Value
Use these probabilities to work out the expected value of the litigation. The
expected value of an outcome is the probability of an outcome multiplied by
the net value of the outcome. The expected value of a decision is the sum of
the expected values of all possible outcomes. Applying this here:
Expected Value
Not Litigating
15,000
Litigating
Winning: 20 % x (20,000)
4,000
Losing: 80% x (10,000)
(8,000)
Net Outcome
(4,000)
Difference
19,000
Figure 9.9 Application of Expected Value to Decision to Litigate
Step 7: Highest Net Value
To decide which outcome is best we see which has the higher expected value.
A net benefit will have a positive measure and a net cost a negative measure.
Here the value to the plaintiff of not litigating is $15,000, while the expected
value of litigating is ($4,000). This means that the plaintiff is better off, by
$19,000 [15,000 - (-4,000)] in not litigating.
 |
 |
 |