Decision Tree Analysis in Litigation: The Basics

From John DeGroote’s Settlement Perspectives

A sample Decision Tree, available in .pdf format here.

I remember my first mediation decision tree. It was late in the day, just before impasse, and our mediator was desperate to show my client and me that we had misvalued the case.  As he sketched it for us the approach made sense, but that was no time to pick up a new technique.  His effort ended no different than most attempts to learn about decision trees on the fly — with a confused client, a frustrated mediator and a lawyer about to change the subject.

Fifteen years later I know the value of a decision tree and, just as important, how to really use one — in connection with settlement discussions and as a part of an Early Case Assessment before settlement talks begin. Admittedly they take a little effort and some practice, but whether you’re a lawyer or a mediator or their client, you’ll see one soon. Knowing what a decision tree is and how to diagram yours will be worth the investment.

What Is a Decision Tree Anyway?

Often used in the business world, decision trees are “tree-shaped models of [a] decision to be made and the uncertainties it encompasses,” according to Dwight Golann in Mediating Legal Disputes. A decision tree “shows the various possible outcomes in a lawsuit and helps the parties evaluate the costs, risks and benefits of each outcome,” as Daniel Klein discusses more fully in his article Decision Trees & The Arboretum.

Stated simply, the decision tree is a tool used to value the multiple financial outcomes possible in any litigation — whether summary judgment is granted, the plaintiff “wins” a small amount, or something else happens.

Just as important, decision trees arrive at these values by translating the subjective judgment of trial counsel into monetary terms — as Patrick Lamb and Ron Friedmann and David Post have pointed out before, your trial lawyer’s interpretation of “a good chance of winning” might be very, very different from yours. A decision tree can eliminate this latent disconnect.

The Four Steps in Creating a Decision Tree

Kathleen M. Scanlon’s concise and helpful Mediator’s Deskbook, published by CPR, tells us that decision trees involve four steps:

1. Listing the various possible events which might occur in the course of litigation (or beyond);
2. Considering the costs or gains associated with each possibility;
3. Discounting each possibility by its probability-estimated likelihood that it will occur; and
4. Evaluating the overall picture by multiplying each possibility by its probability.

Make Decision Trees Work for You

You don’t need to wait until your next mediation to learn about decision tree analysis, because putting these four steps into action isn’t hard:

• Identify Outcomes. Consider every outcome in your case that’s a realistic possibility — the plaintiff takes your initial Rule 68 offer, the court grants summary judgment, you lose because you can’t get that videotape into evidence, or whatever. Once you list everywhere the case could possibly go, sketch those outcomes on a “tree” similar to the one above, reproduced in a .pdf format (with additional explanation if you scroll to page two) here.
  
• Consider the Costs of Each Possible Outcome. Once you know every path your case could realistically take, consider what it will cost to get down each path and what you’ll have to pay when you get there — and add those sums to your tree. Summary judgment may be the cheapest way out of the case for a defendant, but it’ll cost something (say, $40,000 in the example above) even if you win. It takes money to get to mediation, trial or appeal, and more money often changes hands once you’re there. Add these amounts together for each branch, and list them on the tree.
• List the Chances That Each Possible Outcome Will Occur. Once you know everywhere you could go and how much it should cost to get there, you’ll need to apply a little judgment to determine the chances you’ll go down each route. You have a 10% chance of a “high” verdict of $500,000 if a plaintiff’s verdict comes in and it will cost $150,000 to get there? Write it down.
• Do a Little Math. Ultimately you’ll add up the probability-adjusted values of all the branches on your decision tree to achieve the expected monetary value, or EMV, of your case. Simply calculate the value of each ultimate outcome, which is the cost of that particular result times the chances that it will occur, and add up all these figures to arrive at a final value.  In the example above with additional details appearing on page two of this link, its $124,000 EMV is nowhere near the $500,000 number the plaintiff may have focused on since he filed the case (shown above as $650,000 since the illustration includes attorneys’ fees), but it’s much higher than the $40,000 it will take the defendant to get through summary judgment, too.

The ability of decision trees to objectively highlight the real monetary value of the case, rather than the number each party may have focused on previously, is one of the key attributes of the tool, and I’ll write more about how to leverage that value here.

A Great — and Free — Tool to Try Decision Trees on Your Own

Dan Klein’s article Decision Trees & The Arboretum, mentioned above, is one of the best practical discussions of decision trees out there, and his website also has a free tool to compute simple decision trees called The Arboretum, where you can “create, save, and modify your own confidential decision trees”; he even has an express option where you can create a single tree without a login here. The decision tree at the top of this post was created using Dan’s online tool, and I’ll be pointing to it again soon.

By the way, that mediator who introduced me to my first decision tree had a point — a point that would have been better understood on mediation day if I had really known how to leverage decision trees in settlement discussions before I got there.

Try a decision tree in your next case. You’ll be glad you did.

                       

John DeGroote

John serves as a mediator and arbitrator in complex business, technology, and intellectual property matters involving parties and interests around the country and beyond — often before litigation is filed. Prior to his service as a mediator and arbitrator, John served as the lead settlement negotiator in hundreds of cases,… MORE >