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Risk Analysis: A Primer. Croatian Mediation Association HRVATSKA UDRUGA ZA MIRENJE HUM Club June 4, 2012. Risk Analysis: A Primer. Math for Mediators. Risk Analysis. Decision trees for evaluating options and alternatives Litigation evaluation of independent risk factors
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Risk Analysis:A Primer Croatian Mediation Association HRVATSKA UDRUGA ZA MIRENJE HUM Club June 4, 2012
Risk Analysis: A Primer @ James E. McGuire, JAMS, 2012
Math for Mediators @ James E. McGuire, JAMS, 2012
Risk Analysis • Decision trees for evaluating options and alternatives • Litigation evaluation of independent risk factors • A Tool, not a Talisman @ James E. McGuire, JAMS, 2012
Risk Analysis • Why? • Analysis helps • What does a “strong case” mean? • How to discount risk avoidance • “Objective” thinking @ James E. McGuire, JAMS, 2012
Risk Analysis Inputs • Realistic best case = $??? • Identify key variables • Liability • Damages • Key motions or rulings • Probability of each independent variable • Costs/fees through trial @ James E. McGuire, JAMS, 2012
Risk Analysis Example • Plaintiff’s Trial Demand: $300,000 • Questions of fact on liability and damages • “Strong case” • $30,000 fees/costs through trial • Defendant’s Offer: $75,000 • “Good defenses” • $30,000 fees/costs through trial • Should the plaintiff accept? @ James E. McGuire, JAMS, 2012
Likelihood of WinningLiability 0 1 @ James E. McGuire, JAMS, 2012
Likelihood of WinningDamages of $300K 0 1 @ James E. McGuire, JAMS, 2012
Create visual decision tree Damages Liability 60% ACME v. DELTA 50% Settlement @ James E. McGuire, JAMS, 2012
Then Do the Math • $300,000 x 0.5 = $150,000 (Liability) • $150,000 x 0.6 =$ 90,000 (Damages) • Minus Transactional costs (legal fees & costs) $30,000 • $90,000 -$30,000 = $60,000 @ James E. McGuire, JAMS, 2012
Risk-Adjusted Value of $300K Verdict Damages Costs = $30K $90K Liability 60% $150K ACME v. DELTA $60K 50% $75K $75K Costs = $00 Settlement @ James E. McGuire, JAMS, 2012
Try to see it from other side Same set up; likely different numbers Risk Analysis: Symmetry @ James E. McGuire, JAMS, 2012
Defendant’s Math • $300,000 x 0.4 = $120,000 (Liability) • $120,000 x 0.5 =$ 60,000 (Damages) • PLUS Transactional costs (legal fees + costs) $30,000 • $60,000 +$30,000 = $90,000 @ James E. McGuire, JAMS, 2012
Risk-Adjusted Valueof $300K Verdict: Defendant’s Tree Damages Costs = $30K + $60K Liability 50% $120K ACME v. DELTA $90K 40% $75K $75K Costs = $00 Settlement @ James E. McGuire, JAMS, 2012
ZOPA (Zone of Possible agreement) $60K $90K @ James E. McGuire, JAMS, 2012
Risk AnalysisMinimize GIGO • Any tool can be manipulated • “Garbage In; Garbage Out” • Use inputs from entire team • Associate(s) • Client • Partner • Avoid groupthink @ James E. McGuire, JAMS, 2012
Objective Benchmarks • Costs/fees for typical case • Actual results of comparable cases • Liability and damages • Likelihood of actually going to trial • <2% of all civil filings end in trial • [U.S. Federal courts; state courts vary but all courts =<10% of trials from civil filings] @ James E. McGuire, JAMS, 2012
Easy to use Fast set-up Can handle multiple variables Efficient for repeat trials and variations Paper & Pen v. Software @ James E. McGuire, JAMS, 2012
Risk Analysis @ James E. McGuire, JAMS, 2012
Risk Analysis Rollback @ James E. McGuire, JAMS, 2012
Reading outside the box • Risk analysis software: • TreeAge Pro • TreeAge Software, Inc. • www.treeage.com @ James E. McGuire, JAMS, 2012
