How Decision Trees Can Help Your Right-Brain Clients Arrive at Successful Conclusions

A few of us are attending the American Bar Association (ABA) Annual Meeting in Toronto this week, and we’ll be posting a few updates on some sessions.

Rebecca Bowman of Pittsburgh, Pennsylvania spoke on how decision trees can be used in the negotiation and arbitration processes, specifically when dealing with right-brain clients.

When we can’t consciously calculate something, we’ll do it unconsciously, and we call it intuition. But intuition also includes biases, and can exclude important information and make it much less persuasive case to an auditor.

Decisions in the litigation process are incredibly complex, and involve a wide variety of factors, almost all involve uncertainty. A systematic approach can help create greater certainty. Decision trees provide the language to deal with the uncertainty and probability.

Words mean different things to different people. Look at terms like “very likely,” “probably,” “almost certain,” and “likely.” Using these terms can result in misunderstandings with clients, and potentially malpractice complaints. Using a decision tree provides more precision as to what different types of probability actually means in terms of outcome for the client.

Probability is based on a subjective expert opinion. If you have no information, you have to estimate 50/50. If we judge only by outcomes, decisions will be made to pursue the lowest probability of a bad outcome.

A good decision is logically and internally consistent with knowledge and preferences, but if the knowledge and preferences are not examined, it’s still guessing.

Value considerations are dominated by litigation uncertainties and monetary outcomes, but this is only obvious when quantified explicitly, for example, looking at impact on sales from negative publicity. Examining values might help clients identify the outcomes they really prefer. The client may just want a public apology instead of the forms of restitution available from litigation.

The logic for quantification is to break the problem into smaller pieces to delete unimportant factors and focus on a few critical factors. The Risk Management Process consists of: structure the problem, assess the probabilities, assess outcomes, analyze the structure, evaluate the probabilities, iterate if necessary, and decide.

Case Study

Assembler (A) is suing Parts (P) for allegedly defective components provided by P. Obviously if there is no finding of liability there is no consequentials. Negative outcomes would have adverse publicity which would cost P a pending contract worth $1M of profit.

The objective is to determine the projection of Net Present Value (NPV) of trial outcome.

1) establish a discount rate

2) identify significant factors of uncertainty. In litigation this will include finding of direct liability, consequential liability, and business losses

3) build a decision tree, mapping out the effects of different factors, and the costs of direct liability, consequential liability, and business loss

4) populate the decision tree by assigning probabilities to each branch of the decision tree

5) List the net outcomes, which provides a monetary amount for each branch of the decision tree

6) multiply the net outcome by the probability of each potential branch of the decision tree

7) calculate the probability distribution for each outcome from left to right
At this point the estimates of each probability can be reassessed. Clients can also look at outcomes in relation to each other and provide a more realistic estimate of business loss.

8) plot the sensitivity to find impact of critical factors
Different settlement amounts are plotted on the y axis, and the probability of outcomes are plotted on the x axis. The slope of the probability curve allows an examination of the impact of if the assumptions are wrong.

Right-brain clients instantly understand sensitivity because they like graphs and colour lines, and it allows them to challenge their assumptions. Possibility of appeals and time-value assumptions can be discussed with clients to help them make litigation decisions and determine appropriate settlement amounts.

A copy of Rebecca Bowman’s slides are available here.