Litigators can learn a lot about evaluating the settlement value of a case from mathematicians and poker players. Typically, litigators evaluating the settlement value of a case think about factors such as the liability facts, damages, venue and skill of opposing counsel. These factors swim around the lawyer’s brain and the the lawyer spits out an estimated settlement value without really spending time to identify the various possible outcomes and the probability of each outcome occuring.

Poker players and professional gamblers speak in terms of Expected Value (EV) and try to base their decisions on the decision that yields the maximum EV.

Lawyers could do a better job of determining the settlement value of a case by using these factors and their judgment to determine the probability of various identified outcomes and then calculating the Expected Value (EV) of the case.

Explanation of Expected Value (EV)

Expected Value (EV) is a math calculation used to describe the long-term average outcome of a given scenario. Wikipedia has a good section on expected value.

Here is a simple explanation: if you flip a coin and someone gives you $1 every time it lands on heads and zero when it lands on tails, then the expected value of each coin flip for you is 50 cents, since half the time you will get zero and half the time you will get $1.

The calculation looks like this: (1/2 x 1) + (1/2 x 0) = .5. If you don’t trust my math, you can use this on-line expected value calculator.

EV calculations can be useful in evaluating the settlement value of a case.

Example of Expected Value in a Liquidated Damages Case

Say there is a lawsuit pending with purely economic damages of $100,000. The defendant agrees on the damage amount, but denies liability. If the parties also agree that there is a 50% chance that the plaintiff will win at trial, then the expected value of the case is $50,000: (1/2 x 100,000) + (1/2 x 0) = 50,000. That is not an opinion, that is math. In that situation, the case should settle for $50,000.

Expected Value Calculation in Personal Injury Cases

Let’s say you have a personal injury case. The plaintiff has decided to ask the jury to award $300,000 in damages. The defendant denies liability. The defendant also contends that if the jury does find for the plaintiff, then a reasonable verdict would be $50,000. To calculate the EV in this case you need to use your skills as a lawyer to decide on the probability of various outcomes at trial.

This could look something like this:

Defense verdict- $0: 50%

Plaintiff verdict– $300,000: 10%

Plaintiff verdict– $50,000: 10%

Plaintiff verdict– $100,000: 10%

Plaintiff verdict– $200,000: 10%

Plaintiff verdict– $250,000: 10%

Expected Value = $90,000. (using EV calculator).

While I am not advocating basing all settlement decisions on the calculated expected value, I am suggesting that using the calculation would allow lawyers to make more informed recommendations to their clients regarding settlement.

But it’s Not that Simple

These examples assume that the expected value for the plaintiff is the same as for the defendant. That is, the defendant’s loss equals the plaintiff’s gain. In litigation, however, that is not the case due to the affect of attorney’s fees and case expenses. I will look at how these factors impact settlement values in a later post.