Decision Trees - a tool for better decision-making
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Uploaded on behalf of Rebecca A. Bowman. Presented at the ABA Annual Meeting, Toronto, on August 4, 2011
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Decision Trees - a tool for better decision-making
- 1. Decision Trees -- a tool for better decision-making Rebecca A. Bowman, Esq., P.E.
- 24. Step 3 Build a decision tree Decision Direct Consequential Business Loss Liability Liability ($3M) ($1M) ($1M) Yes Yes No Yes Yes Litigate No No No Settle
- 25. Step 4 Assign probabilities Decision Direct Consequential Business Loss Liability Liability ($3M) ($1M) ($1M) Yes Yes .6 .6 .4 No Yes Yes .6 .6 Litigate .4 No .4 No .4 No Settle
- 26. Step 5 List net outcomes Decision Direct Consequential Business Loss Outcomes Liability Liability ($3M) ($1M) ($1M) Yes $5M Yes .6 .6 .4 No $4M Yes Yes $2M .6 .6 Litigate .4 No .4 No $1M .4 No $0 Settle ?
- 27. Step 6: Evaluate from the left the left to get expected values Decision Direct Consequential Business Loss Outcomes Liability Liability ($3M) ($1M) ($1M) Yes $5M Yes .6 x $5M=$3M .6 x $4.6M =$2.76M .4 x $4M=$1.6M $4M Yes Yes $2M .6 x $2M=$1.2M .6 x $3.4M .4 x $1.6M Litigate =2.04M =$0.64M .4 x $1M=$.4M $1M $2.04M .4 x $0 = $0 No $0 Settle <$2.04M
- 28. Step 7: Evaluate from the left to obtain probability distribution Decision Direct Consequential Business Loss Outcomes Probability Liability Liability ($3M) ($1M) ($1M) Yes $5M .6x.6x.6 Yes .6 x $5M=$3M =.216 .6 x $4.6M .6x.6x.4 =$2.76M .4 x $4M=$1.6M $4M =.144 Yes Yes $2M .6x.4x.6 .6 x $2M=$1.2M =.144 .6 x $3.4M .4 x $1.6M Litigate =2.04M =$0.64M .4 x $1M=$.4M $1M .6x.4x.4 $2.04M =.096 .4 x $0 = $0 No $0 =.400 Settle <$2.04M
- 29. Step 8: Plot sensitivity to find impact of critical factors 25% 50% 75% Probability Value -0.4M -0.8M -1.2M -1.6M -2.0M
- 30. Step 8: Plot sensitivity to find impact of critical factors 25% 50% 75% Probability Value -0.4M -0.8M -1.2M -1.6M -2.0M Settlement of $.8M Settlement of $1.4M
- 34. Step 3 Build a decision tree Decision Liability Damages Hi ($5M) Yes Med ($4M) Lo ($2M) Litigate No Settle ($1.5M)
- 35. Step 4 Assign probabilities Decision Liability Damages Hi ($5M) .2 Yes Med .6 .5 ($4M) Lo .3 ($2M) Litigate .4 No Settle ($1.5M)
- 36. Step 5 List net outcomes Decision Liability Damages Hi Outcomes ($5M) $5M .2 Yes Med $4M .6 .5 ($4M) Lo .3 ($2M) $2M Litigate .4 $0 No Settle ($1.5M) $1.5M
- 37. Step 6 Evaluate from the right to get expected values Decision Liability Damages Hi Outcomes ($5M) $5M .2x$5M=$1M Yes Med $4M .6x$3.6M .5x$4M=$2M ($4M) =$2.16M Lo .3x$2M=$.6M ($2M) $2M Litigate .4x$0=0 $0 No Settle ($1.5M) $1.5M
- 38. Step 7 Evaluate from the left to obtain probability distribution Decision Liability Damages Hi Outcomes Probability ($5M) $5M .6x.2=.12 .2x$5M=$1M Yes Med $4M .6x.5=.30 .6x$3.6M .5x$4M=$2M ($4M) =$2.16M Lo .3x$2M=$.6M ($2M) $2M .6x.3=.18 Litigate .4x$0=0 $0 .4 No Settle ($1.5M) $1.5M
- 39. Step 8: Plot sensitivity to find impact of critical factors 25% 50% 75% Probability Value -0.4M -0.8M -1.2M -1.6M -2.0M
- 40. Step 8: Plot sensitivity to find impact of critical factors 25% 50% 75% Probability Value -$1M -$2M -$3M Settlement of $1.5M