Decision Trees- a tool for better decision-making
-
Upload
omar-ha-redeye -
Category
Education
-
view
1.369 -
download
2
description
Transcript of Decision Trees- a tool for better decision-making
![Page 1: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/1.jpg)
Decision Trees
-- a tool for better decision-making
Rebecca A. Bowman, Esq., P.E.
![Page 2: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/2.jpg)
Why is litigation decision-making difficult?
Complexity
Uncertainty
![Page 3: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/3.jpg)
Complexity
Facts
What actually happened?What evidence is there?Can evidence be acquired?Is the evidence admissible?Is the evidence believable?
![Page 4: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/4.jpg)
Complexity
The LawStatutesBest precedents
LiabilityWill there be liability?Under which statutes?
![Page 5: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/5.jpg)
Complexity
DamagesWhat types of damages?What evidence/documentation is available?Is the evidence/documentation persuasive?Punitives?
![Page 6: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/6.jpg)
Complexity
Other factors – almost all involve uncertainty
Direct costImpact of the trial on businessImpact of outcome on businessValue of injunctionImportance as precedence
![Page 7: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/7.jpg)
Complexity
Other factors – almost all involve uncertainty
Time to judgmentTime to end of appealsTime value of moneyAttitude toward risk
![Page 8: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/8.jpg)
Intuition
Uncertainty and complexity usually dealt with intuitionIntuition includes biasIntuition may not suggest alternatives/answersCan’t document/assess/audit
![Page 9: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/9.jpg)
Systematic Approach
Deal with complexity
Understand factors of uncertainty
Explicitly account for uncertainty
Language to deal with uncertainty - probability
![Page 10: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/10.jpg)
Estimating probability
Min Max
“Very likely” _____ _____“Probably” _____ _____“Almost certain” _____ _____“Likely” _____ _____
![Page 11: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/11.jpg)
Disclosure of unasserted claims
Possible claim – no disclosureProbable claim – disclosure
Reasonably certainExtrinsic evidence strong enough to establish presumptionProspect of non-assertion slight
![Page 12: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/12.jpg)
ProbabilityExpert subjective judgment
Based on experience and informationDon’t know? 50-50
Expected value – not precisionCharacteristics of alternativesPotential outcomesLikelihood of outcomes
Value of uncertaintyAttitude toward risk-taking
![Page 13: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/13.jpg)
Judgment
If you judge by outcomes,
Decisions will be made
to pursue lowest probability
of bad outcome
![Page 14: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/14.jpg)
A Good Decision
Logically consistent
with knowledge
and preferences
![Page 15: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/15.jpg)
Logic for Decisions
Alternatives “What can I do?”
Information “What do I know?”
Values “What do I want?”
![Page 16: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/16.jpg)
Value ConsiderationsDominated by litigation uncertainties and monetary outcomesOnly obvious when quantified explicitly
i.e. impact on sales from negative publicity
Which outcome do I really prefer?How much do I prefer that outcome?
![Page 17: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/17.jpg)
Logic for quantification
Break problem in simple pieces
Delete unimportant factorsUse judgment Use sensitivity analysis
Focus on the few, critical issues
![Page 18: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/18.jpg)
Risk Management Process
Structure the problemAssess probabilitiesAssess outcomesAnalyze the structureEvaluate the probabilitiesIterate if necessaryDecide
![Page 19: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/19.jpg)
Case I: Assembler v. Parts
Assembler is suing PartsAlleged defective components from PartsCaused high return rate of Assembler’s productsDirect damages (value of parts) = $1MConsequential damages (returns, repairs, damage to reputation) = $3M
![Page 20: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/20.jpg)
Case I: Assembler v. Parts
Finding of no liability means no consequentialsNegative outcome would have adverse publicity which would cost Parts a pending contract worth $1M of profit
![Page 21: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/21.jpg)
Objective
Projection of net present value of trial outcome.
What would you ask a fortune-teller if you could?
![Page 22: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/22.jpg)
Step 1 Establish a discount rateFor our case study, we’ll use 10%
$1 paid out in is = X$ today 1 year $.91 2 years $.83 3 years $.75 4 years $.68 5 years $.62
![Page 23: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/23.jpg)
Step 2Identify significant factors
of uncertainty
Finding of direct liabilityFinding of consequential liabilityBusiness lossesLitigate or settle
![Page 24: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/24.jpg)
Step 3Build a decision tree
Decision Direct Consequential Business Loss Liability Liability ($3M) ($1M)
($1M) Yes Yes
No Yes Yes
Litigate No
No
No
Settle
![Page 25: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/25.jpg)
Step 4Assign probabilities
Decision Direct Consequential Business Loss Liability Liability ($3M) ($1M) ($1M) Yes Yes .6
.6 .4 No Yes Yes .6 .6Litigate .4 No
.4 No
.4 No
Settle
![Page 26: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/26.jpg)
Step 5List 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 .6Litigate .4 No
.4 No $1M
.4 No $0
Settle ?
![Page 27: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/27.jpg)
Step 6: Evaluate from the left
the left to get expected valuesDecision 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 $1.6MLitigate =2.04M =$0.64M
.4 x $1M=$.4M $1M$2.04M .4 x $0 = $0 No $0
Settle <$2.04M
![Page 28: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/28.jpg)
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
![Page 29: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/29.jpg)
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
![Page 30: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/30.jpg)
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
![Page 31: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/31.jpg)
Case 2: Driver v. MachineDriver is suing Machine for personal injuryMachine failed to provide safety guardWorkers’ comp claim settledSettlement offer of $1.5MLow liability estimate of $2MHigh liability estimate of $5MBest guess is $4M
![Page 32: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/32.jpg)
Step 1 Establish a discount rateFor our case study, we’ll use 10%
$1 paid out in is = X$ today 1 year $.91 2 years $.83 3 years $.75 4 years $.68 5 years $.62
![Page 33: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/33.jpg)
Step 2Identify significant factors
of uncertainty
Finding of direct liability
Amount of damages
Litigate or settle
![Page 34: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/34.jpg)
Step 3Build a decision tree
Decision Liability Damages Hi ($5M) Yes Med ($4M) Lo ($2M) Litigate
No
Settle ($1.5M)
![Page 35: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/35.jpg)
Step 4Assign probabilities
Decision Liability Damages Hi ($5M) .2 Yes Med .6 .5 ($4M) Lo .3 ($2M) Litigate
.4 No
Settle ($1.5M)
![Page 36: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/36.jpg)
Step 5List 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
![Page 37: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/37.jpg)
Step 6Evaluate from the rightto 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
![Page 38: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/38.jpg)
Step 7Evaluate from the left to
obtain probability distributionDecision 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
![Page 39: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/39.jpg)
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
![Page 40: Decision Trees- a tool for better decision-making](https://reader033.fdocuments.us/reader033/viewer/2022061118/54698cb7af795946718b6077/html5/thumbnails/40.jpg)
Step 8: Plot sensitivity to find impact of critical factors
25% 50% 75% Probability Value
-$1M
-$2M
-$3M
Settlement of $1.5M