Traditional approaches to the evaluation of litigation risk focus almost exclusively on trial expected values, the range of potential trial outcomes or a conservative estimate of the same. This is to confuse trial risk with litigation risk, and while trial risk may be useful in assessing the threshold of financial accounting disclosures, it greatly oversimplifies the evaluation of overall claim risk. Such an approach suffers from several simplifications that erode the accuracy and value of risk assessment including:
- Confusing trial value for litigation value
- Failure to price litigation risk in its correct bilateral context
- Collapsing estimates of uncertainty into discrete points resulting in a loss of risk resolution.
The faults inherent in the traditional approach to litigation risk analsis lie in the use of what is essentially a “decision theory” approach. (Decision theory being the theoretical discipline of one-person games.) Very often traditional methods of litigation risk analysis rely on decision trees to examine the spectrum of trial outcomes. This can be useful for framing the problem, but it still suffers from over-simplification of the problem. [more]
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