# Study Case Lawsuit Defense Strategy

Topics: Decision theory, Expected value, Random variable Pages: 2 (349 words) Published: May 7, 2013
1.DECISION TREE

Allied Accepts John's
Offer of \$750,000\$750 000

John accepts Allied counteroffer

Allied counteroffers with \$400 000

Based on the decision tree above, I must fold back the decision tree in order to calculate the expected values and to find the optimal decision. Hence, the decision that I will fold back is at node No. 1 which is John accepts the offer of \$750 000 and at node No. 4 which is Allied rejects John’s offer of \$600 000 because both of them seem unrealistic and gives disadvantage to the both parties. So, now I can be able to calculate the expected values as below:

EV (Node 3)= (1500 000 X 0.3) + (750 000 X 0.5) + (0 X 0.2)= \$825 000 EV (Node 5)= (1500 000 X 0.3) + (750 000 X 0.5) + (0 X 0.2)= \$825 000 EV (Node 4)= (600 000 X 1.0)= \$600 000

EV (Node 2)= (400 000 X 0.1) + (825 000 X 0.4) + (600 000 X 0.5)= \$670 000 EV (Node 1)= (400 000 X 0.1) + (825 000 X 0.4) + (600 000 X 0.5)= \$670 000

2.I recommend that Allied should not accept the offer of \$750 000 from John. It is because, based on the expected value at node 1, it show that \$670 000 which is much cheaper than from the offer of \$750 000 from John. So, the strategy to counteroffer of \$400 000 is better than accepting John’s offer.

3.If John accepts Allied's counteroffer of \$400,000, so there is no further action required. If John rejects Allied's counteroffer and decides to have a jury‘s settlement amount, Allied must prepare for a trial. If John counteroffers with \$600,000, so Allied should accept John's counteroffer.

4.RISK PROFILE

P (0)= 0.2 X 0.4= 0.08
P (400 000)= 0.1
P (600 000)= 0.5
P (750 000)= 0.5 X 0.4= 0.2
P (1500 000)= 0.3 X 0.4= 0.12____ Total Probabilities 1.00