Study Case Lawsuit Defense Strategy
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
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