Mdtryhht

For this question let's use the amount of $200,000 owed to the plaintiff by the defendant in a breach of contract dispute. Is there a rule of thumb for calculating how much you should accept in a settlement?

Some factors:

• The monies owed are for specific damages based on transactions and do not include anything arbitrary such as emotional damages, etc.




• 50% of the $200K is based on a verbal agreement and past practice




• If I had to estimate the odds for a trial, I would put them at 70/30 for the plaintiff

Legal question, statistical (economic) answer.

You need to evaluate the expected value of an outcome which is the sum of the product of probability of winning and the gain (or loss) from winning and the product of the probability of losing and the gain (or loss) from losing.

As a mathmatical expression: Expected value = [P(winning) x gain] - [P(losing) x loss]

For your example, for the plantiff it would be: Expected value = 70% * $200,000 + 30% * $0 = $140,000

Take the expected value and compare that to your settlement. For the plaintiff, any settlement offer above $140,000 to a rational plaintiff (can't emphasize rational enough) is a good deal and they should accept. Any offer below $140,000 would be a good deal for a rational defendant. Going to trial is what happens when the parties are either irrational or estimate different/more favorable odds or outcomes.

Now this doesn't account for lawyers' fees incurred which will depend on whether you are on contingency or not but this can change your outcomes. Because of these fees, many insurance companies tend to just pay out for minor claims since the cost of winning in court even if it is certain is a higher cost than the claim.

Addressing Some Good Comments: There are additional factors such as court fees, time value of money (settlement happens now, courts take years), publicity, establishing or overturning precedent, disclosure, marginal utility of money for the plaintiff, emotions from testifying, deterrence of future law suits, and infinitely more possible elements of a lawsuit that all affect the value of a given outcome win, lose or settle. All good points brought up by commenters (Thank you all). These are important considerations that vary the gain (or loss) from winning and loss from losing but are 1.) beyond the scope of this question and 2.) too broad to be addressed if it was. I think it is keep in mind that this is for the person receiving a settlement offer to estimate and decide within the limits of their assumptions and bounded rationality. An ammended expression is attached to account for fixed costs of trial:

Expected value = [P(winning) x gain] - [P(losing) x loss] - fixed costs of trial

A problem is that statistical "expectation" answers (percentage chance x value) are not a value one may expect to receive. They are a value which on average may be expected if there were repeated events.

For a lawyer, with many clients and cases, an accurate expectation will suggest how they can maximise their overall case wins.

But its a lot less clear how valid that is for a single client with a single case. An analogy might be - roll a die. If the number is 3 - 6 you double your money, 1 or 2 you lose it all. Now, the expectation is that for every pound/dollar you bet, you'll receive a gain of 33% (bet 6 times => lose 2 units, win back 8 units => long term expected gain is 8/6 x your bet value). Now, I as your friend suggest that as you have an expectation of profit, you should borrow heavily and bet your shirt and all you can on a single roll of the dice, and enjoy the outcome! You probably don't want to. Whereas if I suggested betting many times for £100 each, you'd probably like it, because the expectation (long term) will have a very good chance to play off.

With a single case having a 70% chance of a win and 30% chance of a lose, the risk isn't of a gradual gain/gradual loss. You get a single event only, which is that you roll the dice once, and a significant chance of both major gain and major loss. Expectations and trends and averages just aren't a good way to decide it. It can guide, but it shouldn't decide.

A better frame of mind is this. Here are 3 medical situations (not great analogies, but a high-impact single event choice we are all familiar with):

1. Suppose you had to consider whether or not to have surgery to fix a disability (representing the damage you're currently living with in the legal situation). The surgery is guaranteed to be quick and pain-free, so the only question is the likely outcome. You have a 60% chance of complete success but 40% chance of making it worse.


2. As above, but this time there's an 85% chance of success - but also a 15% chance of death.


3. Finally, suppose you had usually-fatal-in-18-months cancer. Chemotherapy would be painful and cost all you have, but gives you a 20% chance of complete cure, a 20% chance of 2 more years of life, and a 60% chance of completely wasting your money and being painful as well.

Can you see from these 3 examples, how in single event cases, many people might reject an 85% success option, or accept a painful and costly 20-40% chance. Different people with different views will often differ on what they'd do. They probably would not just do a "statistical working" to decide between the options, though.

To;Dr - expected gain/loss is a helpful hint, but a bad decider.

In a single case, you need to engage your intuition about the other party, and your own needs and attitudes.

You ask for a rule of thumb, but for a single case, the best rule of thumb is to ask, "what do you think is likely to happen, what are the risks and impact if it works/fails, and what are your attitudes to those".

Is there a rule of thumb for determining the amount one should accept for of a settlement offer?

No. It is entirely up to the injured party to decide how much he is willing to irreversibly give away in a settlement. The party should crunch numbers to ascertain the actual amount he would receive after expenses (first and foremost, attorney fees, if he is represented by one).

Yes, you guys are correct that there isn't one standard number, but in general you should look at the amounts given in similar cases.

I know that isn't as long and drawn out as most answers on here, but truthfully you normally look at awards in past cases.