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Scenario analysis: Better insights with the power of perspective

Date posted: 
April 18, 2022

Decision analytics is a highly effective tool for understanding and explaining litigation prospects and risks. The inherently uncertain nature of litigation is what makes decision analytics so effective - after all, making smart decisions in the face of uncertainty is the core purpose of decision analytics.

Identifying uncertainties

When applying decision analytics in practice, the key uncertainties of a given case need to be identified, analyzed and arranged together to produce a clear overall view on prospects.

The process of identifying uncertainties is relatively straightforward where there is a small number of potential outcomes. In these situations, legal teams working on a case will be well equipped to identify each uncertain outcome in precise terms.

Example 1: In a litigation for breach of contract, a key uncertainty will be whether or not the court finds that the defendant committed an actionable breach. Identifying this uncertainty is straightforward because there are only two potential outcomes. Either (1) the court will find a breach, or (2) the court will find no breach.

But other uncertainties are more difficult to identify because they involve ranges of many potential outcomes.

Example 2: If the court finds a breach was committed, a further key uncertainty will be what damages the plaintiff is awarded. Identifying this uncertainty is not straightforward because there is a range of many potential damages awards the court might determine. 

The traditional approach for dealing with ranged uncertainties in decision analytics is to identify a small number of indicative outcomes from the range of all potential outcomes. This typically involves identifying "high", "medium" and "low" (or "best"/"base"/"worst") indicative outcomes from the range, and then analyzing overall prospects by reference to those indicative outcomes.

Problems with the high/medium/low approach

While the high/medium/low approach has been widely used in decision analytics, it isn't without drawbacks:

  • Using a high/medium/low approach tends to add a lot of complexity to visual plans used in decision analytics, without adding any real insight. This extra complexity can be counter-productive for decision-makers who need to understand and interpret visual plans.
  • Another problem arises when trying to assign probabilities to each indicative high/medium/low outcome. Assessing probabilities for "indicative" outcomes isn't an intuitive process, and to do it properly you really need to understand how to convert a probability density function (or large-valued probability mass function) into a subset of outcomes. This task is challenging even for seasoned decision analytics pros, so it's not something most legal teams are well equipped to handle.
  • A final drawback of the high/medium/low approach is that it doesn't permit more than a single view on overall prospects, known as an "evaluation". The reality is that, in practice, most decision-makers feel more confident after they've had a chance to consider multiple evaluations for various different scenarios.

A new approach with scenarios

Litigaze's patent-pending scenario analysis feature is designed to solve all the problems of the high/medium/low approach, while providing decision-makers even more useful insights on complex litigation uncertainties.

To see how dramatic an improvement scenario analysis is, compare the following two visual plans which represent exactly the same hypothetical breach of contract litigation.

The old way, without scenario analysis:
The same, but using scenario analysis:

Using scenario analysis in Litigaze takes a few simple steps:

Step 1: Add variables

First, you'll need to add some variables to your plan. These could be financial variables (like a damages award), chance variables (like the chance of establishing breach of contract), or both.

Step 2: Add scenarios

Next, you'll need to add scenarios to your variables to represent different viewpoints on those variables.

  • For the optimistic scenario, change the variable settings to reflect how you see that variable from an optimistic viewpoint.
  • For the pessimistic scenario, do the opposite and set the variable to reflect a pessimistic viewpoint.

Step 3: Change scenarios, see new perspectives!

Once you've added scenarios to your variables, they'll appear in the scenarios menu, which you can access from the sidebar (TIP: click "M" on your keyboard to toggle the sidebar menu).

In the scenarios menu, you can easily switch variables between different scenarios with a simple click. To change all variables at once, click the scenarios headings.

To see how changing scenarios affects your plan evaluation, simply switch scenarios after running an evaluation.