Question

Adam is being sued for 500 , 000. 50% chance of going to court and winning and 50% chance of going to court and losing. another option is settling for 200,000 and client accepting the offer 80% not going to court.

He would rather settle for 200,000 and not go to court. 2nd best option is going to court and winning but he still would prefer not to go to court over that. least favourite would be going to court and losing.

Assign reasonable utility numbers (on a scale from 0 to 10) for the following scenarios.

Going to court and winning ___

Going to court and losing ___

Settling out of court for $200,000 ___

From Rajay’s point of view, what is the expected utility of trying to settle out of court for $200,000?

From Rajay’s point of view, what is the expected utility of going to court right away

Answer 1

Adam has the ranking for the event as follows - settling outside court, going to the court and winning, going to the court and losing

So, he will have more utility value for the ones he prefers most.

Thus, going to court and winning = utility of 5

going to court and losing = utility of 2

Settling outside court = utility of 8

Rajay accepts 80% of the time not going to the court, so his expected utility should be higher in not going to the court.

The expected utility of settling out of court is 8 and the expected utility of going to court is 2 so that the ratio of 20% and 80% remains intact.