Applying the Kelly criterion to lawsuits

Author: Barnett, Tristan

Source: Law, Probability and Risk, Volume 9, Number 2, 8 June 2010 , pp. 139-147(9)

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Abstract:

This article analyses the risks and rewards involved in the litigation process, and whether it is beneficial for a victim to file a lawsuit against the injurer given there are risks involved if unsuccessful in court. The analysis can be used to determine whether a victim should have legal representation in court to obtain a higher expected payout, or minimize risk through legal costs by representing themselves in court, even though the expected payout is reduced without legal representation. Analysis is given to obtain insights as to how much a victim should accept in an out-of-court settlement. A working example from an employment dispute is given to demonstrate the methodology.

Keywords: dispute resolution; litigation; negotiation; casino mathematics; Kelly criterion; employment

Document Type: Research article

DOI: http://dx.doi.org/10.1093/lpr/mgq002

Publication date: 2010-06-08

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The journal publishes papers that deal with topics on the interface of law and probabilistic reasoning. These are interpreted broadly to include aspects relevant to the interpretation of scientific evidence, the assessment of uncertainty and the assessment of risk. The readership is primarily academic lawyers, mathematicians, statisticians and social scientists with interests in quantitative reasoning.