Forecasting Damages Using Monte Carlo Simulation
In our last post, we discussed using @RISK software to navigate decision analysis challenges and determine fair market value of intellectual property. This final post will continue exploring ways to enhance your litigation strategy by using @RISK to forecast damages.
A common first step in litigation strategy is to calculate the case’s settlement value. As discussed in our past legal blog series (download here), settlement calculations can quickly become inundated with countless variables and uncertainties. These legal uncertainties raise questions about estimating damages, a crucial step in the value calculation.
Financial forensics specialists Solis Financial Forensics, LLC use Palisade’s @RISK software to forecast damages in a variety of complex legal cases.
“If I’m projecting future lost profits, for example, there can be many unknowns,” stated David Solis, founder and managing member of Solis Financial Forensics LLC. “What will lost revenues be in the future? How long is the loss period? What growth rate is expected for future revenues? What would the variable cost percentage have been, had the damaging event not occurred? These are all factors that can be difficult to predict with certainty, because they have not or did not occur.”
With @RISK, you can account for uncertainties such as growth rates, discount rates, and future loss periods to calculate a wide range of damages with indisputable credibility. This easy-to-use software works within Microsoft Excel and uses Monte Carlo simulation to calculate many different possible outcomes, along with the probabilities they will occur. Additionally, you can quickly create models within your existing spreadsheets that show potential lost earnings, lost profits, and the diminishment of value.
“@RISK allows me to say that I looked at a range of possible outcomes in regard to unknown variables, and based on my analysis incorporating those ranges, I believe lost profits to be X with a reasonable degree of certainty,” said Solis.
By combining the results received from @RISK with your litigation decision tree, you can map out case outcomes with increased accuracy.
At Palisade, the makers of PrecisionTree, @RISK, and other leading risk and decision analysis solutions, we provide cost-effective, easy-to-use analytics to companies who want to make better decisions. To learn more about how we can help you speed up negotiations, determine fair market value of IP, or even solve a different challenge you might be facing, check out the previous series post or request a free trial of @RISK and PrecisionTree, included in the DecisionTools Suite.