applying concepts from finance behavioral economics and game theory to improve case management and legal advice to clients 2013 David Chariton amp Myer Sankary 1 MOTIVATION WHATS THE PROBLEM ID: 563489
Download Presentation The PPT/PDF document "Strategic decision-making for lawyers" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Strategic decision-making for lawyers
applying concepts from finance, behavioral economics, and game theory to improve case management and legal advice to clients
© 2013 David Chariton & Myer
Sankary
1Slide2
MOTIVATION
WHAT’S THE PROBLEM? What should lawyers know about finance and economics?WHY DO WE NEED TO KNOW WHAT WE DON’T KNOW?
What you don’t know can be costly to you and/or your client.PURPOSE OF PROGRAM
To become better informed about the decision making process using concepts from finance, behavioral economics, and strategic game theory. Slide3
It’s a jungle out there!
And we need to learn to survive!Slide4
BAD DECISIONS IN THE SPOTLIGHT
What do these two seemingly different situations have in common?
SCOTT LONDON
LEO APOTHEKERSlide5
Problem Solving & DecisionsSlide6
Decisions – Fast and slow
GUT FEELING/ INTUITION
COGNITIVE RATIONAL ANALYSIS
FAST/
INSTINCTIVE
SLOW
/ THOUGHTFUL
Daniel
Kahneman
, “Thinking Fast and Slow”Slide7
INTRO TO KEY CONCEPTS
VALUE – fundamental concept in financeMODIFIERS TO VALUE
TIMERISK / UNCERTAINTYRELATIVE VALUEMONETARY VS. NON-MONETARY VALUEOPPORTUNITY COSTS
SUNK COSTS
© 2013 David Chariton & Myer
Sankary
7Slide8
IRS DEFINITION OF “FMV”
© 2013 David Chariton & Myer
Sankary
8
“…the
price that would be agreed on between a willing
buyer
and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts
.”
So… everyone should agree on the value of everything!
Pablo Picasso's
“Nude
, Green Leaves and
Bust”
Sold for $106.5M in 2010
36,000
sqft
(9 bedrooms + 13 bathrooms) house in Beverly Hills.
On market for $49.5M in 2010Slide9
What is the value of $1M?
© 2013 David Chariton & Myer
Sankary
9Slide10
What is the value of $1M?
© 2013 David Chariton & Myer
Sankary
10
TODAY
RECEIVED IN 10 YEARS
VS.
DISCOUNTED PRESENT VALUE
TIME VALUE OF MONEYSlide11
What is the value of $1M?
© 2013 David Chariton & Myer
Sankary
11
$1M FOR CERTAIN
10% CHANCE OF $10M
VS.
RISK-REWARD TRADEOFF
SAME “EXPECTED VALUE”Slide12
What is the value of $1M?
© 2013 David Chariton & Myer
Sankary
12
$1M CASH
CHANCE OF AVOIDING
EXTENDED PRISON TERM
VS.
RELATIVE VALUE VS. ABSOLUTE VALUE
MONETARY VS. NON-MONETARY VALUESlide13
Opportunity costs / sunk costs
© 2013 David Chariton & Myer
Sankary
13
OPPORTUNITY COSTS
What else could you be doing with your money, time, energy, etc.?
SUNK COSTS
Don’t throw good money after bad!Slide14
DECISION-MAKING MODEL
DECISION & OUTCOME “TREES”
IMPACT OF RISKRISK/REWARD TRADE-OF
“DIVERSIFIABLE” VS. “NON-DIVERSIFIABLE”GAME THEORYNOT ACTING IN VACUUMCONSIDER OTHER PLAYER(S) DECISION-MODEL
HEURISTIC BIASES
FAULTY ASSUMPTIONS AND/OR LOGIC
MISALLIGNED STRATEGIES/GOALS
“PREDICTABLY IRRATIONAL”
DECISIONS
© 2013 David Chariton & Myer
Sankary
14Slide15
SIMPLE DECISION TREE
© 2013 David Chariton & Myer
Sankary
15
4
th
& Goal on the 2 yard line
Line up for a field goal
Go for it
Pass
Run
QB Sneak
Fake FG
Kick FG
Run
Pass
End run
Off-tackle
35% chance of 7 points
42% chance of 7 points
31% chance of 7 points
21% chance of 7 points
24% chance of 7 points
93% chance of 3 pointsSlide16
DON’T FORGET THE OTHER COACH!
© 2013 David Chariton & Myer
Sankary
16
Fake Field Goal
Pass
Run
3
1% chance of 7 points
Expects Fake
Caught Off-guard
OFFENSE
DEFENSE
Expects Fake
Caught Off-guard
3% chance of 7 points
12% chance of 7 points
24% chance of 7 points
25%
25%
7
5%
7
5%
21%
24%Slide17
Game theory – EXAMPLE
© 2013 David Chariton & Myer
Sankary
17
PLAYER B
PLAYER A
1
1
0
10
10
0
5
5
“the prisoners’ dilemma”
TIGHT-LIPPED
SING
SING
TIGHT-LIPPEDSlide18
BEHAVIORAL ECONOMICS
© 2013 David Chariton & Myer
Sankary
18
CLASSICAL ECONOMICS
People act rationally based on all available information.
BEHAVIORAL ECONOMICS
People
are subject to biases, both conscious and not.Slide19
Which option is more effective to get employees to save some of their salaries?
Opt in?
Give employees all the information about their options and let
them choose whether or not to opt-into the 401k?Opt-out?
Default is automatic enrollment in 401 k and employee can opt – out. Slide20
© 2013 David Chariton & Myer
Sankary
20
Impact of perspective?
STEELERS FAN: “Clearly a Touchdown!”
CARDINALS FAN: “He’s Out of Bounds!”Slide21
RATIONALIZING VS. RATIONAL
BRAND NEW BENTLEY CONTINENTAL GT
© 2013 David Chariton & Myer
Sankary
21
~$200,000
~$60,000
2009 NISSAN GT WITH 55K MILES
WHICH WOULD YOU RATHER VALET?Slide22
BACK TO LONDON & APOTHEKER
How and why did they make the decisions they did?
Where did they go wrong?
What lessons have we learned from finance and economics?Where do we go from here?
A Cautionary Tale for All Creative, Intelligent ProfessionalsSlide23
Thank you!
MYER SANKARY, Esq.
Advanced Mediation Services/ ADR Services, Inc.myerj@sankary.com818
-231-2965DAVID CHARITONFinance / Economics / Strategy
dave@minersmills.com
323-481-6297
Disclaimer – all images and photos may be protected by copyright and they may not be used or copied for any purpose other than in connection with this
powerpoint
.
© 2013 David Chariton & Myer
Sankary
23