Positive Negotiations, Part 12: Introducing the Bell Curve of Risks

In this video, I introduce and explain the Bell Curve of Risks, a tool that is particularly helpful in visualizing and explaining the range of risks each side faces in going to trial, and how that range of risks can impact settlement negotiations.

Video Transcript

Hello, and welcome.

In this video I am going to discuss a different visual tool, or graphic, we can use to explain the range of risks of trials.  This is the Bell Curve of Risks - and it is particularly helpful in visualizing and explaining how this range of risks can impact negotiations.  

Like the Risk Assessment Matrix that I focused on in my last two videos, the Bell Curve of Risks breaks the concept of risk into two component parts: (1) the probability of a particular event or occurrence actually happening, and (2) the consequence of that event or occurrence should it indeed happen.  

While both of these graphics can be useful tools, there are some differences between them.  So let’s quickly review the Risk Assessment Matrix, and then we’ll take a closer look at the Bell Curve of Risks.    

If you saw my last video, you’ll recall I discussed specific questions that help us make a candid assessment of the probabilities and consequences from each side’s evidence, and how we can then apply the answers to those questions to the Risk Assessment Matrix.  Truncated, these questions are:

• What is the probability a jury will find each party’s evidence credible, coherent, and compelling - with the options on this probability scale being: Rare, Unlikely, Possible, Likely, or Almost Certain?

And:

• What would be the consequence of such findings, with the options on this consequence scale being: Negligible, Minor, Moderate, Major, or Catastrophic?

When we apply the answers to these questions to the Risk Assessment Matrix we get a visual representation of the levels of risk each side faces based on the evidence.  

For example, if it is “Likely” to “Almost Certain” a jury will find Party A’s evidence is credible, coherent, and compelling, and that evidence indicates Party A suffered “Major” to "Catastrophic" damages, we can see from this matrix that the opposing party - I’ll call “Party B” - faces an Extreme risk of an adverse verdict.  In a case like this, Party A has what is essentially “overwhelming” evidence and therefore a very strong case. 

If Party A’s evidence is more mixed, however, it will score lower on the probability and consequence scales.  We may have a situation where it is only “Possible” a jury will find Party A’s evidence is credible, coherent, and compelling, and let’s suppose that evidence at most shows Party A suffered “Minor” to “Moderate” damages.  In this kind of case, and using this particular matrix, the evidence suggests Party B may face a “Moderate” to “High” risk of an adverse verdict.  

And of course, if Party A’s evidence is weak on liability, and it would be “Rare” to “Unlikely” for a jury to find it credible, coherent, and compelling, and that evidence also suggests Party A suffered a “Negligible” to “Minor” damages, then Party B may only face a “Low” to “Moderate” risk in going to trial.    

These are just a few of the many scenarios this matrix can address.  

There are, of course, caveats in using this kind of tool.  It does not, for example, express risk in terms of dollar amounts, and oftentimes the only way parties can resolve their disputes is through some form of agreement or judgment that is reduced to a dollar amount. 

The Bell Curve of Risks depicts risk using the same elements of “Probability” and “Consequence”, but it expresses the array of potential “Consequences” in terms of dollars. This makes it particularly instructive for those involved in settlement negotiations.  

While the Risk Assessment Matrix can help parties appreciate what risks they face with a trial and why those risks exist, the Bell Curve of Risks can help them understand how these risks can, and most likely will, impact negotiations. 

To explain this, I am going to use a classic, symmetrical bell curve. This depicts a “normal” distribution of data points - and here those data points represent the dollar amounts of different trial verdicts. Now I am going to sidestep a discussion on statistical theory, and I must emphasize this curve is not based on real verdict data, but there are reasons to be confident it is instructive to use a curve like this in this context.

Along the X axis, we have the array of consequences, which is now expressed in a range of dollar amounts.  The dollar amount increases the further we move to the right, and decreases the further we move to the left.  On the Y axis we have the array of probabilities, which increases as we go up that axis and decreases as we go down.

By dividing this curve in two, we delineate each side’s area of risk.  On the left side of the curve is Party A’s - or the plaintiff’s - area of risk, and on the right side of the curve as Party B’s - or the defendant’s - area of risk.

Now if we look at the far left portion of this graph, which is in Party A’s area of risk, the bell curve is low on the Probability scale but high on the Consequence scale.  Using the same terms we used in the Risk Assessment Matrix, we can classify the level of probability in this area as “Rare” to “Unlikely” - meaning there is a low probability a trial would end up with a result in this area.  Nonetheless, the consequence for Party A would be “Catastrophic” because it depicts a zero to negligible dollar recovery.  That is, based on a normal distribution of trial verdicts, Party A faces at least some risk of a catastrophic result in going to trial.

We have the same level of risk depicted on the right side of the curve, in Party B’s area of risk.  The probability Party B would end up with a result in this area is “Rare” to “Unlikely”, but the consequence for Party B would also be “Catastrophic” - this time being an extraordinarily high damages award against Party B.  So Party B also faces some risk of a catastrophic result with a trial based on a normal distribution of trial results.  

If we move further to the right on Party A’s side of the curve we enter a zone of "Possible" verdicts.  Again, borrowing from the language we used in the Risk Assessment Matrix, this area depicts Major to Moderate adverse consequences for Party A because it still represents a low to modest recovery in relation to the full spectrum of results represented by the entire bell curve.

The same is true for the same area on Party B’s side of the curve.  This depicts the Possibility that Party B will suffer a Major to Moderate adverse verdict should this dispute end up in a trial - in this case, the possibility of a high to very high damages award against Party B.  

The central portion of the curve is where the Probability level is “Likely” to “Almost Certain”.  This represents the most likely verdict area should the case go to trial.  Aside from being the most likely result, it is also the most benign.  Neither side suffers a Catastrophic, Major, or even Moderate adverse consequence.  It may not represent any one side’s best day in a courtroom, but it also doesn’t represent their worst day in a courtroom.  Even if the actual result is slightly to the left or right of the apex of this zone, the adverse impact that would have on one side or the other would be - based on the terms we used in the Risk Assessment Matrix - Negligible to Minor. 

To sum up, the Bell Curve of Risks provides a visual representation - and explanation - of each side’s risks should they choose to resolve their dispute through a trial.  There is some risk one side or the other will end up with a Catastrophic result - either little or no recovery for the plaintiff, or an extraordinary damages award against the defendant.  There is a higher probability that one side or the other will end up with a Moderate to Major adverse result - that is a verdict that falls below, or exceeds, what each of the parties might reasonably expect. Then there is the zone where, at worst, neither side suffers anything more than a Negligible or Minor deviation from what is - considering all the evidence - the most likely verdict area.  

If all the parties want to avoid their respective risks of a trial, and they instead want to manage their risks through negotiations, this green portion of the curve is where they will most likely succeed in reaching those goals.  

Next, we’ll take a look at how negotiations typically track this Bell Curve of Risks.  That will be the topic of my next video.

Until then, goodbye.