We're looking at the unit on preparing for negotiation and a very important question, which is how can I conduct a negotiation analysis? We looked at a list of questions that you should ask in completing any analysis. We then looked at a specific problem that arises with dispute resolution negotiation and that is that your BATNA often is litigation or perhaps arbitration and, therefore, it's important to understand what goes on in a litigation and some fundamental differences in a global economy between US style litigation and elsewhere. Now we're dealing with a final question relating to analysis of a negotiation and that is how can I use decision trees to complete my BATNA analysis? A decision sheet is a very useful tool in doing the BATNA analysis and beyond. It's a very useful tool for making all sorts of business decisions. So I hope that this segment will be useful to you not only in negotiation, but also in other aspects of your personal life or your business life. So let's start with this example. This happens to be a dispute resolution example, but I'll look at a deal making example in a few minutes. Let's say your company has sued its supplier for 4.6 million. There's a 50/50 chance your company will win. Future legal and other expenses to litigate the case total 400,000. During negotiations, the defendant has offered to settle the case for 2 million. Should your company accept the offer? Now think about that for a second. What does your intuition tell you? If you used pure logic in answering that question, you didn't use emotion, you didn't consider your attitude toward risk, pure logic, would it make sense for you to accept the $2 million offer or to continue on with your litigation where you might win 4.6 million? Okay, write down your answer. You would accept the settlement or continue with the litigation. Now, let's look at how you can analyze this question by using a decision tree. A decision tree looks very much like a tree on its side. And the decision in a decision tree is represented by a square or rectangle. So we have here the decision is do you continue with the litigation, or do you settle? And then uncertainties in your decisions are represented by circles. And the uncertainty is, if you continue will you win or lose? So you start you're decision tree analysis with step one, by drawing a picture of the decision. And this is a very useful tool even if you never add numbers. It's very useful for clarifying your thinking. I use this tool constantly. If I'm in a meeting and the conversation is drifting in different directions and its unclear what this decision is or what the uncertainties are, I find it very useful, just on the back of an envelope, to sketch out a decision tree to lay out the options. But in this case, we're going further than this. We're going to step two, which is to add the numbers. So here are the numbers. There's a 50/50 chance of winning, so you plug in the probabilities. If you win, you will net 4.2 million after deducting attorneys fees. If you lose, you lose 400,000, whereas the settlement offer is 2 million. And then step three, the final step, is to calculate weighted averages. So in this case, 50% of 4.2 is 2.1, minus 50% of 400,000 brings you to a weighted average of 1.9 million, which is the expected value of continuing, and you can see here that that's less than accepting the settlement offer. Therefore, logically you should accept the settlement offer absent other factors. So this gives you a nice tool for analyzing your BATNA in a dispute resolution type negotiation such as this. Decision tree analysis is also a very useful tool for doing a BATNA analysis when you're involved in negotiating a deal and here's an example. Let's assume that you're making a decision. Should you acquire company A, which has a $21 million value, or company B, which has a $15 million value. The price is the same for both companies. Now, if you stop there, the decision would be easy. Of course you would acquire Company A if the price is the same as for Company B, because of the different valuation. However, the problem is that if you acquire Company A, there's a 90% chance the government will challenge the acquisition, and a 60% chance the government will win. If the government wins, the value of A drops to 14 million because of legal fees plus sell-off costs. Even if the government loses, the value drops to 19 million because of legal fees. Whereas if you acquire Company B, there's not gonna be a government challenge. We know that. So, before you do a decision tree analysis, what would be your gut reaction? What is your intuition tell you about this decision? Would you negotiate to acquire Company A, or negotiate to acquire Company B? Please write down A or B. When I ask this question in class, a large majority of the class usually picks Company B. Now let's try a decision tree analysis of this same decision. So you know now how to do a decision tree analysis. Remember the decision is the square and the uncertainties are represented by circles. The decision tree looks like a tree on its side. So draw a picture of this decision, which is step one. Plug in the numbers and calculate the weighted average. Please hit pause while you do this, and then we'll compare results. This is what my decision tree looks like for this decision. The decision is do you acquire Company A or Company B? And if you acquire company A, then you have two uncertainties. Will the government challenge the acquisition, and if the government does challenge, will the government win or lose? So that's the drawing of the tree and then you plug in your numbers. 90% chance the government will challenge. 10% chance no challenge. 60% chance the government will win. 40% chance government loses. If the government wins, the value drops to 14 million. Even if the government loses, the value does drop a little to 19 million. Where as if there's no government challenge, Company A is worth 21 million. So you plug in the numbers and then you do your weighted average calculation. 60% of 14 plus 40% of 19 is 16. 90% of 16 plus 10% of 21 is 16.5. So the weighted average, or the so called expected value of acquiring Company A is 16.5 million, which is still quite a bit higher than the value of Company B. So, if you used just a decision tree analysis, forgetting about emotions, forgetting about attitude toward risk, the logical decision would be to acquire Company A. So, in conclusion, decision trees are valuable tools for analyzing your BATNA, in both dispute resolution and deal-making negotiations, and this is a tool that you should also use for making other complex business decisions.