>> We're looking at the unit on preparing for negotiation, and at 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 tree is a very useful tool in doing the BATNA analysis and beyond. It's, 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 a 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 two million. Should your company accept the offer? Now think about that for a second. What does your intuition tell you? If you use pure logic in answering that question, you didn't use emotion. You didn't consider your attitude towards 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 analyse 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 your 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 it's unclear what this decision is or what the uncertainties are, I find it very useful just in 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, you plug in the probabilities. If you win, you will net $4.2 million after deducting attorney's 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'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 stopped 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, a 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. Where as if you acquire company B, there's not going to be a government challenge, we know that. So before you do a decision tree analysis, what would be your gut reaction? What, what does 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 the 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. Whereas if there is 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 use just a decision tree analysis, you know, 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.