 How to Calculate Expected Monetary Value (EMV) - dummies

# How to Calculate Expected Monetary Value (EMV)

Expected monetary value (EMV) is a ballpark figure that shows how much money a plaintiff can reasonably expect in mediation. Think of it as an average of the best- and worst-case scenarios. It accounts not only for the dollar figure assigned to each outcome but also for the likelihood of that outcome occurring.

To calculate EMV, multiply the dollar value of each possible outcome by each outcome’s chance of occurring (percentage), and total the results.

For example, if you bet \$60 that I’ll roll a die and it’ll come up on the number 4, the EMV is –\$40, because you have a 1 in 6 chance of winning \$60 and a 5 in 6 chance of losing \$60:  If you had the choice of which bet to make, you’d be wise to listen to the EMVs and opt for the coin flip.

As you may expect, EMVs get more complicated when you toss in a string of multiple outcomes. Here’s an example from John DeGroote. It starts with the decision tree shown here. (The values include attorney fees, and \$124,000 represents the EMV for no settlement.) A decision-tree program generated the tree and already calculated the EMV for the no settlement outcome, but you’re probably wondering how it came up with that number. To calculate the EMV for the no settlement, start on the far right, where the plaintiff has a 30 percent chance of winning a \$250,000 judgment, 60 percent chance for \$350,000, and 10 percent chance for \$650,000:

(.30 x \$250,000) + (.60 x \$350,000) + (.10 x \$650,000) =

\$75,000 + \$210,000 + \$65,000 = \$350,000

Now, you must multiply that by the 50 percent chance that the plaintiff wins the verdict — half of \$350,000 is \$175,000.

The EMV for the defendant’s verdict is 50 percent of \$150,000, or \$75,000.

Add the EMVs for the defendant and plaintiff: \$175,000 for the plaintiff plus \$75,000 for the defendant gives you \$250,000. Because the summary judgment denied outcome has a 40 percent chance of occurring, multiply the \$250,000 by .40 to get \$100,000.

The EMV for summary judgment granted is 60 percent of \$40,000, which comes to \$24,000.

Total the EMV for summary judgment granted and summary judgment denied, and you get \$100,000 + \$24,000 = \$124,000, which represents the EMV for no settlement.

This EMV is likely to give the client a new perspective, especially if the client is the plaintiff who’s convinced of winning a settlement of \$650,000. Compared to an EMV of \$124,000, a much lower sure-thing settlement of, say, \$300,000 looks much more attractive.