Settlement vs. Trial Cost-Benefit Calculator
Compare the financial expected value of accepting a settlement offer versus proceeding to trial, factoring in litigation costs, win probability, and potential damages.
Settlement Details
Trial Details
Risk & Time Adjustments
Formulas Used
Net Settlement Value (Plaintiff):
Net Settlement = Settlement Offer − Settlement Legal Costs
Net Settlement Value (Defendant):
Net Settlement = −(Settlement Offer + Settlement Legal Costs)
Expected Gross Trial Value:
EVgross = P(win) × Outcomewin + P(lose) × Outcomelose
Fee-Shifting Adjustments:
• American Rule: Each party pays own costs regardless of outcome
• English Rule (Loser Pays): Winner recovers own costs; loser pays both sides
• Winner Collects: Winner recovers own costs from loser only
Time Value of Money (Present Value):
PV = Net Trial Value ÷ (1 + r)t
where r = annual discount rate, t = years until trial conclusion
Risk Adjustment:
Adjusted Trial EV = PV × Risk Multiplier
(Risk Neutral = 1.0, Risk Averse = 0.90, Risk Seeking = 1.10)
Breakeven Win Probability (American Rule):
p* = (Net Settlement × Discount Factor / Risk Multiplier − Damageslose + Trial Costs) ÷ (Damageswin − Damageslose)
Assumptions & References
- Expected value framework follows standard decision theory: EV = Σ P(outcome) × Value(outcome) (von Neumann & Morgenstern, 1944).
- The American Rule (each party bears own legal costs) is the default in U.S. litigation; fee-shifting applies in specific statutory contexts (e.g., civil rights, patent, ERISA).
- The English Rule (loser pays) is standard in most Commonwealth jurisdictions and many European systems.
- Present value discounting reflects the opportunity cost of capital tied up during litigation; typical discount rates range from 3%–10% depending on risk profile.
- Risk aversion adjustment reflects empirical findings that litigants often accept settlements below expected trial value due to uncertainty aversion (Kahneman & Tversky, Prospect Theory, 1979).
- Breakeven probability is the minimum win probability at which trial is financially equivalent to settlement, holding all other variables constant.
- This calculator does not account for non-monetary factors: precedent value, reputational risk, confidentiality, emotional cost, or injunctive relief.
- Damages figures should reflect net recovery after taxes where applicable (IRC § 104 excludes physical injury compensatory damages from gross income).
- Reference: Posner, R.A. (1973). "An Economic Approach to Legal Procedure and Judicial Administration." Journal of Legal Studies, 2(2), 399–458.
- Reference: Shavell, S. (1982). "Suit, Settlement, and Trial: A Theoretical Analysis." Journal of Legal Studies, 11(1), 55–81.