Settlement Range Calculation¶
Why It Matters¶
Settlement occurs when there's a zone of possible agreement - when plaintiff's minimum is less than defendant's maximum. But parties often don't know if such a zone exists because they haven't rigorously calculated their own reservation price, let alone their opponent's. Settlement range calculation makes implicit judgments explicit and testable, preventing two errors: settling for less than your alternative (trial) is worth, and failing to settle when a beneficial deal is available.
The Key Move¶
Calculate your expected trial value: (probability of winning) × (expected award if you win) minus (probability of losing) × (expected payment if you lose, for defendant) minus (your litigation costs) minus (discount for risk aversion and delay). This is your reservation price - settle for more (if plaintiff) or less (if defendant), otherwise go to trial. Then estimate opponent's expected trial value using their probability estimates (usually different from yours), their costs (usually different from yours), and their risk tolerance. Settlement zone exists where plaintiff's minimum < defendant's maximum. If your calculations show no zone, trial is likely unless someone's estimates are wrong.
Classic Application¶
Personal injury case. Plaintiff estimates 60% win probability, $1M likely verdict if win, $200,000 remaining litigation costs, case will take 2 years, plaintiff is risk-averse (values certainty). Expected value: 0.6 × $1M = $600,000, minus $200,000 costs = $400,000, minus discount for risk/delay perhaps $100,000 = $300,000 minimum settlement. Defendant estimates 50% plaintiff win probability (more conservative), $800,000 likely verdict (lower estimate), $300,000 remaining defense costs, defendant corporation is risk-neutral. Expected value: 0.5 × $800,000 = $400,000, plus $300,000 costs = $700,000 maximum settlement. Settlement zone exists: $300,000 to $700,000. Any number in that range makes both parties better off than trial.
Surprising Application¶
Salary negotiations. Candidate calculates minimum acceptable salary: current salary $120,000, new role requires relocation costing $30,000, new role career advancement worth $20,000 to candidate, candidate has standing offer at $130,000 from different company. Minimum: $120,000 + $30,000 - $20,000 = $130,000 (matching alternative offer). Employer calculates maximum: best alternative candidate would cost $160,000 (recruiting, training, delayed productivity), this candidate could generate $200,000 incremental value in first year, employer budgeted $150,000 for role. Maximum: $160,000 (alternative cost). Settlement zone: $130,000 to $160,000. Negotiation should find agreement. If employer offers $125,000, candidate knows this is below employer's true maximum and can credibly counter.
Failure Modes¶
Using same probability estimates for both sides - parties almost always estimate win probability differently. Ignoring non-monetary factors - reputation, precedent, principle, relationships often affect settlement values but are hard to quantify. Assuming settlement must split the difference - any point in the zone is theoretically acceptable, distribution depends on negotiating power. Revealing your reservation price - knowing your minimum/maximum is for internal planning, not disclosure. Failing to update as case develops - settlement range should change as evidence develops and costs accumulate. Treating calculation as precise when inputs are rough estimates - this is decision aid, not mathematical proof.
Go Deeper¶
Mnookin, Robert H. & Kornhauser, Lewis. "Bargaining in the Shadow of the Law: The Case of Divorce." Yale Law Journal, Vol. 88, 1979; Korobkin, Russell. "Negotiation Theory and Strategy." Wolters Kluwer, 3rd edition, 2014, Chapters 2-3.