Katie and Bob have decided to call it quits after 21 years of marriage. Initially, Bob offered Katie the house and all the proceeds from selling it. This would have netted Katie $130,000 ("net proceeds") after subtracting all selling expenses. But now Bob has changed his mind; he wants 40% of the net proceeds.

Katie is now considering one of three options: (1) try mediation to get Bob to soften his position; (2) try collaborative resolution (a series of face-to-face meetings between parties with their attorneys and conflict resolution counselors present) to get Bob to soften his position; (3) go straight to court and let a judge decide. Mediation would cost Katie $10000, going to court would cost Katie $30000, and collaborative resolution would cost Katie $20000.

Katie believes that mediation would result in one of three equally likely outcomes: She and Bob would agree that 100% of the net proceeds should go to her; She and Bob would agree to "split the difference" so she would get 80% of the net proceeds; She and Bob would not reach an agreement because Bob would insist on his 40% of the net proceeds. In the latter case, mediation fails, and Katie would have another choice to make: accept Bob's demand for 40% of the net proceeds, or go to court. If she goes to court, she incurs court costs, but she feels the court would grant her 100% of the net proceeds with probability .70, split the difference (80% of the net proceeds to Katie) with probability .20, or grant Bob's demands for 40% of the net proceeds with probability .10.

Another option is that Katie can go straight to court. With this option, she only incurs court costs. As was the case with failed mediation, she feels the court would grant her 100% of the net proceeds with probability .70, split the difference (80% of the net to Katie) with probability .20, or grant Bob's demands for 40% of the net with probability .10.

The final option is to try collaborative resolution. Katie feels her chances of getting an acceptable agreement are better with counselors and attorneys present. Katie thinks she and Bob would come to an agreement where she gets 100% of the net with probability .50, or they would come to an agreement to split the difference (80% of the net to Katie) with probability .30. However, if Bob does not budge, the resolution process fails, and Katie would need to decide whether she wants to go to court and incur the additional court costs, or simply accept Bob's original demand for 40% of the net proceeds. Additionally, because they have already failed to resolve the matter out of court with their attorneys present, Katie is slightly less optimistic about her chances in court. She thinks the court will grant her 100% of the net proceeds with probability .60, split the difference (80% net proceeds to Katie) with probability .20, and grant Bob's demand for 40% of net proceeds with probability .20.

Draw a decision tree and advise Katie on her optimal course of action using the expected value (EV) criterion.

Answer rating: 100% (QA)

To solve this problem we can use a decision tree analysis to determine Katies optimal course of acti... View the full answer