Real Options in Law: (Possibly, Frivolous) Litigation and Other Applications


This Article advances the thesis that real options are not only ubiquitous in law, but also provide novel insights about legal decision making, doctrines and rules. An introduction provides a brief a primer about financial options, real options, and real options in law. Part I of this Article develops implications of the fact that every lawsuit contains a sequence of real options for the plaintiff to unilaterally abandon that lawsuit. Part II of this Article appraises the limitations of game-theoretic analysis of the abandonment options embedded in litigation and some responses to such limitations. Part III of this Article illustrates how to apply real options analysis to provide insights over numerous legal areas, including the “calculus” of negligence and the Hand formula; collateral estoppel and res judicata; constitutional amendments; judicial minimalism; and marriage or divorce statutes. A conclusion summarizes the insights of the novel real options approach to law advanced in this Article. An appendix develops a general mathematical sequential real abandonment options game-theoretic model of (possibly, frivolous) litigation. This analytical model demonstrates how the real abandonment option values in (possibly, frivolous) litigation determine a set of necessary and sufficient conditions for the sequential credibility of (possibly, frivolous) litigation and derives Nash equilibrium settlement values.


Dispute Resolution and Arbitration | Economics | Law | Litigation | Torts

Date of this Version

August 2003