Title

Hindsight in Commercial Damages Analysis

Document Type

Article

Journal/Book Title/Conference

Journal of Legal Economics

Volume

14

Issue

3

Publication Date

2008

First Page

1

Last Page

14

Abstract

Whether hindsight should and can be used in commercial damage calculations presents an interesting question from both an economic and legal perspective. A strong economic argument can be made that given certain restrictive assumptions hindsight should be ignored. Courts, however, appear rather eclectic in allowing damage calculations based on hindsight. This paper shows that in a model characterized by efficient markets hindsight results in overcompensation of the plaintiff. In a two-state model characterized by positive expected economic profits and litigation costs, however, hindsight can work for or against the plaintiff. It is shown that the advantage, if any, that hindsight provides the plaintiff is inversely related to litigation costs and the magnitude of expected economic profits, and directly related to the probability of the negative economic outcome and the absolute size of this negative outcome.

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