Hindsight in Commercial Damages Analysis
Journal of Legal Economics
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.
Bowles, Tyler J. “Hindsight in Commercial Damages Analysis.” Journal of Legal Economics 14(3, March 2008):1-14.