Mechanism of Instrumental Game Theory in The Legal Process via Stochastic Options Pricing Induction

TL;DR

This paper applies stochastic options pricing and backward induction to model legal negotiations, aiming to improve settlement efficiency and reduce social costs by addressing uncertainty and asymmetric information in legal processes.

Contribution

It introduces a novel numerical methodology combining aleatory analysis, axiological concepts, and stochastic options pricing to estimate fair bargains in legal negotiations.

Findings

Enhanced understanding of legal negotiation failures due to uncertainty.

A new model for estimating fair settlements using stochastic options pricing.

Potential reduction in social costs through optimized legal dispute resolutions.

Abstract

Economic theory has provided an estimable intuition in understanding the perplexing ideologies in law, in the areas of economic law, tort law, contract law, procedural law and many others. Most legal systems require the parties involved in a legal dispute to exchange information through a process called discovery. The purpose is to reduce the relative optimisms developed by asymmetric information between the parties. Like a head or tail phenomenon in stochastic processes, uncertainty in the adjudication affects the decisions of the parties in a legal negotiation. This paper therefore applies the principles of aleatory analysis to determine how negotiations fail in the legal process, introduce the axiological concept of optimal transaction cost and formulates a numerical methodology based on backwards induction and stochastic options pricing economics in estimating the reasonable and fair bargain in order to induce settlements thereby increasing efficiency and reducing social costs.