FORENSIC ECONOMICS &
SCIENTIFIC EVIDENCE
Scott Gilbert
Economics Department
Southern Illinois University Carbondale
Comments? Please send to: gilberts@siu.edu
Source: Barry Ritholtz, http://www.ritholtz.com
Outline
• What is forensic economics?
• The tribe of forensic economists (FE)
• What they say: FE opinion
• Case Study: Carlisle v. Illinois Central Railroad
• Cowboys or Cogs? FE procedure
• Scientific Evidence
• Court interpretation of economic evidence
• Best FE practices
What is forensic economics?
The use of economic theory and statistics to identify
pecuniary remedies for economic damages.
Examples:
• lost future income in cases of injury, death, job loss
• lost future profits in cases of business loss
• future income in divorce cases
The tribe of forensic economists
Who are they?
National Association of Forensic Economics (NAFE)
- about 600 members
- about 300 Ph.D. economists
- about 150 Ph.D. economics professors
Source: drawinghowtodraw.com
Some publish research in Journal of Forensic Economics
- about 100 NAFE Ph.D. econ. profs. publish in JFE
..and some present their research at NAFE meetings
- about 75 NAFE Ph.D. econ profs. publish in JFE
and present at NAFE meetings
Forensic economists are:
- a small tribe
- highly specialized expert witnesses, mainly in:
personal injury, wrongful death,
wrongful termination, contract disputes
- mostly solo practitioners or small firms
- a vibrant community, via NAFE’s online discussion
board & others (AAEFE)
- self-policing, via NAFE code of ethics
NAFE Ethical Statement
1. Engagement
Practitioners of forensic economics should decline involvement in any
litigation when they are asked to assume invalid representations of fact
or alter their methodologies without foundation or compelling analytical
reason.
2. Compensation
Practitioners of forensic economics should not accept contingency fee
arrangements, or fee amounts associated with the size of a court award
or out-of-court settlement.
3. Diligence
Practitioners of forensic economics should employ generally accepted
and/or theoretically sound economic methodologies based on reliable
economic data. Practitioners of forensic economics should attempt to
provide accurate, fair and reasonable expert opinions, recognizing that
it is not the responsibility of the practitioner to verify the accuracy or
completeness of the case-specific information that has been provided.
Ethical Statement, continued
4. Disclosure
Practitioners of forensic economics should stand ready to provide
sufficient detail to allow replication of all numerical calculations, with
reasonable effort, by other competent forensic economics experts, and
be prepared to provide sufficient disclosure of sources of information and
assumptions underpinning their opinions to make them understandable
to others.
5. Consistency
While it is recognized that practitioners of forensic economics may be
given a different assignment when engaged on behalf of the plaintiff than
when engaged on behalf of the defense, for any given assignment, the
basic assumptions, sources, and methods should not change regardless
of the party who engages the expert to perform the assignment. There
should be no change in methodology for purposes of favoring any party's
claim. This requirement of consistency is not meant to preclude
methodological changes as new knowledge evolves, nor is it meant to
preclude performing requested calculations based upon a hypothetical-as long as its hypothetical nature is clearly disclosed in the expert's
report and testimony.
Ethical Statement, continued
6. Knowledge
Practitioners of forensic economics should strive to maintain a current
knowledge base of their discipline.
7. Discourse
Open, uninhibited discussion is a desired educational feature of
academic and professional forensic economic conferences. Therefore,
to preserve and protect the educational environment, practitioners of
forensic economics will refrain from the citation of oral remarks made in
an educational environment, without permission from the speaker.
8. Responsibility
Practitioners of forensic economics are encouraged to make known the
existence of, and their adherence to, these principles to those retaining
them to perform economic analyses and to other participants in
litigation. In addition, it is appropriate for practitioners of forensic
economics to offer criticisms of breaches of these principles.
NAFE Members, by State
Lawyers, by State
What they say: FE opinion
Centers on economic damage appraisal
- includes past losses (before trial date)
& future losses (after trial date)
- bottom line: “present value” of losses
Are FEs human calculators?
- if yes, cheaper to buy a digital one
- but good FEs creatively identify
pecuniary remedies, when needed
Case Study
Robert Carlisle v. Illinois Central Railroad Co.
(Case Number 2007-L-17, First Judicial Circuit, Illinois state court)
- personal injury case, injured railroad worker
- lost wages, past & future
- forensic economist hired by plaintiff’s attorney
-- uses statistics to estimate wages
-- uses market data to determine discount rate
-- econ. damages estimate: $1.184 million
- case settles
Economic Damages for Robert Carlisle
December 2007
After-tax income in 2008 = $53,595
Retirement
Age
Past
Losses2
Discounted
Future Lost
Income3
Discounted
Future Lost
Fringe
Benefits4
Discounted
Future Lost
Household
Services5
Total
Economic
Losses
67
$151,240
$779,284
$153,597
$99,773
$1,183,854
12008
before tax income of $61,061. State plus federal average income tax rate = 12.23%
losses in 2005, 2006 and 2007 based on before tax income of $61,061. Includes past lost wages and past
lost household services.
3Net discount rate = 1.5%.
4Net discount rate = 1.5%. Fringe benefit loss begins January 1, 2008. Fringe benefits include lost medical
insurance valued at 17.3% of before tax income.
5Net discount rate = 2.0%. Annual loss of household services = $5,488 in 2008.
2Past
Cowboys or Cogs? FE Procedure
Source: 321coloringpages.com
Sourceclker.com
Reference Manual of Scientific Evidence (3rd edition)
Section on economics:
“Reference Guide on Estimation of Economic
Losses in Damages Awards”
by Robert Hall & Victoria Lazear
- Broad survey of procedure, with examples
- Citation of relevant case law and statutes
Example from Reference Manual (2nd ed.), lost profits:
Table 4. Plaintiff’s Damages Analysis (in Millions of Dollars)
(1)
Year
1996
1997
1998
1999
2000
2001
2002
2003
Total
(2)
Earnings
(3)
but for
Actual
Misconduct Earnings
$187
$34
200
56
213
45
227
87
242
96
259
105
276
116
294
127
(4)
Loss
$153
144
168
140
147
153
160
167
(5)
(6)
Discount Discounted
Factor
Loss
$1.21
$185
1.14
164
1.07
180
1.00
140
0.96
141
0.92
142
0.89
142
0.85
143
1,237
- Total damages of $1.237 million
- Other opinions are possible, depending on economic assumptions
- Manual treats assumptions as flexible. FEs are not “cogs”.
Scientific Evidence
Case study: Thomas Bruno v. BVC Entity1
(wrongful termination)
FE opinion:
“Within a reasonable degree of economic certainty, and
based on the facts and analysis contained in this report, it
is our professional opinion that the total present value of
pecuniary losses to Thomas Bruno amounts to between
$2,461,115 and $4,774,286.”
1Source: expert’s report : “A Revised Appraisal of Economic Loss to Thomas Bruno”, by Kristin K. Kucma and Frank D.
Tinari, currently online at nelanj.org.
Year
Portion of
Year
Projected Gross
Earnings
[@3.9%]
Projected
Adjusted
Earnings
[(2)x(3)x75.53%]
Present Value
[@4.75%]
Cumulative
Present Value
(1)
(2)
(3)
(4)
(5)
(6)
2011
75%
$464,432
$263,089
$263,089
$263,089
2012
100%
464,432
350,785
334,879
597,968
2013
100%
464,432
350,785
319,693
917,661
2014
100%
464,432
350,785
305,196
1,222,858
2015
100%
464,432
350,785
291,357
1,514,215
2016
100%
464,432
350,785
278,145
1,792,360
2017
100%
464,432
350,785
265,532
2,057,892
2018
100%
464,432
350,785
253,491
2,311,384
2019
100%
464,432
350,785
241,997
2,553,380
2020
100%
464,432
350,785
231,023
2,784,403
2021
100%
464,432
350,785
220,547
3,004,950
2022
100%
464,432
350,785
210,546
3,215,497
2023
47%
464,432
164,869
94,469
3,309,966
Case Law
Fry General Acceptance Test (Fry v. U.S., 1923)
Is the expert’s approach generally accepted by
the relevant scientific community?
Daubert/Joiner/Kumho Tire “Trilogy”
- Daubert v. Merrell Dow Pharms. Inc. (1993)
- General Electric Co. v. Joiner (1997)
- Kumho Tire Co. v. Carmichael (1999)
→ Stronger test: scientific knowledge, reliability
Federal Statute
FRE Rule 702: Testimony by Expert Witnesses
A witness who is qualified as an expert by knowledge, skill, experience,
training, or education may testify in the form of an opinion or otherwise
if:
(a) the expert’s scientific, technical, or other specialized knowledge
will help the trier of fact to understand the evidence or to
determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and methods; and
(d) the expert has reliably applied the principles and methods to the
facts of the case.
Bruno v. BVC case, continued:
(a) expert is a forensic economist
(econ. Ph.D., NAFE member, JFE author)
(b) data used by FE:
plaintiff’s employment records & personal history,
market interest rates, statistical estimates of
worklife and retirement age, government tax tables
(c) principles and methods: discounting, present value,
“gross up” tax adjustment
(d) combines principles, methods & data to
assess Mr. Bruno’s economic damages range:
$2,461,115 to $4,774,286.
Is this scientific? Yes, if FE’s assumptions are accepted.
Court interpretation of econ. evidence
Federal Supreme Court
Jones & Laughlin Steel Corporation etc. v. Howard E. Pfeifer
462 U.S. 523 (103 S.Ct. 2541, 76 L.Ed.2d 768)
(a) The two elements that determine the calculation of a damages award to a
permanently injured employee in an inflation-free economy are the amount
that the employee would have earned during each year that he could have
been expected to work after the injury, and the appropriate discount rate,
reflecting the safest available investment.
(b) In an inflationary economy, inflation should ideally affect both stages of the
calculation described above. This Court, however, will not at this time select
one of the many rules proposed by the litigants and amici in this case and
establish it for all time as the exclusive method in all federal courts for
calculating an award for lost earnings in an inflationary economy. First, by
its very nature the calculation of an award for lost earnings must be a rough
approximation. Second, sustained price inflation can make the award
substantially less precise. And third, the question of lost earnings can arise
in many different contexts.
The Jones decision stipulates relevant factors:
- expected income stream
- discount rate
but declines to say how these factors are to be used when
determining economic damages.
UPSHOT
Starting from reasonable assumptions, damage estimates can
be inferred via economics. But there are many reasonable
assumptions.
Recent Findings
Bi-Market Economy, Inc. v. Harleysville Ins. Co. of New York (NY 2008)
“Damages for the loss of future profits must proven with
reasonable certainty and be capable of measurement
based upon known reliable factors without undue
speculation.”
Helpin v. Trustees, U. of Penn., 10 A.3d 267 (PA 2010)
“the calculation of an award for lost earnings must be a
rough approximation. . . not . . .based on mere guesswork
or speculation, but rather requires a reasonable basis to
support such an award.”
Best FE Practices
- identify pecuniary remedies for economic damages
- state assumptions, discuss them if needed
- document data sources & methods
- explain remedies in terms understandable
to a typical American
- explore alternative assumptions, when reasonable
What are pecuniary remedies for?
Make-Whole Principle
A pecuniary remedy for economic damages should make
the plaintiff whole, restoring the plaintiff to the pre-loss
economic position, or as near to that position as possible.
How?
- payment for past losses
- investment fund to cover future losses,
facilitated via “lump sum” or structured settlement
Example 1: Future Loss Fund for Thomas Carlisle
year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
age
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
pre-tax
earnings
61061
64175
67448
70888
74503
78303
82296
86493
90905
95541
100413
105534
110917
116573
122519
128767
135334
post-tax
earnings
53595
56328
59201
62220
65394
68729
72234
75918
79790
83859
88136
92631
97355
102320
107538
113023
118787
tax on
interest interest
53132
52771
52208
51422
50389
49086
47484
45555
43268
40588
37480
33903
29817
25174
19925
14019
7398
5007
4973
4920
4846
4748
4626
4475
4293
4077
3825
3532
3195
2810
2372
1878
1321
697
fund
value
$805,030
799560
791030
779117
763473
743720
719451
690227
655571
614972
567877
513689
451767
381419
301901
212411
112086
0
←
PV
Example 2: Future Losses, alternative worklife
year
age
pre-tax
post-tax
earnings
earnings
tax on
interest interest
2007
fund
value
$579,957
2008
51
61061
53595
38277
3607
561032
2009
52
64175
56328
37028
3489
538243
2010
53
67448
59201
35524
3348
511218
2011
54
70888
62220
33740
3179
479559
2012
55
74503
65394
31651
2983
442833
2013
56
78303
68729
29227
2754
400578
2014
57
82296
72234
26438
2491
352290
2015
58
86493
75918
23251
2191
297433
2016
59
90905
79790
19631
1850
235424
2017
60
95541
83859
15538
1464
165639
2018
61
100413
88136
10932
1030
87405
2019
62
105534
92631
5769
544
0
← PV
Questions