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How to Calculate Economic Damages

Close up of a calculator on the desk of an economic damages expert.

Economic damages are generally calculated as the difference between the monetary value of an asset or stream of cash flows at a certain point in time relative to the value of those same assets but-for the actions or negligence of the party accused of causing the decline in value.

Once causation is determined, the economic damages expert calculates damages by determining the difference between the actual value and the but-for value.

Is There an Economic Formula for Damages?

Although there is no specific formula for calculating economic damages, generally one must calculate the value of the particular asset but-for the inappropriate action or negligence.

For example, if a portfolio is mismanaged then the damages expert would compare the actual portfolio value to the value of a portfolio that is similar but not mismanaged.

Another example is damages from defamation or wrongful termination would be based on the difference between the post-termination or defamation expected stream of cash flows or earnings and the stream of cash flows or earnings that would have occurred absent the defamation or wrongful termination.

Calculation of Losses

Examples of economic loses include:

Data on historic performance prior to the wrongful act can be helpful to extrapolate future expected performance.

Other independent data such as work life expectancy tables provided by the Bureau of Labor Statistics can also be used in the case of lost earnings.

In some cases, lost profits and lost business value can both be claimed in the same case.

Example Economic Damages Models

Examples of economic damage models include:

  • Lost profits as lost sales less the cost associated just with those lost sales.
  • Lost earnings as expected earning multiplied by work-life expectancy given the plaintiff’s age, sex, and level of education.
  • Diminution in business value which involves calculating the value of the business prior to the wrongful act less the value of the business subsequent to the wrongful act.

Some Examples of How Economic Damages are Calculated

The above examples provide a general formula for calculating economic damages, the exact formula will be specific to the facts of the particular case.

For example, in the case of theft of trade secrets the aggrieved party may recover damages associated with profits made by the defendant as a result of the theft.

Alternatively, the aggrieved party may recover the profits they can show that they lost as a result of the theft of intellectual property, and finally, they may recover the value of the intellectual property associated with the cost to license the intellectual property.

We recently had a case relating to theft of trade secrets and provided the arbitrators with three alternative damage calculations; lost profits, profits disgorged from the trade secret stealer and the economic value of the stand alone trade secrets. The arbitrators chose the stand alone value in this particular case.

Who Does Economic Damages Calculations?

Economic damages are calculated by either accountants or economists. Both must have knowledge of accounting data and statistical methodologies to properly calculate damages using such data.

Be warned that a pure economist with no knowledge of accounting or a pure accountant with no knowledge of economic theory or statistical methods may be the wrong expert for determining economic damages acceptable in court or arbitration.

Fortunately Dr. Donald May has both a PhD in economics and statistical methods and is a certified public accountant (CPA), making him the perfect candidate to calculate economic damages.

DMA Economics performs rigorous analyses of damages that are clearly communicated to all triers-of-fact. Contact our economic damages expert witnesses today using the form on this page for more information on how we can help you with your case.

Donald May Economic Damages Expert Witness

About the Author

Dr. Donald M. May PhD CPA

As a former MIT finance professor with extensive testifying experience, Dr. May is a world-class expert in the valuation of damages. With his invaluable experience in testifying in arbitration as well as state and federal court, Dr. May represents what sets us apart from others—our solid knowledge base and experience.