Research has shown that humans tend to be overoptimistic on the infrequent, huge decisions we make, and overly loss-averse on our smaller, more routine decisions. This finding comes from an intriguing post by Bruce MacEwen, author of the blog — Adam Smith, Esq. — who comments on an article by McKinsey about behavioral economics and decision making (Dec. 30, 2005). His entire post deserves study, but I want to highlight one particular insight.
Reflect on significant decisions general counsel make. When giving advice on hostile takeovers, class actions, massive settlements, decisions to push the antitrust or litigation envelope, accusations of CEO wrong-doing or other, infrequent but extremely consequential decisions, people tend to over-rate their abilities and to make forecasts that are too rosy.
In counter-intuitive contrast, the garden-variety decisions get dragged down by our familiarity with what can go wrong, the principal-agent imbalance (See my post of Jan. 16, 2006.), and our failure to look at the string of decisions as a portfolio of risks, which tend to balance out. The lesson: take more time on major decisions; trust your instincts and push ahead on common decisions.