Legal “risk” compared to legal “uncertainty”

Lawyers should appreciate the difference. First expressed by an economist, Frank Knight, there is legal risk “when the probability of an outcome is possible to calculate (or is knowable),” whereas legal uncertainty “when the probability of an outcome is not possible to determine (or is unknowable),” Harvard Bus. Rev., Vol. 84, Jan. 2006 at 35.

According to these definitions, legal risk management probably misnames its goal, since no one can calculate mathematically the probability of undesirable legal outcomes (See my posts of March 27, 2005 and Aug. 14, 2005 disparaging the term, and the Nov. 15, 2005 meta-post.). The chances of a legal fiasco are not like tossing dice, where we know the odds of any particular throw (See my post of July 15, 2005 on lawyers estimating probabilities.). Instead, legal uncertainties abound, such as a change in key regulations, the reversal of established precedent, a class action certification, or a novel cause of action prevailing. We know what we cannot know.

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