Risk aversion quantified: the gain needs to be twice the amount a risk of being lost

As explained by Richard B. McKenzie, Why Popcorn Costs so Much at the Movies (Copernicus Books 2008) at 212, people discount their feelings associated with potential gains (or magnify the bad feelings about potential losses). Lawyer, most being people too, may do the same mental math. “One study fortified this position by finding that people will not take a 50% chance of losing $50 unless that prospective loss was set against a 50% chance of gaining more than twice $50” (emphasis supplied).

If an in-house lawyer’s psychology calls for at least double the gain (in reputation, prominence, praise, self-satisfaction or whatever) to make a potential loss palatable, no wonder risk aversion holds sway (See my post of Aug. 24, 2008: lawyers and risk averse behavior with 11 references.)! Why recommend any but the most compelling settlement, since someone might criticize the amount paid later? Why push a powerful client to yield on a legally shaky position, when the risk is manifest – disapproval, anger, endless meetings – and the gain has to be a multiple of that risk? Why sign off on an agreement when you need to anticipate twice the good to counterbalance downsides you fear?

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