Three observations about legal risk: subjective, power-laden, and poorly calculated

(1) Some people maintain that “risk” is not an independent something waiting to be measured. It is, instead, completely definitional, situational, cultural, and malleable. As part of this argument, think about all the ways a “legal risk” might be described: delay, money lost, reputation besmirched, time wasted, share value diminished, lousy law passed. The protean notion of risk rests heavily on cultural and financial expectations, both of which have historicist determinants.

(2) Risk smacks of power – whoever defines how risk is identified, prioritized, measured, and ameliorated benefits from that version of the concept, which means the power of that person increases. To the extent risk recognition sets things in motion, someone gains power and someone loses. Daniel Kahneman, Thinking, Fast and Slow (Farrar, Straus & Giroux 2011) at 141, inspired the groundwork for these two observations.

(3) Kahneman at 143 also makes the point that our “risk math” is cognitively flawed. He gives several examples of “a basic limitation in the ability of our mind to deal with small risks: we either ignore them altogether or give them far too much weight – nothing in between.” For a lawyer in-house, this leads to remembering the one time in the past 16 years where the force majeure clause was invoked, and so fixates on that tiny risk or, at the antipode, simply doesn’t give a thought to the clause. Kahneman puts this mental foible in math terms: when our brains estimate probabilities, they over-emphasize the numerator we recall and under-state the denominator of all the instances

This blog has returned to the concept of legal risk quite often in the recent months (See my post of July 19, 2010: 7 commonalities between the constructs of “risk” and “value”; July 29, 2010: 7 koans on “legal risk”; June 23, 2011: problematic to link legal risk to corporate strategy; July 26, 2011: logical positivism would ignore risk; July 27, 2011: risk management as a contender to economic models of law departments; Oct. 3, 2011: view that GC should not be in charge of risk management; and Nov. 29, 2011: bold, risky leadership results in worse decisions.).

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