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Law departments and the economics of error

According to Richard A. Posner, Public Intellectuals: A Study of Decline (Harvard University Press 2001) at 151, “the optimal number of errors is not zero but is a number derived from minimizing the sum of error costs and error-avoidance costs.” An error cost might be a default judgment entered for $50,000 because no answer was filed, while the error-avoidance cost might be a full-time paralegal for $70,000 a year to keep track of complaints served and docket entries. The match of cost to cost is imperfect, but the point should serve. Law departments should strive to minimize both costs, not single-mindedly focus on the error costs.

The worse the consequences, in other words, the more we should invest in their avoidance, but we should not invest every dime in prevention. That policy is folly (See my post of Jan. 24, 2006 that it’s cheaper to fix a localized disaster than prevent all of them.).

Two problems with error detection are that it is selectively enforced (only some people’s errors are unmasked) and it is often not clear who made the “mistake.” Aside from those weaknesses, no sane law department should even strive to be error-free nor should it hold out as its goal to prevent legal problems within its company. Economics are against it. Plus, it is unproductive, infuriating to clients and, being unattainable, hard on staff morale.

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