Articles Posted in Thinking

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.

If you want to bring about improvement and change in a law department, understand “mental models.” A mental model is the framework from which someone perceives and understands the world. For example, someone’s model of a law department might be that of a smoothly ticking clock, or perhaps a jungle free-for-all, or an academic refuge for thinkers.

All general counsel have several mental models about the effective operation of the law department. Few of them, though, can fully articulate their mental models.

If managers can articulate even portions of their internal model, it can help them be more flexible in their thinking of alternatives to the status quo, objectively assess alternative arrangements, wide the scope of their thinking, and define what they perceive to be key components.

“Whether diagnosing patients or evaluating job candidates, human beings [RWM: no exceptions for lawyers] vastly overestimate their ability to make judgments, research shows.” The NY Times pronounced this Aug. 28, 2005 (at pg. WK4) in a piece about statistics and baseball, and continued, “Numbers and analysis almost always make people better.”

As a Mets and statistics fan, I like the point made, and note that it holds equally for managers of law departments. If picking students to admit to a school and predicting the survival of cancer patients can be done better by a computer model given the same information as an expert, as cited by Richard Thaler – a University of Chicago economist who studies decision-making – then in-house decisions to patent, to sue, to settle, to disclose, to license, to retain will also benefit from benchmark numbers and analysis, even with software tools.

Applying legal judgment and expertise has much art to it, but art achieves its purposes best if the artist combines facts and their analysis, the domain of numbers and statistics.

Ever since John von Neumann and Oskar Morgenstern published Theory of Games and Economic Behavior in 1944, economists and other social scientists have tried to apply to real-life situations the theoretical insights subsumed under “game theory.” As with the classic prisoners’ dilemma, game theoretic analyses work best when two parties engage in a zero-sum game.

Litigation, especially repeated litigation with the same adversary, as occurs with mass tort or product liability litigation, meets this description: plaintiff and adversary contesting over a somewhat fixed amount – total fees and settlements.

Clients often plead with their in-house counselors to estimate the likelihood of, for instance, a patent holding up to an infringement claim or an indemnity provision being triggered. Researchers at Wharton’s Risk Management and Decision Process Center have demonstrated that a lawyer (actually, they generalized to all people) has the best change of estimating expected value when a variety of low-probability events are aggregated to generate a probability. For example, “estimate the probability that there will be either a reversal, a remititure or an en banc decision” as compared to estimating the likelihood of each possibility individually.

Other studies suggest that lawyers are more effective when assessing possible outcomes relative to low probability events they are familiar with, such as “estimate the risk of a $10 million plus verdict versus the risk of having a traffic accident.”

Finally, research shows that decision makers evaluating low probability, high impact events tend to either over-insure, assuming the occurrence of the event was inevitable, or ignore the event entirely, thinking “that can’t happen to me.” Lawyers, tending to conservativism, are probably more likely to over-react to the low probability, high impact event (the European Union rejecting the merger, the class action being certified, the 8K disclosure clobbering the share price). The source of these points was The Professional Services Firm Bible, John Baschab and John Piot, Eds. at pgs 32-33.

Intuition, the brain’s process of interpreting and concluding without resort to conscious thought, has its place for law department managers, but they also ought to know its two major limitations.  A piece by Eric Bonabeau in CSFB’s Thought Leader Forum (2003) stresses two inadequacies of intuition.

1. “Intuition is not always good at evaluating options and solutions.”  One reason for this is that people tend to fixate on the first idea they have. Another reason is that few of us can understand the interaction effects between many different components of a situation.  Intuition allows a speedy conclusion when the current situation resembles previous situations, not when conditions have changed.

2. “Intuition is never good at exploring alternatives.” .It is not, Bonabeu writes, adept at seeking out potentially original solutions.  Bonabeau encourages people to use “evolutionary computation” to promote creativity.

I reject Weserman’s main title.  Corporate counsel make decisions every hour that change how the law department operates – they manage.  Those decisions range from asinine to sublime, because of their consequences to quality, productivity, cost, client satisfaction, and personnel. A few lawyers make progressive, defensible management decisions most of the time; many make good decisions some of the time; some have tin ears for the tunes of good management.

Managing legal departments is not herding cats.  It is not an oxymoron.  Managing a law department is a set of skills, values, perspectives, and intuitions that most people can improve, understand and apply with at least a modicum of skill.

Ed Weserman’s title, catchy and ironic to be sure, irritates me. Described in a book review as having “vast experience consulting to diverse law practices,” Weserman’s new book announces in its (self-contradictory) sub-title that it takes on “tough issues for law firm managing partners and administrators.” [www.authorhouse.com/bookstore]

A fascinating article highlighted three common ways groups of fail to interpret information.  Translated into the law department’s world, these information failures help us understand why law departments might ignore or devalue indications – signals – of serious problems [46 MIT Sloan Mgt. Rev., Spring 2005, pg 5].

Signals are not seen as warnings because they are consistent with a law department’s beliefs and aspirations.  For example, if a department prides itself on hard-ball litigation tactics, its belief in them and its desire to scorch the plaintiff’s earth could blind it to signals about higher costs, longer cycle times for law suits, a more aggressive plaintiff’s bar, and negative publicity.

Warning signals are noticed but the general counsel and senior lawyers do not act on them.  A law department might lose several A players, lag on employee morale surveys, rumble with wide-spread discontent during annual reviews, and hear from the HR person supporting the department about continuing tensions.  If senior management of the department does nothing based on these information signals of, a serious condition will worsen.

A widely applied psychometric test is usually widely known as Myers-Briggs.  (I am an ENTJ, if you want to know.) Understanding style differences can help managers significantly.

I do not know whether data exists to compare MBTI (Type Instrument) scores of private practitioners to those of in-house attorneys.  But research has been published about generic lawyers’ scores.  How do lawyers compare to other adults in the United States?

Here is some data from cherylstephens.com/professional/ABA-MBTIcharts.pdf.

What psychologists know about people’s behavior when they must make choices has applications for law departments.  A piece in the NY Times explained these findings about choice behavior (March 7, 2005 at page WK12).

For example, when people face too many choices, such as juggling more than 18 major issues in an agreement being negotiated or picking matter types from a list of 32, they balk.  They stumble with cognitive overload. 

Likewise, when people choose from among a wide selection, they express more regret and uncertainty about their decision.  If a department has 10 good candidates to hire for an open position, they may look ruefully look back on their choice as compared to having only three candidates.