Law Department Management Blog

(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

Much has been made about expertise being the payoff of 10,000+ hours of disciplined, thoughtful practice (See my post of June 12, 2005: Herbert Simon’s 10-year rule on expertise; July 15, 2005: how to increase “deep smarts.”; Nov. 6, 2006: effortful study over time, plus motivation; Jan. 18, 2007: concentrated work and further effort; March 4, 2008: compensation may reflect immersion over years; and April 29, 2010: hard, deliberate practice matters more than innate talent.

An article in the NY Times, Nov. 20, 2011 at SR12, concurs that immersion and focused learning over time goes a long way. Practice, done right, helps to make perfect. But the writer makes two further points. Based on extensive research, “’working memory capacity,’ a core component of intellectual ability, predicts success in a wide variety of complex activities.” You test working memory by having someone try to remember information (like a list of random digits) while performing another task.

Second, the author says that scores on the SAT correlate so highly with IQ that some regard it as a thinly disguised intelligence test, which correlates to working memory capacity. Possibly LSAT scores translate the predict the same way and as well.

One of the consistent attacks on the rational homo economicus is that we so often fail to let our judgments of probability stay close to an informative statistic, referred to by cognitive researchers as a “base rate.” If you were asked the average number of lawyers in the AmLaw 200 firms, you might quickly say 400, or some number. You retrieved that number so quickly that you didn’t stop to think about what you might know that could give you a decent baseline for your estimate: the sizes of large firms retained by your department, your sense of firm size when you last interviewed, or the list you reviewed of global large firms or any other source of a base rate.

We should start with base rate clues, even if they are partial. More generally, and the source of this post’s idea, Daniel Kahneman, Thinking, Fast and Slow (Farrar, Straus & Giroux 2011) in Chapter 14, at 154, urges us to question the diagnosticity of our evidence – the degree to which it favors the hypothesis over the alternative.

The more arguments you come up with to support your decision, the less confident you will be that the decision is correct. Doesn’t that disturb you, as someone who prides yourself on thinking honestly, objectively and thoroughly about what positions to take? Yet the psychological paradox has been well researched, as described in Daniel Kahneman, Thinking, Fast and Slow (Farrar, Straus & Giroux 2011) in Chapter 12.

Our minds work harder and harder to come up with additional advantages of a course of action, and what Kahneman calls our System 1 brain, our quick and instinctive brain, misconstrues that effort as uncertainty and doubt. If the idea was felt hard to arrive at and formulate, the conclusion must be doubtful. That part of our mind does not weight and evaluate arguments; it fires off on ease and availability only.

This blogger has tried to come up with reasons for points made here, even going so far as to force and collect pros and cons (See my post of March 23, 2009: pros and cons of various practices, with 13 references and two metaposts.). Psychologically, and ironically, that effort may have instilled a sense of skepticism more than confidence! So think deeply about all sides of an issue but keep your neural eye open for the instinctive consequences, a feeling of lack of certainty.

Once a number is put on the table, it can exert an untoward effect on those around the table. The “anchoring effect” of the first number put forward in a negotiation or discussion powerfully, yet often unconsciously, shifts both sides closer to that number. Even wholly unrelated anchors weigh down (or up) the subsequent number, as is persuasively explained by Daniel Kahneman, Thinking, Fast and Slow (Farrar, Straus & Giroux 2011) in Chapter 11. The next time you want a discount from a law firm, start with a figure like 25 percent. It will anchor the subsequent negotiations. If you want permission to buy software, mention early on “an ROI of perhaps 50% or more” and let that anchor work its subliminal charms.

This distorting effect surprises no psychologists and is well understood. What Kahneman also illuminated for me is the effect of a cap or floor. If a general counsel decrees that budgets have to be prepared for all matters expected to cost more than $50,000 in external fees, or if online research less than $1,000 requires no prior approval by the responsible in-house lawyer, those thresholds will influence everyone – they will anchor decisions involving them. Numeric guideposts, like goals, alter behavior (See my post of May 16, 2006: gaming performance metrics; Sept. 13, 2006: people try to manipulate performance metrics; and Nov. 11, 2009: the plasticity of numbers in goals.).