Lawyers are sometimes criticized as being too “risk averse”. Is that fair? After all, most people are risk (or loss) averse: the pain of losing is psychologically about twice as powerful as the pleasure of gaining or “losses loom larger than gains” (Kahneman & Tversky, 1979).
The New York Times reported an interesting example of loss aversion bias at work from the world of professional golf. The University of Pennsylvania’s Wharton School study demonstrated that “…even the world’s best pros are so consumed with avoiding bogeys that they make putts for birdie discernibly less often than identical-length putts for par,…” and attributed this to “a force as human as it is irrational: risk intolerance”. This conservative tendency came at a cost “…loss aversion costs the average pro about one stroke per 72-hole tournament, and the top 20 golfers about $1.2 million in prize money a year.” (Settling for Par: Pros More Likely to Play It Safe, New York Times June 15, 2009)
So, loss aversion is common and it carries a cost. But what could be the costs of this bias for corporate lawyers and the businesses they serve? Taking the safe course (risk avoidance or elimination) may be comfortable but unhelpful: successful corporations thrive on taking smart, well informed risk, not by taking the safe or comfortable course. The expectation of business is that the lawyers will provide reasoned and well informed legal inputs to enable smart “go/no go” decisions. Being out of step with business expectations could itself become uncomfortable and limit career progression. The risk of misalignment between lawyers and business executives is particularly acute in corporates with disruptive ambitions.
Smart business executives include their lawyers at every stage of a project because they know that high quality legal advice underpins business success. However, lawyers who are seen as too conservative can find themselves excluded from the planning process or supplanted by another lawyer who is perceived as an enabler, rather than a naysayer (sometimes referred to as "forum shopping")
Most importantly, loss or risk aversion among lawyers can carry with it significant opportunity costs for business. The M&A transaction the business didn’t pursue but a competitor picked up at a lower risk adjusted price, for example. Or the disruptive strategy abandoned or diluted because of the uncertainty and attendant risks of forging a path away from the status quo.
To be clear, none of this is to suggest that lawyers should in any way shape or form shirk their professional responsibility to advise against the unlawful or unethical. Or that one size fits all - different sectors tend to have different risk appetites, of course. Rather, this is a call for awareness and action to mitigate the costs of bias.
Comments