Mental Models for Corporate Counsel - Fooled by Randomness
We tend to generously attribute outcomes to actions and underestimate simple randomness.
Corporate counsel can help clients by reminding them of the significant impact of random and uncontrolled events.
What is the model?
This one isn’t so much an accepted ’ mental model’ but rather the core message I took away from Nassim Taleb’s book, Fooled by Randomness.
To paraphrase, we tend to look back on our lives and build causal stories around events (i.e. ‘I was responsible for…’) when they were much more a result of random variables outside our control. So we tend to overestimate the extent to which we might influence future events.
That is, we are ‘fooled’ by the consequences of randomness we don’t understand.
How does the model apply to corporate counsel?
In my view, corporate counsel need to remain cautious of the extent to which people can over-estimate control over outcomes. If we stay mindful of how randomness can overshadow our actions, we can better appreciate potential risks.
For example, in a contractual negotiation setting a client might agree to take on additional risk through a widely drafted indemnity. The client might say something along the lines of ‘We’ll live with it’ or ‘We’ll just have to monitor that as we go’. They might believe it’s risk that can be mitigated through additional action - perhaps a new procedure or an individual responsible for making sure the problem never eventuates. But the ‘Fooled by Randomness’ Model tells us the risk is more likely to explode as a result of random occurrences outside anyone’s control, and so our actions are of limited use.
The corporate counsel might prompt the commercial risk-taker to consider the butterfly flapping its wings loudly over the horizon, by asking questions such as ‘Sounds good, but just in case, have you considered what happens if this doesn’t play out the way you think it will?’ or ’have you priced in any kind of ‘bad luck’ premium here?’
Be on the lookout for..
Any time someone says something along the lines of ‘That won’t happen’ or ’we’ve done this before and it worked out fine’.
Where to read more..
Taleb’s book is great and well worth buying.
I could dump many quotes from the book here, but instead I will stick to just this one favourite — which I think is particularly appropriate to the corporate counsel setting:
“Finally, there is an ingratitude factor in warning people about something abstract (by definition anything that did not happen is abstract). Say you engage in a business of protecting investors from rare events by constructing packages that shield them from their sting (something I have done on occasion). Say that nothing happens during the period. Some investors will complain about your spending their money; some will even try to make you feel sorry: “You wasted my money on insurance last year; the factory did not burn, it was a stupid expense. You should only insure for events that happen."
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