Risk and Uncertainty

Why lawyers get *half* of the risk equation right

Risk. A four-letter word.

If you’ve worked within a mile of lawyers, you know that lawyers are famously “risk averse.” Do you know how you know that lawyers hate risk? Because lawyers rely heavily on the phrase “it depends.”

What does “it depends” have to do with risk, you might wonder. As it turns out, risk is a function of two things: (1) the impact of an event’s occurrence; and (2) the uncertainty about whether that event will occur.

People often misunderstand the second part, and think that uncertainty is the same as probability of an event occurring. That’s not so. If something is definitely going to happen (i.e., 100% probability, 0% uncertainty), that’s not a risk: that’s a fact. If something is definitely not going to happen (0% probability, 0% uncertainty), that’s also not a risk: that’s an irrational fear. Uncertainty of an event’s occurrence is the key variable, not probability.

Risk exists only when there’s some chance of an event occurring, and you don’t know whether it’s going to occur or not. Risk is reserved for the unknowns (all three, in fact! the known unknowns, the unknown knowns, and the unknown unknowns all entail risk).

So why do lawyers say “it depends?” Because lawyers are trained to manage risk by exploring uncertainty: juries are famously hard to predict; judges, too; Congress may change a law; transactions may fall apart; etc. It might happen, but we aren’t certain it will happen.

That said, lawyers fail to appreciate that being averse to risk isn’t the same as properly managing it. In a future post, I’ll address why lawyers tend to misunderstand the first part of the risk equation. But for today, it’s worth remembering that risk isn’t about what you know; rather, it depends on what you don’t.