Nicholas Nassim Taleb's book, The Black Swan: The Impact of the Highly Improbable, introduced a wide lay audience to the the "black swan effect," whereby people tend to overgeneralize based upon extremely rare, but impactful events. More generally, in psychology, this is referred to hindsight bias. The basic idea is that highly improbable events tend to get noticed. They stick in the brain and are easily accessed mentally. As such, people tend to underestimate just how improbable the event was. In addition, most people are really crummy at comprehending either really large or really small numbers. So, for example, an average person can't really distinguish the difference between a one-in-a-million chance and a one-in-ten-million-chance. Both are pretty much "never gonna happen." By contrast, people are pretty good at appreciating the difference between a coin flip and a one-in-twenty chance. Mathematically, the two comparisons are identical. The first event in each pairing is ten times more likely to happen than the second one.
Recently, Taleb has teamed up with Daniel G. Goldstein, and Mark W. Spitznagel to apply the black swan effect to corporate risk management in an article in the Harvard Business Review, enititled, "The Six Mistakes Risk Managers make in Risk Management." The focus of the article is to help managers recognize hindsight bias in their own decision-making. They caution these risk managers not to think they could have predicted these events from the past. Not should they use them to predict the future.
Given how much difficulty even seasoned risk managers have overcoming hindsight bias, it should not be surprising that ordinary people find the problem almost insurmountable. The problem is that many torts are the results of Black Swan events. A very improbable event takes place, adversely impacting someone in a profound way. That person sues and some company finds itself defending a failure to predict and prevent the unforeseeable. So, a risk manager also needs to understand this issue because it profoundly affects her company's performance in court.
I wrote an article on how (poorly) jurors handle issues of statistics and probabilities for The Jury Box, back when it was a newsletter. In addition, I have given several presentations on this topic, some slides for which can be found here. Given the timeliness of the topic (Really, it's timeless), I am reprinting that original article below. I hope you find it instructive.
A jury trial can be Risky Business (Don’t worry – not all issues will make reference to Tom Cruise). In addition to the inherent uncertainty associated with putting your case in the hands of a group of laypersons, a jury trial is complicated by the fact that jurors themselves are notoriously unreliable at evaluating risk. In this issue I focus on how juries handle probabilities, risks and cost-benefit analyses.
If it weren’t for bad luck, I’d have no luck at all
Most litigation involves a dispute over an unlikely event. A patient develops an allergic reaction, brakes fail, a grape rolls down an aisle to precisely the place where a little old lady is about to take her next step. These low-probability events turn into legal questions of foresee-ability, reasonable care and adequate notice, all of which turn, to one degree or another, on just how unlikely the jury believes the event to have been.
One common problem that jurors have evaluating probabilities is known as hindsight bias. When someone learns of a low-probability event having actually occurred, there is a tendency to treat it as if were much more likely than it was. If a juror places greater likelihood on the event, she will believe it to have been more easily anticipated and will assign greater urgency to guarding against it. The result is that defendants are often blamed for not anticipating and preventing truly freak accidents.
An alarming second order effect is that the more bizarre the circumstances, the greater the hindsight bias. This may be because really weird circumstances are more easily remembered and recalled by jurors.
One strategy for overcoming hindsight bias is to argue by analogy to something with which jurors are likely to be familiar. The problem usually confronts defense counsel, so it is also wise to choose an analogy for which jurors might feel some responsibility. For instance, if one argues that an allergic reaction to a medication is as common as an automobile accident caused by a sneezing driver, jurors may conclude that the situation was not very dangerous, given that they never pull over their cars just because they need to sneeze.
All costs with no benefits
The economic theory of reasonable care in tort goes back at least as far as Learned Hand’s opinion in Carroll Towing. A cost-benefit analysis showing that all economically efficient precautions were taken is supposed to be a defense to a charge of negligence. Many industry regulations make such calculations mandatory. One might imagine, then, that jurors would look favorably upon companies who perform cost-benefit analyses. One would be dead wrong. Typically, whatever appreciation that jurors might have for a company thinking hard about safety is overwhelmed by their discomfort in reducing human pain and suffering to a mathematical calculation, especially one involving money.
Several empirical studies have shown that defendants are almost always punished for performing cost-benefit analyses, regardless of how clearly the calculations support the measures taken. Plaintiffs’ attorneys are wise to play up the cold, callous, calculating nature of the defendant’s methods. By contrast, defense counsel has the difficult task of convincing the jury that her client cares about safety without the testimony being reduced to probabilities, statistics and dollar signs. Again, reasoning by analogy is often the best policy, alerting jurors to the many cost-benefit calculations they perform in their every day lives, with a focus on those costly precautions most people choose not to take. For instance, it is clearly safer for children to wear helmets on playgrounds but almost no parent makes her children wear them.
It is also worth noting that companies are actually punished for placing a higher value on human life in their cost-benefit analyses. While this high value might help marginally in avoiding liability, it creates a costly anchor when jurors are calculating damages.
The zero risk fallacy
Many jurors mistakenly believe that it is possible to make products, services and treatments absolutely safe. They conclude that any risk of loss or injury is unacceptable. They have essentially adopted a strict liability standard despite the law to the contrary. Others have simply decided that manufacturers or service providers, rather than consumers, should be responsible for all safety precautions because of perceived wealth or knowledge advantages.
Many jurors are troubled by the idea of bad things happening to innocent people. Some conclude that the world is unfair and that the poor victim is entitled to be compensated for her loss. The only source from which the jury can take money is the defendant, so liability is attached despite conclusions that the defendant did nothing wrong. The inadmissibility of evidence of insurance can exacerbate this problem since jurors often assume that the absence of any mention of insurance means that the plaintiff had none.
Plaintiffs face their own risks
Juror difficulties with risk and probabilities do not always benefit plaintiffs. Plaintiffs who are engaged in risky activities are sometimes entitled to compensation because defendant’s conduct unacceptably increased the risk. Jurors sometimes conclude that risk-takers implicitly assume all responsibility for their well-being. For instance, a juror might think, “Hey, skiing is a dangerous sport. If you get hurt, you have no-one to blame but yourself.” A plaintiff will have trouble convincing such a juror that the ski-binding manufacturer is liable for her injuries.
In most cases, both parties have behaved imperfectly. Some jurors implicitly adopt a contributory negligence rule, whereby any fault by the plaintiff bars compensation. I recommend that counsel make sure that the jury is given a very clear instruction on negligence. Ideally, the jury should be given the instruction in advance of opening arguments (an increasingly common practice, endorsed by the ABA). The idea is to get the jury to focus as quickly as possible on the defendant’s conduct.
I also recommend that plaintiff’s counsel consider a “de-fanging” strategy, whereby the plaintiff owns up to any personal mistakes. This will prevent defense counsel from raising the plaintiff’s failings in a manner that suggests to the jury that they somehow excuse the defendant’s conduct. If the plaintiff conveys confidence in the legitimacy of her claim despite a full appreciation of her own shortcomings, the jury is more likely to do so, as well.