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RISK ANALYSIS
by Charles B. Parselle
The gravity of a risk is its magnitude multiplied by its probability.
Russian Roulette is a game in which a single bullet is placed in a revolver with six chambers. If you play this game, the chances are 6 to 1 in your favor. But the consequence of failure is death. Who would play the game for $5? $500? $5,000? $50,000? $500,000? $5,000,000? $50,000,000? $500,000,000? Some people would never play this game, no matter what the prize for survival, but others would find a point at which they are willing to take the risk.
If two bullets are placed in the revolver, the odds in favor of death have just doubled. Whoever plays the game now has only a 1 in 3 chance of survival. Not many people would accept such odds, but some will always be found who will take that chance if the rewards are enough, depending on their personal situation. People undergo operations where the chance of a successful outcome is extremely low, but where the chance of survival without the operation is even lower. Some people are willing to kill themselves so their family can collect insurance proceeds. People routinely incorrectly assess the risk they are undertaking. Millions of people buy lottery tickets every week, which amounts to a kind of tax on their income, but they accept the exceedingly low odds of success because the amount at risk is also very low. But people will ruin themselves in gambling casinos, where the odds are against them but considerable better than the chances of winning a lottery, because their optimism keeps them believing that they are going to outwit “lady luck.”
Robert McNamara, Defense Secretary during the 1962 Cuban missile crisis, estimated the chance of all out nuclear war during those years as high as 1 in 6. How many people would play Russian roulette with their own lives and a single bullet in the chamber?
Most of us are unlikely to hold the fate of millions of people in our hands, but the essential assessment of risk factors enter into play every time people engage in conflict, whether by way of litigation or otherwise. The disputants assess risk, consequence and reward. They try to predict the likely outcome if they do not settle. Whether they do it instinctively or by laborious examining every conceivable fact, they are estimating the magnitude of the risk multiplied by its probability, and making their decisions accordingly. Very often, they get the equation wrong; in fact, looking at it purely statistically, whenever two parties got to war, or to trial, or escalate any conflict, one of them has misestimated the reality of the situation.
In any particular instance, it may be possible to estimate one’s chances at greater or lesser than 50 percent, but over the long term the 50/50 proportion holds true.
In legal situations, if an attorney has a case with “weak liability”, he may still take that case to trial if the potential payoff is very large. For example, if someone is involved in an automobile accident and rendered quadriplegic, then even if the chances of success are slim, some attorneys will take that chance because the injuries are so horrific that, if the jury finds in favor of the injured person, the compensation will be very large.
On the other hand, even where liability is considered a “slam dunk” a case may be settled for a relatively modest amount where the damages are quite low.
One of the main reasons that people settle their disputes is exhaustion, rather than pessimism. People get into fights or lawsuits, and it is remarkable how optimistic both sides are about a favorable outcome. But these things have a tendency to drag on and on, and the longer they continue, the more likely it is that the disputants will simply get fed up with playing that particular game, and wish to “move on with their lives.” Once the parties get involved in a conflict, it is as if they were dragging the burden behind them attached to one ankle by a rope. It slows them down. It takes their attention away from other things. What appeared at the beginning of the site as being a most important principle may come to be seen over a period of time as simply not worth all the bother.
Therefore, even though the assessment of risk may be entirely wrong, and even though parties may be unduly optimistic about their own chances, nonetheless at time will come when they may be very ready to put the matter to bed. People do stop fighting out of sheer exhaustion.
“Let him be rich and weary, That at least, if goodness lead him not, yet weariness
May toss him to my breast.”George Herbert [1593-1633]
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