Fooled by Randomness
2 min read

Fooled by Randomness

We tend to generously attribute outcomes to actions and underestimate simple randomness.

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 (affiliate link).

To paraphrase, because we humans are unable to shake our flawed and biased thinking, we tend to look back on our lives and build causal stories  (i.e. 'I was responsible for...') around events that were much more a result of random variables outside our control than any thing we might have done. This means we are likely 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 we overestimate a person's control over a particular outcome. If we stay mindful of how randomness can overshadow those actions we can identify new risks or have a better appreciation for risks already identified.

For example, in a contractual negotiation setting a client might agree to take on additional risk through a widely drafted indemnity. They will usually say something along the lines of 'we'll live with it' or 'we'll just have to monitor that as we go'. They likely assume this risk can be mitigated through additional action - perhaps a new procedure assigned to an individual responsible for making sure the risk never eventuates.  But the 'Fooled by Randomness' principle tells us the outcome is more likely to eventuate as a result of random occurrences outside anyone's control, and so any new risk mitigation procedures we introduce are of limited use.

What's more, we know the indemnity won't care whether the client 'tried really hard' to stop [XYZ] from happening. Once triggered, things usually get expensive despite the best of intentions.

So the wise corporate counsel might prompt the commercial risk-taker to consider the butterfly flapping its wings loudly over the horizon. 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' factor here?' may be all it takes to remind the decision makers of the importance of defending against the unknowable.

Look Out For

Anytime someone says something along the lines of 'that won't happen' or 'we've done this before and it was 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."

Many times I've found myself fighting tooth and nail over an indemnity that never becomes relevant - but that doesn't mean it wasn't worth fighting over.

Aside from reading Taleb's excellent book, you can learn more about this concept at:

--

What do you think? Have I got this one right or have I missed the point? Do you have your own example of being 'fooled by randomness' in a corporate setting? Let me know.