by Tom Stilp JD, MBA/MM, LLM, MSC, DBA, January 21, 2026
There is evidence that humans systematically depart from rational behavior (Posner, 2011). That is to say, humans are predictably unpredictable. Most humans have difficulty dealing with what Judge Posner called “low-probability events” (Posner, 2011 at p. 22). Based on our ancestral development, the need to address low-probability events offered little survival benefits, as surviving required attention on high-probability threats.
What does this mean for clients and legal analysis? As lawyers, we see thousands of transactions where a low-probability event may have happened a dozen times, a so-called fraction of fraction. But still, the lawyer knows the event happened. Compare that with a client’s knowledge, using a much smaller universe of transactions, never seeing the event and, therefore, incorrectly believing the event does not ever happen. This is where the cognitive dissonance occurs, where the attorney will offer advice based on the experience that the event is infrequent, but it does and will happen, and the client’s understandable reluctance to pay for guarding against a low-probability event.
A good attorney will assume an issue will occur and include prior boilerplate (“boilerplate” is commonly used and accepted language in contracts that has been approved by the courts); if the issue does not occur, the contract covered an issue that did not happen, a false-positive (Type I error). A bad attorney will fail to provide for a contingency covered by boilerplate, assuming there will be no issue; if the issue happens, the contract failed to cover it, a false-negative (Type II error). Clients will not notice the first type of error, but will notice the second.
If the lawyer leaves a gap in the contract (the bad attorney committing a Type II error above), courts provide default rules to fill in the gaps (Posner, 1998). However, according to Judge Posner, courts frequently get it wrong. Courts can use a variety of methods to fill gaps, such as (1) trying to figure out what the parties really meant; (2) guessing what the parties would have drafted in the contract had they spent more time on it; (3) pick an efficient solution on the basis that the parties want that resolution; or (4) toss a coin and break a tie, perhaps using some rule of contract interpretation, of which there are many (Posner, 2005, at p. 1590).
Clearly, none of these options is satisfactory. Accordingly, the higher value of the contract, the more justified the cost on making the contract complete (Posner, 2005). In fact, according to the formula (below), the more spent to get it right, the more utility for the client. We have prepared and litigated thousands of contracts, and know what to include and what not to include to be cost-effective.
References
Posner, E. (1998). The parol evidence rule, the plain meaning rule, and the principles of contractual interpretation. Univ. of Penn. Law Review, 146, 533-577.
Posner, R. (2005). The law of economics of contract interpretation. Texas Law Review, 83, 1581 – 1614.
Posner, R. Economic analysis of law (8th ed. 2011). Aspen Publishers.
Rosen, S. (1981). The economics of superstars. The American Economic Review 71(5), 845-858.
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¹ There is an inverse relation: The probability of judicial error (“courts getting it wrong”) goes down as the investment of negotiating and writing the contract goes up. To express this idea as a formula, let “u” = utility, “p” = probability, “f” = fees by the attorney for negotiating and writing the contract, “e” = judicial error, and “L” = loss of time (t), litigation cost (c) and opportunity (o). Thus, we have:
u = [p(v) + f] – [p(e) + L(t,c,o)]
Describing the formula, the utility of a clause depends on the probable value of that clause (i.e., its importance), plus the attorney fees to prepare it, weighed against the probability of judicial error if there is a gap, plus the loss of time, litigation costs and opportunity. The formula suggests that clients would maximize their utility by having the attorney negotiate and prepare clauses, particularly clauses of high value, rather than leave a gap and the related costs for a later date.
