Why is Tort Law like Accounting?
I have suffered a million dollar loss for which I think you should be liable. I sue you. If the court concludes that there is a .4 chance that I am right, I get nothing. If it thinks there is a .6 chance, I get a million dollars. All probabilities less than .5 are treated as zero, greater than .5 as one.
Accountants do the same thing. If your accountant thinks the probability of your losing the suit is .4, he doesn't list your expected loss of $400,000 as a liability. He leaves it out entirely, aside from a footnote mentioning the existence of the lawsuit. If he thinks the probability is .6, he puts it in as a million dollar liability.
I suspect the underlying reason is the same in both cases. Both tort law and accounting depend on low quality decision making mechanisms. Nobody designing an automobile or diagnosing an illness would do it by putting the question to 12 laymen. So instead of asking the hard question--what is the probability that the defendant was negligent--we ask a simpler question: Was he probably negligent? If you are not competent to answer a comlicated question, there is much to be said for limiting yourself to simple ones.
An accountant is a more sophisticated decision maker than a jury, but he knows much less about a business than the people running it. And those people frequently have an interest in having the accounts turn out one way instead of another--high equity to boost stock prices or low profit to hold down taxes. One way of making it harder for them to fudge the accounts by the information they give their accountant is to have accountants use simple rules wherever possible. That explains many of the ways in which accounting substitutes a simple answer for a correct one--with the treatment of probability only one example. Other biggies are the preference for cost price over market price and the reluctance to take account of intangibles, even important ones such as brand name reputation.
And this is my last post on accounting. Unless something else interesting occurs to me.