Written by: Roger Royse, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
Cognitive behavioral therapy (CBT) has been developed to change distortions in thoughts, beliefs, and attitudes. In psychotherapy, CBT is intensely practical and focuses on solving problems and is not only an effective therapy tool but can also be used to obtain better outcomes in law and business.
CBT starts with identifying unhelpful thinking styles (cognitive distortions). For example, we may engage in magnification and minimization and overstate the effect of an event or make it seem less important than it is. Businesses must accurately assess risks to make good decisions but executives will sometimes overreact to a perceived risk and take action that may not be required. Similarly, an executive may ignore a real risk with no factual basis for doing so. We see magnification and minimization often in areas where action or inaction can have outsized consequences (such as class action litigation or employment matters).
Similarly, contrary to what game theory teaches us, humans tend to engage in emotional reasoning that may be less than logical. If someone feels it, they assume it to be true. Litigants are often, if not always, emotionally invested in their cases and may not act as they would if they took an unemotional, logical view.
All or nothing thinking is another trap that affects many. This distortion is characterized by seeing things as black or white, complete success or dismal failure. Few things are so in business and law and all or nothing thinking misses the fact that most issues are matters of degree. A course of action may not be simply good or bad but, instead, somewhere in between. Closely related to this overgeneralizing, which results in finding patterns based on single events.
One of the most insidious distortions is the application of a mental filter in which a party only sees what they want to see. Is that person, scenario or result as bad as you think it is? Or is it that you have filtered out the good aspects?
Parties in negotiation must often understand the goals of their counter party. In that environment, it is easy to jump to unfounded conclusions. Do you know how your counterparty values a proposed transaction? Or are you assuming so without evidence?
The number of cognitive distortions is limited only by the human imagination. CBT also offers a systematic approach for resolving them.
The first step is identifying whether a belief is a distortion. Once that has occurred, the evidence or argument can be examined. For example, is your counter party dishonest? Or simply self-interested? Viewed in the clear light of facts, the answer may become clear.
After properly evaluating the belief, we can substitute problem solving for reaction in solving a problem. For example, a tax or regulatory compliance matter might carry a small chance of causing harm but that harm would be large enough to threaten the viability of the business. In that case, the decision makers may reasonably determine to incur the costs to reduce the risk by restructuring, avoiding a transaction or simply taking a conservative approach to interpreting the rules.
CBT was not likely developed with business transactions in mind but, since businesses are managed by people, CBT can be a useful tool to making better decisions.
Roger Royse, Executive Contributor Brainz Magazine
Roger Royse is a partner in the Palo Alto office of Haynes and Boone, LLP and practices in the areas of corporate and securities law, domestic and international tax, mergers and acquisitions, and fund formation. He works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger is a Fellow of the American College of Tax Counsel and former chair of several committees of the American Bar Association Sections of Business Law and Taxation. Roger has been an instructor or professor of legal, tax and business topics for the Center for International Studies (Salzburg, Austria), Golden Gate University School of Law and Stanford Continuing Studies. Roger is a nationally recognized authority on AgTech – the technology of food production ‒ and the legal considerations for companies in this industry. Roger is also the author of 10,000 Startups: Legal Strategies for Success and Dead on Arrival: How to Avoid the Legal Mistakes That Could Kill Your Startup and has been interviewed and quoted in the Wall Street Journal, Forbes, Fox Business, Chicago Tribune, Associated Press, Tax Notes, Inc. Magazine, Nikkei Asian Review, China Daily, San Francisco Chronicle, Reuters, The Recorder, 7X7, Business Insurance and Fast Company.
