Archive for the ‘Behavioral Law and Economics’ Category

A Proposed Study To Measure Law Clerk Influence

posted by Dave Hoffman

Citation studies as a proxy for judicial quality are all the rage.  I concur with Larry that the effort spent often seems disproportionate to the result.  Selection is the culprit here, not just academic modesty: it’s hard to imagine that any truly dramatic effects of judicial character, or legal rule, would not be washed away by parties’ ability to settle strategically.

Exogenous shocks open windows – of limited scope – which may help us penetrate this fog.  There’s one ongoing today that I think could in several years allow us to test one of the most important, but obscure, questions about judicial performance.  Although there have been a few studies about the usage, hiring, and quality of law clerks, I haven’t seen work that really convinces me that clerks change judicial performance (rather than match it).  That question of influence is pretty important for all kinds of reasons — not least because if law clerks were really influencing their judges, we might want to spend a little bit more time thinking about their roles, ethics, hiring, etc.

So what’s the shock?  I think that the period of 2008-2011 will prove, in retrospect, to be bumper years for clerk quality.  Anecdotally, I’ve heard that the clerkship market has never been more competitive: Yale grads have been encouraged to take state court clerkships (the horror); judges in popular jurisdictions are receiving literally four to five thousand applications per clerk year; individuals who before might have taken firm jobs are instead throwing their hats in the ring; magistrate judges are taking clerks previously destined for district judges; alumni in practice for five years are going back into the clerk market and competing with fresh-faced 3Ls.  As an organ of the government, the judiciary simply eats better brains when the economy stinks.

Assuming the effect is real (which we could test by looking at placement statistics), I’d propose that eight to ten years from now – in 2018 or thereabouts – we test whether opinions arising from this bumper-clerk period are cited at a higher rate than opinions from the ordinary market periods immediately preceding and following.  The hypothesis would be that if clerks influence judges to write better opinions, better clerks will produce to more citable opinions.  Notably, we can’t perform this same analysis on the effect of past recessions, as (1) they reportedly didn’t have the same effects on the clerkship market; and (2) opinion collection practices were really sporadic before 1995.  It’s 2018 or bust.  Mitu et al., I call dibs!

  October 7, 2009 at 8:34 am   Posted in: Behavioral Law and Economics, Economic Analysis of Law, Empirical Analysis of Law, Sociology of Law   Print This Post   12 Comments

Principles for the Health Reform Homestretch

posted by Frank Pasquale

House and Senate leaders will soon have to reconcile several different versions of health reform bills. The bills are complex, but some simple principles should guide the process of integrating them into a final product. As the press reports on a whirlwind of proposed laws, we need to ask of any particular proposal: Does it . . .

1) Increase productive competition in health care? Everyone talks about “increasing competition” among insurers and providers, but there are many ways to compete. Hospitals and doctors can game the reimbursement system. Insurers may not directly discriminate against the sick, but can find other ways to keep high-risk patients out of their plans, as even the most market-oriented health policy experts realize:

[T]o avoid patients with costly, complicated medical conditions, health plans could include in their networks relatively few doctors who specialize in treating those conditions, said Mark V. Pauly, professor of health-care management at the University of Pennsylvania’s Wharton School.

Both the Netherlands and Switzerland have already experienced problems in this area, even though the Netherlands has implemented risk-adjustment methods (which attempt to deter such “cherrypicking” and “lemondropping”) far more serious than anything proposed in current bills in the US. As Karen Pollitz has repeatedly argued, we’re going to need a much greater investment in insurance regulation to make any reform bill work.

2) Make it easier for uninsured or underinsured individuals to buy coverage? Many of the proposals for allocating and awarding subsidies for coverage sound exceedingly complex. We’re hearing about serious limitations on access to exchanges, subexchanges, burdensome “free rider” provisions, etc. Any particular provision may sound good in the abstract, but taken as a whole they could become an obstacle course that makes obtaining insurance coverage a miserable and exasperating experience for those supposedly aided by reform. During the second Bush administration, hundreds of thousands of children eligible for subsidized health insurance were not enrolled because states failed to make enrollment convenient enough for time- and cash-strapped parents. As Liebman and Zeckhauser remind us, “we must design systems for mere mortals, not the people who inhabit the models of traditional economists.” What seems easy to one of DC’s privileged elite can be very hard for an overworked mom or minimum wage-earning service worker.
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  October 4, 2009 at 8:17 pm   Posted in: Behavioral Law and Economics, Health Law   Print This Post   One Comment

Bernie Madoff and the Unfortunate Consequences of Celebrity Bias

posted by Danielle Citron

Celebrity is intoxicating.  We have long been willing to play the fool to the rich and powerful, even if that means turning a blind eye to signs of trickery.  In the late 1980s, a 37-year-old con artist convinced Duke University administrators and students that he hailed from the wealthy Rothschild family of France despite the fact that he spoke no French, drove a run-down car, and offered clipped out magazine articles to show his family’s homes. During a two-year charade, the imposter borrowed (stole) thousands of dollars from Duke and joined a fraternity. (I was an Duke undergraduate at the time, but alas did not know him).  More recently, Christopher Chichester tricked many into believing that he was a Rockefeller despite his gauche manners and outrageous claims (e.g, that he owned “the key to Rockefeller Center”).  As Clark Rockefeller, he gained admission to exclusive clubs and married a partner at McKinsey Consulting.  Only after Mr. Chichester kidnapped his daughter from his ex-wife did the police discover his true identity and connection to unsolved murders.

Perhaps such celebrity bias had some role in the SEC’s bungling of the Bernie Madoff fiasco.  On Thursday, the S.E.C.’s Inspector General’s Report explored why the agency missed so many “red flags” about Madoff since 1992.  The report discussed missed leads, bureaucratic snafus, and investigators’ inexperience.  Investigators were far too believing because they were simply awed by him.  One investigator described Madoff as “a wonderful storyteller” and a “captivating speaker.”  As with the faux Rockefeller and Rothschild incidents, Madoff’s ruse worked for so long despite the clues of foul play perhaps because investigators and investors could not shake their sense of Madoff as a rich, powerful, and trusted financial guru.  Madoff’s celebrity reputation anchored their thinking, permitting Madoff to get away with his scheme for far longer than it should have.  As Madoff’s victims’ stories attest, celebrity bias had profoundly destructive consequences.

StockXchange Image; Wikimedia Commons Image

  September 5, 2009 at 3:39 am   Posted in: Behavioral Law and Economics, Corporate Law, Culture, Current Events, Psychology and Behavior, Securities Regulation, Uncategorized   Print This Post   No Comments

Game Theory and Law

posted by Gerard Magliocca

Yesterday The New York Times magazine profiled Bruce Bueno de Mesquita, who was a professor of mine at Stanford and is a leading figure in using game theory to predict political and social outcomes.  His was the best class that I ever took as an undergraduate.  (Honestly, ten years out of school, how many classes do you look back on and think, “Wow, that was really terrific.”)  One lesson from that course that I took into my legal scholarship is that you have to study near-misses as well as successes to understand a phenomenon. He made us look at foreign policy crises that did not lead to wars and asked “Why not?”  This is pretty good model for thinking about law, especially in the constitutional area.  Indeed, my forthcoming book on the Populists and article on the defeat of the Child Labor Amendment apply that concept aggressively and yield some interesting insights as a result.

  August 17, 2009 at 12:05 pm   Posted in: Behavioral Law and Economics   Print This Post   No Comments

A Breach Born Every Minute

posted by Dave Hoffman

In the Spring, I asked you folks for some help thinking of examples of true Holmesian agreements, “contracts which, when breached, have a similar psychological profile to a speeding ticket.”  It turned out to be pretty hard to identify such agreements, since most people believe breach to be a morally wrongful activity – not simply an option to pay damages at will.  As Jonathan Baron and Tess Wilkinson-Ryan previously have found, the degree to which individuals find breach to be “bad” is quite manipulable:  breaches to gain are worse than breaches to avoid loss, liquidated damages ameliorate feelings of reprehensibility, etc.  Missing from this research has been a psychological theory of what makes breach so aversive.

Tess and I came up with a working hypothesis: breach is seen as a form of interpersonal exploitation that makes the breachee a sucker.  We’ve put together a paper that reports on a series of experiments supporting this hypothesis, titled (naturally) “Breach Is For Suckers.“  Check out the abstract, after the jump.

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  August 15, 2009 at 9:41 am   Posted in: Behavioral Law and Economics, Contract Law & Beyond, Law and Psychology   Print This Post   6 Comments

More Carrots, Fewer Sticks

posted by Gerard Magliocca

One project that I’m working on (but haven’t written up yet) is about using liability rules to reward socially useful behavior.  The law is replete with civil and criminal sanctions against wrongful conduct.  Public policy is also enthusiastic about using property rights to encourage innovation or investment.  Less attention, though, is given to what I call “rewards” for positive action.

Consider the concept of salvage in admiralty.  Salvage is a liability rule that gives a vessel a claim against another vessel for a reward (determined ex post by a court) when a successful rescue is made.  This is more effective than imposing an affirmative duty on vessels to help others and sanctioning them if they do not, largely because the enforcement costs of such a duty would be prohibitive.  Likewise, there is no property rule that can achieve the worthy objective of preventing ships or their cargo from sinking once they are in distress.  Other rewards are set ex ante by an administrative body and tailored to a particular issue.  For example, the police often offer rewards for information leading to the arrest of a suspect.  This is better than threatening people with accomplice liability.

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  August 13, 2009 at 3:37 pm   Posted in: Behavioral Law and Economics   Print This Post   7 Comments

The Law Gives Up on Beatty Chadwick

posted by Dave Hoffman

Two years ago, I noted that H. Beatty Chadwick was about to spend his thirteenth year in a Pennsylvania jail for civil contempt, arising out of his failure to comply with a 1995 order to turn over assets in a divorce litigation.  I opined that:

Unless circumstances change, Chadwick will die in jail to preserve an idea: even civil law must be obeyed. As Robert Cover wrote, “Legal interpretation takes place in a field of pain and death.”

So, I guess that Cover needs to be footnoted: “Except when judges blink.”  Beatty is out.  And his jailers are celebrating:

About 35 prison staffers gathered yesterday – some crying and hugging Chadwick – to say goodbye to the “model inmate” who had worked in the law library and forged friendships with everyone from guards to senior administrators, said prison Superintendent John Reilly.

“He’s done more time than maybe the majority of people convicted of homicide do,” said Reilly, a former prosecutor. “What person in his right mind is going to flaunt the authority of the court and say, ‘I’m going to spend the rest of my life in jail?’ People just aren’t made that way.”

Maybe so, but that claim seems to be another example of how we routinely ignore the tremendous emotional investment people have in being vindicated by courts.  As far as I can tell, the state courts of Pennsylvania have not abandoned their factual finding that Chadwick had the money and refused to comply with their order. They’ve just concluded that his ornery will would never bow to any legal pressure.

But just because the judges of Delaware County gave up on compliance doesn’t mean that Chadwick has paid his debt to the courts, his ex-wife, or society at large.  His conduct (as alleged) created a social harm which his ultimate freedom only made worse.  As the  attorney for Chadwick’s ex-wife pointed out, “[h]ere’s a guy who thumbed his nose at a court order for 14 years … There should be some kind of sanctions for doing that.”

  July 27, 2009 at 7:36 pm   Posted in: Behavioral Law and Economics, Criminal Law, Family Law, Law and Psychology, Weird   Print This Post   4 Comments

Does Law and Economics Destroy Law Students’ Sense of Justice?

posted by Dave Hoffman

A draft paper by Raymond Fisman (Columbia Business),  Shachar Kariv (Berkeley Economics) and Daniel Markovits (Yale Law) has gotten surprisingly little attention given its potentially radical implications.  Maybe it’s the title: Exposure to Ideology and Distributional Preferences. I would have gone with something different.  Perhaps “Law and Economics Eats Law Students’ Hearts.”

The authors looked at first-year students at Yale Law School taking contracts and torts.  They labeled the students’ professors by their purported tendency to emphasize economic and “humanist” rhetoric in class.*  They then used the natural experiment of law school sorting to determine the effect that exposure to economic ideology had on law students’ distributional preferences in the dictator game. That is, did students taught by economically-minded professors behave differently than those taught by professors disposed toward humanism or critical-legal studies?

The bottom line: students taught by economically-minded professors were both more selfish and more likely to see fairness as a form of kaldor-hicks efficiency.  By contrast, students taught by humanists were more generous and also  likely to see fairness as a matter of equity.

These are important results for those interested in legal education.

• First, and most obviously, it suggests that our preferences for altruism and the content of fairness are highly manipulable — one semester of teaching by a professor – at Yale, no less – can affect them.  I admit to being a bit surprised by the size of the effect, given the mixed results from earlier work on the relationship between economics and altruism.  It’s also surprising that Yalies are so impressionable!  I wonder whether the effect persists past a semester, and whether better coding of actual classroom discussion would have changed the results.
• Second, it suggests yet more reasons for researchers to think hard about the effect that law school teaching has on the content of legal doctrine.  As I’ve argued, it’s quite likely that some law school professors who never published a lick have had more effect on substantive legal doctrine than those who’ve written reams, simply by influencing how their students (who went on to be lawyers and judges) thought about the content of rules and the byways of arguments.  We should do more work like this!
• Third, and most personally, this makes me nervous.  I’m a highly socratic teacher who places lots (and lots) of emphasis in the first-year on efficiency-arguments and on the need to look beyond questions about distributional equality in the present case.  I thought that by doing so I was helping students to think critically about the dynamic nature of contract law – the relationship between contract rules and market price; the usefulness of an intelligent system of defaults; the importance of getting beyond gut intuitions.  But maybe I’m also indoctrinating the students to grab more of the pie for themselves.  Nuts.

*The method they used to code economic preferences was, to be frank, a little mystifying.  They gave points for PhD’s in economics, but had to make exceptions for Alan Schwartz, PhDless but L&E to the bone, Guido, for obvious reasons, and both Robert Gordon and Carol Rose, who are similarly off-set.  Why not simply ask the professors themselves how much they emphasized economic rhetoric in class?  Or the students?

  May 18, 2009 at 6:17 pm   Posted in: Behavioral Law and Economics, Contract Law & Beyond, Economic Analysis of Law, Empirical Analysis of Law, Law School, Law School (Scholarship), Law School (Teaching), Law Student Discussions   Print This Post   4 Comments

The Law School Faculty as a Commons

posted by Michael Madison

What’s the connection between law professors and stand-up comics?

My last post pointed to a recent short piece on comics and the relationship between “anti-plagiarism” social norms that encourage comic creativity and the emergence of those norms in the context of commodified comedy.  Comics sold and consumers bought LPs by the boat-load. The success of record albums had a clear if unmeasurable impact on comics’ incentives to produce and innovate.

A generalizable point is this: Record album sales are an objective and observable characteristic of this particular environment. The data is mostly external to the comics themselves. What scholars describe as social norms among comics are, by contrast, mostly subjective. Norms are personal to each comic. We “observe” the existence of social norms them by inferring their existence from regular behavior and from anecdotal reports. That interplay between observable, objective, and “external” dimensions of an innovation environment and subjective, “internal” dimensions of that environment is central to understanding its mechanics.

In fact, that interplay is probably central to understanding the mechanics of any cultural context. It’s a central theme in the work that I’ve begun on “cultural commons” with Brett Frischmann and Kathy Strandburg. And it connects stand-up comedy and law faculties. More below the fold.
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  May 11, 2009 at 8:33 am   Posted in: Behavioral Law and Economics, Law School, Law School (Scholarship)   Print This Post   One Comment

CCR Symposium: Risk Perception and Online Speech

posted by Dave Hoffman

I want to join the other participants in this symposium in congratulating Danielle for putting together such a terrific article. As James G. writes, Danielle frames a compelling case for thinking about online harassment as a civil rights problem, an approach both novel and bracing.

Back in March, Danielle put up a post on Trivializing Women’s Harms: The Story of Cyber Gender Harassment. That post attracted commentators, and links, who vigorously disputed both the seriousness of the risk posed by online speech and the (lightness) of the burden that she suggested be placed on anonymous speech. Were we not controlling the comment threads on these posts relatively carefully, we’d see a similar level of skepticism, expressed in vivid, personal, terms. But why would this be? Why aren’t the risks that the online “speech” pose as obvious to our commentators as they are to Daneille and others on this blog?

The reason isn’t because partisans (like the ACLU, whose inconsistency is remarked by Ann Bartow), or free speech advocates, are deliberately conforming their views of risk to their personal interests or ideological positions. Rather, as cultural cognition theory predicts, “individuals are disposed selectively to accept or dismiss risk claims in a manner that expresses their cultural values.” Persons of hierarchical and individualistic orientations will worry more about being rendered defenseless by gun control; egalitarians and communitarians will worry about the legacy of patriarchy and racism associated with guns and thus discount those risks. Similarly hierarchs will be worried about the risks of disorder following flight from the police; egalitarians will be more concerned about the risks of police oppression. And so on.

Applying the group-grid theory to the project of cyber risks suggests that individualists , who value markets and private ordering, might be disposed to discount the risks of online “mobs”, unless those mobs are directed at values of concern, like the right to be anonymous and free from regulation. By contrast, communitarians believe that individuals will interact with one another frequently, depend on one another, and that this mutual inter-dependence is a condition to be celebrated and supported. Thus, people of different cultural views will have distinct views of the risks of conduct & the benefits of regulation, and those views will (significantly) be less likely that you might think to respond to new sets of “facts”. Perversely, arguing from facts my accent, not ameliorate, dissension between individuals holding different values.

What, then, is to be done to convince the individualists that their values aren’t under assault and that the risks of online mobs are severe enough to warrant some form of regulation? Danielle suggests that framing this as a civil rights problem would serve a valuable “normative and expressive role.” The danger, I think, is that many will respond, as does Orin Kerr here, by suggesting that there are competing norms and expressed values in play. It’s a serious problem, and I don’t have the answers. But I do think that being more generous & attentive to those holding different values is an important part of coming to consensus, and thus I’m really pleased with the respect and collegiality demonstrated in this symposium so far.

  April 15, 2009 at 11:36 am   Posted in: Anonymity, Behavioral Law and Economics, Conferences, Cyber Civil Rights   Print This Post   12 Comments

The Bard of the Financial Crisis

posted by Nate Oman

Over the weekend, I re-read A Merchant of Venice, and I was struck by the fact that Shakespeare manages to include in the play virtually every element of the current financial crisis. Scene one begins with a discussion of risk assessment, and Antonio’s belief that he has managed to tame the vagaries of commercial fate through diversification. Asked by Salarino if he “Is sad to think upon his merchandise” (I.i.40), Antonio responds:

Believe me, no. I thank my fortune for it

My ventures are not in one bottom trusted,

Nor to one place; nor is my whole estate

Upon the fortune of this present year.

Therefore my merchandise makes me not sad. (I.i.41-45)

Having ignored the problem of fat tails and black swans, Antonio decides to engage in a bit of dodgy finance. He borrows in the wholesale market from Shylock under terms that appear favorable, but have a huge downside in the unlikely event of his default. Antonio, of course, is unconcerned. From his point of view he is getting cheap money by taking on what seems like an extremely remote risk. He then takes these borrowed funds and uses them to make what can only be described as a no doc, subprime loan. Bassiano wants money for a speculative venture — the wooing “In Belmont [of] a lady richly left” (I.i.161) — and Antonio agrees, in effect renting out his credit rating:

Try what my credit in Venice can do;

That shall be racked even to the uttermost

To furnish thee to Belmont to fair Portia.

Go presently inquire, and so will I,

Where money is; and I no question make

To have it of my trust or for my sake. (I.i.180-185)

Shylock, for his part, does not approve of the loose monetary policy in Venice, which he rightly blames on wild lending practices, such as Antonio’s loans:

How like a fawning publican he looks.

I hate him for he is a Christian;

But more, for what is low simplicity,

He lends out money gratis and brings down

The rate of usance here with us in Venice. (I.iii.38-42)

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  March 24, 2009 at 11:33 am   Posted in: Articles and Books, Bankruptcy, Behavioral Law and Economics, Consumer Protection Law, Contract Law & Beyond, Current Events, History of Law, Humor, Law and Humanities   Print This Post   11 Comments

Liptak Writes on Whose Eyes…

posted by Dave Hoffman

Adam Liptak’s sidebar column for today’s NYT talked about the use of video evidence in the Supreme Court, using as a lede Whose Eyes Are You Going to Believe, an article by Dan Kahan, Don Braman, and me which just came out the HLR. (Blogged before. Often. Too often? Shamelessly. Sorry. Last time! But Liptak could still have used the SSRN link. If I’m to catch Solove, I need to start somewhere.)

Liptak offers a slightly different slant on the Article than I might, focusing not on the mechanism shaping individuals’ differing views of facts and risks, and the normative consequences of those differences, but instead on the unique risks posed by video evidence. Quoting Jessica Sibley, Liptak suggests that video evidence is particularly likely to persuade judges, even though it is only a “a partial, volatile and dangerously persuasive account of what happened.” Why? Because of our genes: “it works on the brain in a different way.”

Although it is plausible that judges react to visual evidence more intensely than the paper record, nothing in Whose Eyes actually depends on judges relying on their brute sense impressions. That just made the problem much easier to test. If the Court had processed a paper record about deception in exchange (the strength of caveat emptor, for example, in a puffery case) I think that we’d see similar culturally-loaded dissensus about the meaning of shared facts. As Orin Kerr pointed out in a comment to this post, there’s nothing that special about video evidence. On the other hand, video evidence might pose distinct legitimacy concerns, since the evidence can be easily shared and viewed by the public, making it more likely that judges who call those that disagree with their view of the facts “unreasonable” will offend a large number of people. (Cf. Slobogin.)

  March 2, 2009 at 7:40 pm   Posted in: Behavioral Law and Economics   Print This Post   One Comment

The Four Cultures Blog

posted by Dave Hoffman

I just came across the Four Cultures Blog, which looks to be some anonymous blogger’s vision of how cultural cognition theory would consider various topics, including Star Wars, marketing, climate change, business failure, fatalism in public policy and much much more. (For those of you who are unfamiliar with cultural cognition theory, you can find a primer, with pictures, here. Or you can check out the project’s homepage here. Incidentally, the author of the Four Cultures blog refers to the low group-grid fatalistic cultural style, a term deliberately missing from the Kahanian papers.)

The blog appears to be little visited so far, and consequently the comments are pretty good. Check it out!

  March 1, 2009 at 10:16 pm   Posted in: Behavioral Law and Economics   Print This Post   One Comment

Mispredicting and the Philadelphia Eagles

posted by Dave Hoffman

There’s a large, and burgeoning, literature on the ways that individuals mispredict their own happiness. The classic examples are the loss of happiness from injury (becoming a paraplegic) and the gain in happiness from winning a lottery. In both scenarios, we mispredict how actual individuals experience the losses and gains. Another well-known result is one of particular salience today: individuals aren’t as unhappy when their sports teams lose as they predicted they would be, nor does their happiness last as long as they anticipated. Scholars argue that we adapt, quickly, and revert to our baseline happiness.

I’ve learned from the work of my colleague Peter Huang, and my former colleague Rick Swedloff, that we should all be a little bit more skeptical about the hedonic adaptation literature, and its adaptation to legal policy. Here’s a particular example. The literature might predict that when my Eagles beat the (hated) NY Giants today to advance to the NFC Championship, I would be joyful briefly, but then would adapt, so that I’d be moderately pleased by dinner and phlegmatic by the late evening. Indeed, on this theory, I might have started to adapt as soon as it was clear (by the mid-fourth-quarter that the Eagles weren’t going to execute their long-planned choking maneuver. And, I certainly would be aware that this win only sets me up for a greater feeling of disappointment. next week, when the Birds lose to a decidedly inferior Cardinals team. If behaving at all rationally, I should price that anticipated regret into my current mood.

Not so. I still feel pretty darn good. And, though I feel for certain Giants fans, I have concluded that the forces of evil once again have lost a battle today. Philly is on the march.

  January 11, 2009 at 9:25 pm   Posted in: Behavioral Law and Economics   Print This Post   4 Comments

Rational Actors and the Economic Crisis

posted by Dave Hoffman

I missed this when it originally happened, but you should read Richard Posner’s take on the financial crisis, as delivered to Columbia law students.

Posner devoted the bulk of his presentation to outlining the myriad motivations behind the excessive risks. What disturbs him most, he said, is that all of the risk-takers – from CEOs to the day traders to home buyers – were behaving rationally, which free-marketers such as Posner generally believe should act as a bulwark to protect against such catastrophes.

The bankers, for example, were rational in betting on mortgage-backed securities and other housing-related investments, even long after they recognized that their entire industry was, in fact, standing deeply inside an enormous, overstretched bubble. “Even if you know you’re in a bubble, it’s extremely difficult to get out,” said Posner. Pulling up stakes before the bubble explodes means telling investors to expect smaller short-terms rewards. “I think that is a very hard sell,” he said.

Besides, Posner added, when investors want to balance their portfolios, they will do it themselves with, say, bonds or treasuries. The purpose of the high-risk funds is to take the high risks necessary to generate the outsized profits.

Posner also cited the win-win structure of most top executives’ contracts: If their high-risk decisions result in big gains they receive huge bonuses, and if the gambles fail they result in huge severance packages. He noted the $161.5 million awarded last year to outgoing Merrill Lynch chief Stanley O’Neil. “Very, very generous compensation incentivizes executives to maximize their short-term profits,” he added.

Boards of directors, Posner lamented, are hardly “reliable agents of shareholders.” With compensation in the high six-figures for positions that require them to attend only a few meetings per year, board members would need to act against their own self-interest to contest a CEO’s plus-size salary – which wouldn’t exactly be rational.

“This is rational behavior. This is troublesome for economists,” Posner said. “You can have rationality and you can have competition, and you can still have disasters.”

Though he said he wanted to end the presentation on a high note, Posner seemed to have trouble finding one.

There is much here to agree with, particular Judge Posner’s skepticism about the efficacy of regulation. But I’m not as convinced (as he is) that this story is best explained as a failure of perfectly maximizing actors. Indeed, as the story describes his position, it sounds like many of the agents were not maximizing at all. Why, for instance, could bankers not convince (purported) rational investors that we were in a bubble? The best reason, which Posner hints at, is overoptimism bias. Why aren’t executives’ contracts structured for long-term return instead of short-term profit taking? Wouldn’t rational boards and rational executives prefer a smooth future income stream? I’ve got to think that a rich account of compensation behavior would take into account both the tournament effect and risk aversion. And why isn’t there a better market for board members? Could it be some kind of bias against out-groups?

  December 8, 2008 at 2:06 pm   Posted in: Behavioral Law and Economics, Corporate Finance, Corporate Law, Sociology of Law   Print This Post   3 Comments

Social Pressure for a Green Good (and Perhaps Red, White, and Blue Too)

posted by Danielle Citron

According to this month’s Scientific American, academics at UCLA have found that peer pressure does a better job of motivating people to conserve resources than do standard environmental messages. In an experiment, researchers presented two different signs to hotel guests: one had a typical conservation message and the other told guests that most of their fellow travelers had reused towels. The study found that the social-norm message worked 25% better than the generic environmental message in convincing guests to reuse their towels. It also found that telling guests that those who had stayed in same room had reused their towels worked even better than saying that other guests at the same hotel had done so.

Crowd motivation seemed at work yesterday as well. According to The New York Times, recent studies attribute our drive to cast a ballot to the desire to see ourselves as the kind of people who vote. In other words, we vote to maintain our moral self-image. This desire seemingly operates internally and externally. We vote because we want to feel good ourselves and because we want others to feel good about us too. Hence, so many kept on their “I Voted!” stickers throughout the day. As the UCLA study suggests, those “I Voted!” stickers likely motivated others to head to the polls, especially if they were worn by colleagues and friends. Although the heavy turn out was no doubt due to the historic nature of the race–an African American candidate (now President elect)–and the unbelievably high stakes given our economy and the war, it also created a contagion of the greatest kind, one that was red, white, and blue.

  November 5, 2008 at 6:38 pm   Posted in: Behavioral Law and Economics   Print This Post   2 Comments

The Frame’s The Thing: Rioting or Celebration?

posted by Dave Hoffman

After the Phillies won last night, I went out to Broad Street with tens of thousands of my fellow Philadelphians to celebrate. I felt happy, but in a vaguely distanced way, stunned as I was by the unexpected reality of a major sports team championship in Philly. Because Philadelphia is such a small place (in some ways) I saw three students on the street in fairly quick order. Good times.

As I watched the celebration gather steam (fireworks! champagne! mosh pits!) I thought back to a post I’d written about watching Naples soccer fans celebrate a soccer victory back in ‘07.

Apparently, Naples tied with Genova in a soccer match, resulting in both teams being promoted to Series A soccer, or the major league. This led to a general “celebration” consisting of an impromptu “parade” of thousands of mopeds and cars, flags flying and horns blaring, with the occasional firework (or pistol?) thrown into the mix. I expressed some doubt then and now about the celebratory atmosphere not just because there were some random acts of violence against Genovese fans, but because the scene was decidedly chaotic. I also question whether a parade can occur simultaneously on every main street in town.

Here, again, the naive foreign tourist might think to himself that the law had broken down, resulting in a potentially bad situation, a view itself reinforced by a Napolese citizens who told that tourist that it was “very dangerous” to walk to the train station. But a more realistic analysis demonstrated that so long as that tourist walked at a brisk pace while shouting “Forza Napoli” at intervals, he could effectively comply with the new set of norms and not be sanctioned by passing celebrants. Plus, I hailed a cab halfway through the walk.

This post was accurate, except that “brisk walk” really needs to be re-written as “a terrified shambling run, dragging luggage behind”. I remember thinking, while shambling, that if this were only happening in Philadelphia I wouldn’t be scared, because I would have a better situation sense of what was appropriate celebration and what was rioting. That is, a “riot” is a subjective thing, determined by your own contextual and culturally-determined view of what kind of public behavior is ok. I don’t speak Italian well enough to know what happy screams sound like, and without a nuanced sense of language, smiles start to look like the prelude to a mugging.

This is a long way of saying that while fireworks, smashing bottles, and random people screaming in Naples made me fear for my life, those same activities on Broad Street last night only made me feel closer to my fellow celebrants. I was right: when you are home, raucous celebrations feel entirely appropriate.

That said, it is true that I left the party around 11:30, before a night’s work of drinking kicked in and the scene turned a bit more ugly. (A few upturned cars, some smashed windows, but no reported serious injuries. (Cf. Boston).

(Image Source: Chris Bowers)

  October 30, 2008 at 2:02 pm   Posted in: Behavioral Law and Economics, Civil Rights, Current Events, Law and Psychology, Politics   Print This Post   3 Comments

Chastening the Collectivist Impulse

posted by Frank Pasquale

As the election draws nigh, financial panic has given way to something like legislation-phobia in some swathes of the electorate. I think that caution can be overblown, but has a ring of truth when it brings up specific instances of misguided government responses to crises in the past. Sasha Abramsky’s recent article on fear provides a great example of the right kind of cautions for collectivists:

Today the very notion of “recession” is enough to put the Federal Reserve Board into a tizzy. Yet in rushing to lower interest rates to stave off a recession in the middle part of this year, and in then throwing hundreds of billions of dollars into hastily cobbled-together, poorly coordinated rescue packages for banks and mortgage lenders, the Fed may well ultimately have unleashed an inflationary spiral that will, in the long run, do at least as much economic damage as a corrective recession would.

As for climate change, while it’s clearly a massive problem, it’s also an extremely complex one. Yet suddenly, as the reality of a warming planet belatedly enters public consciousness, we’ve all become climate experts. Every storm, every deviation from the norm regarding daily temperatures, rainfall, wind speed, is now blamed on global warming. And so we look for quick-fix solutions. In glomming onto one such panacea, biofuels, we may actually have made the problem worse, while contributing to a massive global food crisis. In short, we’re becoming so fearful of the future — the next attack, the next economic collapse, the next environmental catastrophe — that we’re undermining the present.

It’s useful to compare that wise counsel to the usual empty rhetorical attacks on collective action.

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  October 30, 2008 at 9:45 am   Posted in: Behavioral Law and Economics, Culture, Politics   Print This Post   No Comments

Demystifying the Muffin: A Nudge in the Right Direction

posted by Frank Pasquale

New York City has mandated that many restaurants disclose calorie counts, and the results can be pretty surprising:

[W]hen three performers who spent the day rehearsing for “Shrek the Musical” walked into a restaurant on 42nd Street recently, they saw on the menu that a Japanese-style beef bowl had 1,090 calories. They decided to head down the street for a salad. “Counting calories is so 1980s,” said Rachel Stern, one of the dancers. “But when it’s right there, it’s kind of hard to ignore.”

500-calorie muffins and 1300-calorie salads are a real wake-up call. There are a few disappointments, though. As a frequent Dunkin’ Donuts customer (Starbucks’ Fritalian is way too elitist for me), I’ve noticed many of their franchises putting calorie ranges next to items–leaving customers to make a probabilistic assessment of how much a given donut will clog their arteries.

But some information is better than none, and it’s hard to see how people like Ed Glaeser can oppose a trend in policymaking as helpful as this. Philip Zimbardo sizes up the situation well–and explains how we can do more to promote good decisionmaking.

  October 29, 2008 at 11:11 am   Posted in: Behavioral Law and Economics   Print This Post   No Comments

On a Lighter Note

posted by Dave Hoffman

From an email publicized at the Corner:

“I believe today’s massive decline was, in part (and maybe a big “in part”), in fear that the debate tonight won’t go well for McCain and the implications that will have for an Obama victory. The likelihood of a recession has been talked about and, probably, factored in to a lot of folks’ thinking already… …if tonight’s debate tracks well for McCain, you’ll see a positive response tomorrow; if it doesn’t, hold on; it won’t be pretty. Call it: ‘Flight to Safety (from Socialism).’”

Hee! Yup, traders are worried that McCain won’t be able to increase his 4% chance of winning through nimble debate tactics. They’ve already concluded that this sucker could go down, and they are worried about socialism, i.e., more government spending.

That must be it. Not the very scary noises coming from the general vicinity of the credit markets.

  October 15, 2008 at 5:28 pm   Posted in: Behavioral Law and Economics   Print This Post   3 Comments

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