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Category: Behavioral Law and Economics

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Law & Econ’s Influence on Law & Accounting

The hottest book of the century, on corporate law, is in production, thanks to editors Brett McDonnell and Claire Hill, both of Minnesota. As part of a series investigating the economics of particular legal subjects, overseen by Richard Posner and Francesco Perisi, this Research Handbook on the Economics of Corporate Law, promises a comprehensive canvass of the broadest definition of this field of law as it has been structured by economic theories over the past forty years.

My contribution addresses the influence of law and economics on the sub-field of law and accounting, which I suggest takes the form of “two steps forward one step back.”  You can read a draft of my chapter (comments welcome!), available free here, accompanied by the following abstract:

Theory can have profound effects on practice, some intended and desirable, others unintended and undesirable. That’s the story of the influence the field of law and economics has had on the domain of law and accounting. That influence comes primarily from agency theory and modern finance theory, specifically through the efficient capital market hypothesis and capital asset pricing model. Those theories have forged considerable change in federal securities regulation, accounting standard setting, state corporation law, and financial auditing. Affected areas include the nature of disclosure, the measure of financial concepts, the limits of shareholder protection, and the scope of auditor duty.

Analysis reveals how agency theory and finance theory often but not always point to the same policy implications; it reveals how finance theory’s assumptions and limitations are often but not always respected in policy development. As a result, while these theories sometimes produced policy changes that were both intended and desirable, some policy changes were both unintended and undesirable while others were intended but undesirable.  Examination stresses the power of ideas and how they are used and cautions creators and users of ideas to take care to appreciate the limits of theory when shaping practice. That’s vital since the effects of law and economics on law and accounting remain debated in many contexts.

Other contributions to the book similarly available in draft form are by Matt Bodie (St. Louis), David Walker (BU) and Charles Whitehead (Cornell).  The following scholars are also contributing chapters: Bobby Ahdieh (Emory), Steve Bainbridge (UCLA), Margaret Blair (Vandy), Rob Daines (Stanford), Steve Davidoff (Ohio State), Jill Fisch (Penn), Tamar Frankel (BU), Ron Gilson (Stanford/Columbia), Jeff Gordon (Columbia), Sean Griffith (Fordham), Don Langevoort (GT), Ian Lee (Toronto), Richard Painter (Minnesota), Frank Partnoy (SD), Gordon Smith (BYU), Randall Thomas (Vandy), and Bob Thompson (GT).

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Cognitive Illiberalism and the Speech-Conduct Distinction

The partisanship and bad faith of judges who disagree with us has never been more obvious, or more pernicious. For many, the most irritating personality flaw of judicial politicos (and their fellow-travelers) isn’t the bottom-line results of the opinions themselves, it is that judges refuse to acknowledge their own biases, though it’s evident that they aren’t neutral umpires, but rather players in the game.  Indeed, almost every decision you read about these days comes accompanied by a reference  to the political party of the appointing President – as if you needed the help!  As Orin Kerr has brilliantly pointed out, “people who disagree with me are just arguing in bad faith.”

For the Cultural Cognition Project, the way that we talk about legal decisions – and decisionmakers – is a subject of study and concern.  We decided to take a careful look at this topic — which we’ve previously touched on in work like Whose Eyes Are You Going To Believe. Our motivation was to investigate how constitutional norms requiring neutrality in fact finding interact with individuals’ tendencies to perceive facts and risks in ways congenial to their group identities.  Building on Hastorf/Cantril’s social psychology classic, They Saw a Game: A Case Study, we’ve written a new piece about how motivated cognition can de-stabilize constitutional doctrine, render legal fact-finders blind to their own biases, and inflame the culture wars. Our resulting paper, “They Saw a Protest”: Cognitive Illiberalism and the Speech-Conduct Distinction, results from my collaboration with Dan Kahan, Don Braman, Danieli Evans, and Jeff Rachlinski.  The paper is just up on SSRN, and I figured to jump-start the conversation by using this post to talk about our experimental approach and findings.  (I think that Kahan is blogging on Balkinization later in the week about the normative upshot of Protest.)

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The Representation Debate Continues

Jim Greiner and Cassandra Wolos Pattanayak have emailed me a reply to the Harvard Legal Aid Bureau’s comment on What Difference Representation. Since the topic has been the subject of several posts here, as well as some off-line communication from interested readers, I figured that I owed Greiner/Pattanayak a public space for reply.  It consists of a bit of introductory text, and a longer (9-page) paper.

“We recently became aware that HLAB President Rachel Lauter and HLAB Faculty Director David Grossman had written an email to the clinical listserve addressing our paper “What Difference Representation?”.  The email has been posted to various locations in the blogosphere.  Because the email expresses criticisms of the paper that we also have received from one or two other sources, we thought we would take the opportunity the email presented to clarify certain issues.  For example, President Lautner and Professor Grossman echo reactions we have received from another legal aid provider when they say that our study produced “only limited information,” and that more (and more useful) information would be available if we would just analyze the data properly.  We explain here that the analysis the email (and one or two other legal services providers) have advocated is statistically invalid, and that in any event the data required for it do not presently exist and cannot at this time be ethically collected.  As ought to be clear by now, we have the greatest respect for the students of HLAB, including President Lautner, and HLAB’s clinical faculty, including Professor Grossman.  We are using President Lautner and Professor Grossman’s email as a convenient foil representative of a few other comments we have received.

The substance of our response can be captured in the answers to two questions.

1.  Why study the effect of offers of HLAB representation?  All agree that the effect of actual use of representation is interesting, although as we will explain, perhaps less so than one might think at first.  But why study the effect of HLAB offers?

2.  Why not compare those who got offers from any source, not just HLAB, to those who did not get any such offers?}  This is what President Lauter, Professor Grossman, and a few others have suggested.  Why not make this comparison?

We also answer one final question:

3.  So how can we find out about the effect of offers from other service providers?”

To read the full response, click here.

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Wikipedia’s First Lawyer

In Wikitruth Through Wikiorder, Salil Mehra and I detailed the history of Wikipedia’s dispute resolution process.  We highlighted the role of Alex Roshuk, a Brooklyn lawyer and site volunteer who played a key early role in the process by suggesting that the site’s dispute resolution process should look like a “very simplified version[s] of the commercial or international arbitration programs of the American Arbitration Association.” When writing the article, I confess I found it ironic that a lawyer proposed such a formal process, and believed that it was evidence that legalism is an inescapable (and dominant) part of American society.   I just found Roshuk’s response to our article online.   He offers a stinging indictment of the Wikimedia foundation, and what’s come of the dispute resolution system.  As he argues:

While I originally suggested in the fall of 2003 that Wikipedia have a structured dispute resolution process, instead of making this process simple and straightforward, ADR atWikipedia has become a complex system that has all kinds of hard to understand rules.  Perhaps it is the management of this dispute resolution process (or lack thereof) is what has caused or contributed to a lot of Wikipedia users leaving the project and the ripple effect this system has on the general behavior of editors and administrators whose behavior is mediated by this process . . . After seeing the discussion develop at Wikipedia in the fall of 2003 I saw that there were a lot of people who misunderstood the idea of arbitration, They wanted to make it something formal, like a Wikipedia court system, the ArbCom, as it was called became a place where someone could obtain status in the Wikipedia community, originally by being appointed by Mr. James “Jimbo” Wales, one of the founders of Wikipedia, and later by election. When I suggested this kind of system my intention was to get people to talk, mostly through mediation by a neutral third party, to come to a mutual understanding that editors were all contributing knowledge, not fighting against each other to be “right” or “wrong”.

This view of the pathologies of the Arbitration system isn’t, of course, unique to Roshuk, nor is it really in tension with the story Salil and I set out in Wikitruth.  But it is notable that Roshuk has such a dim view of the site’s excessive legalization, and that he attributes the dominance of law to a desire for status and hierarchy, instead of the formal structure of the process itself.

(Image source: Wikilove.)

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Harvard Clinic Responds to Greiner Study

Following up on my two posts on Jim Greiner’s study on attorney representation effects, I was just forwarded the following email from Rachel Lauter, President, Harvard Legal Aid Bureau.  It’s illuminating — of the study’s limitations and of the pressure that the Harvard Legal Aid Bureau is feeling to defend participating in research about the efficacy of its representation.  It’s a long email, so if you are interested, follow me after the jump.
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Bubble Warning on Facebook, Groupon

The mysterious ways of financial valuation manifest daily. One mystery: Facebook, the social network business, and Groupon, the buying network company, both generate annual revenues of about $1 billion. Yet reported private stock trading indicates that traders are pricing Facebook at about 50 times that while pricing Groupon at about 5 times that.

Perhaps this is attributable to analytical factors, such as observed user growth rates, potential market and revenue sources, perceived capacity to convert the revenue into earnings, competitive threats—or negotiating skill in trading of privately-held shares. But given the wildly varying pricing traders give enterprises like this in recent years, it could be a sign of a bubble.

Financial bubbles recur as a natural, inherent product of human behavior in capitalist economies—from the recent real estate bubble, to the dot-com bubble a decade earlier, and stretching back to the tronics bubble of the 70s and back to Amsterdam tulip bulbs centuries ago.  (I wrote a trade book about this after last decade’s bubble burst.)  By definition, a critical mass cannot recognize the bubble as it is in inflating, though invariably some pessimists detect something. Read More

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Three Policy Interventions for Reducing Privacy Harms

Thanks so much to Danielle and Concurring Opinions for inviting me to blog. This is an exciting opportunity and I look forward to sharing my thoughts with you. Hopefully you will find these posts interesting.

There are many policy interventions that legislators can impose to reduce harms caused by one party to another. Two that are very often compared are safety regulations (mandated standards) and liability. They lend themselves well to comparison because they’re generally employed on either side of some harmful event (e.g. data breach or toxic spill): ex ante regulations are applied before the harm, and ex post liability is applied after the harm.

A third approach, one that we might consider ‘sitting between’ regulation and liability, is information disclosure (e.g. data breach disclosure (security breach notification) laws). I’d like to take a few paragraphs to compare these alternatives in regards to data breaches and privacy harms.

Three Interventions

 

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The Numbers are REALLY In–Plus Two Modest Proposals

For those of you who had any doubts, our friends at Kaplan have just confirmed it:  Aspiring law students care more about law school rankings than anything else, including the prospects of getting a job, quality of program, or geography.

Sayeth Kaplan:

1,383 aspiring lawyers who took the October LSAT . . . [were] asked “What is most important to you when picking a law school to apply to?” According to the results, 30% say that a law school’s ranking is the most critical factor, followed by geographic location at 24%; academic programming at 19%; and affordability at 12%. Only 8% of respondents consider a law school’s job placement statistics to be the most important factor. In a related question asking, “How important a factor is a law school’s ranking in determining where you will apply?” 86% say ranking is “very important” or “somewhat important” in their application decision-making.

Mystal at ATL expresses shock–shock!–that potential law students could be so naive. Surely, he fairly observes, they should care most about job prospects.

Yes, that would be true if they were rational.  Yet, we all know from the behavioral literature that we apply a heavy discount rate to long-distance prospects.  How much can I or  should I care today about what may happen 3 (or 4) years from today?

If you think about it from the perspective of any law school applicant today, the one concrete thing they can lock onto that has present value is the school’s ranking:  It is simple, quantified, and–perhaps most important–tauntable.  No one’s face burns with shame because their enemy (or friend)  got into a law school with a better job placement rate.  Jealously and envy–the daily diet of anxious first-years–are driven by much simpler signals:  Is mine bigger (higher) than yours?

This is not to defend the students who place so much faith in numbers that have repeatedly been shown to be incredibly stupid.  It just means that Kaplan’s survey (and I have not seen the instrument or data) makes intuitive sense.

Which leads to me to offer two modest (and probably unoriginal) proposals:

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CELS V: The Year of the Experiment

Data Collection Makes Everyone Grumpy and Hunched Over

For the last several years, I’ve posted recaps of the Annual Empirical Studies Conference.  (See me, @ Cornell, @ USC).  This year, as promised, will be no different.  Yale hosted CELS V, and the committee did a bang up job: the food was tasty; there were no technical snafus of note; and the panels appeared to have a high degree of internal validity & congruence. Richard Brooks, Alan Gerber, Dan Kahan, Yair Listokin, Tracey Meares, and (especially) Roberta Romano are all due a round of applause, or, better yet, supersized computer monitors so they can see their data better.  In this post, I’m going to provide a running diary of the conference.  It will be like you were there with me, except you don’t have to suffer through my bouts of social anxiety!

Unfortunately, I missed the hottest ticket of the conference, Bruce Ackerman’s commentary on Law/Versteeg’s The Evolution and Ideology of Global Constitutionalism.  From all reports, Ackerman said something like: “wrong questions, wrong data, wrong theory,” and then imploded in frustration.  Instead of watching those fireworks, I was watching Yair Listokin present The Meaning of Contractual Silence: A Field Experiment [Here’s an older version of the paper].  Listokin ran a field experiment selling ipods on ebay, some with a warranty, some as-is, and some silent on the warranty term. He found that individuals paid attention to the contract, and there was some evidence that the UCC default was about what they thought silence meant.  As he admitted, there were problems with the design of the study – particularly, (1) small & skewed samples; and (2) a lack of clarity about how much buyers know about ebay’s unique and self-contained dispute resolution system.  As someone remarked after the presentation, it would have been interesting had Listokin sold all the customers bad ipods (instead of good ones) and studied how the contract terms influenced behavior post-“breach”.  Then again, who needs that IRB hassle?

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Litigating Toward Settlement

What is the relationship between litigation and settlement?  In a new working paper, Christina Boyd and I explore that question using data from federal trial dockets.  Our basic intuition is that motion practice propels cases toward faster settlements, as it unlocks information about the facts, the parties’ strategies, the resources they will spend on the case, and (sometimes) what the judge thinks of the merits.  Our results essentially support such hypotheses: the mere filing of a motion speeds case settlement. Moreover, “motions which are granted are more immediately important to the settlement rate than motions denied, plaintiff victories are more important than defendant victories, motions about unclear areas of law are more important than motions about settled law, and motions later in cases are more important that motions earlier in cases.”  These findings are suggestive.  Though motion practice is often thought of as parasitic, driven by agency costs, and part the problem of litigation, our results imply that it has significant pro-social consequences.  Indeed, paying homage to Gilson, why not re-imagine lawyers as canny litigation costs engineers?

We also found some nifty case effects.  Women judges were on average (as Boyd had previously established) better at encouraging settlement than men: “the likelihood of a case settling in any given month is, on average, 25% larger when a female judge presides than when a male judge does.” Also, imbalance between the size of the firms representing the plaintiff and the defendant had a significant influence on compromise’s timing, as the figure below illustrates:

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