Category: Behavioral Law and Economics


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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When a (Health Care) Fine is a (Health Care Price): Israeli Day Cares and HCR

Fortune reports that during the health care debate, AT&T, Verizon, Caterpillar, and John Deere all  produced internal documents considering whether it made sense to stop providing health insurance and simply pay the fine:

AT&T produced a PowerPoint slide entitled “Medical Cost Versus No Coverage Penalty.” A document prepared for Verizon by consulting firm Hewitt Resources stated, “Even though the proposed assessments [on companies that do not provide health care] are material, they are modest when compared to the average cost of health care,” and that to avoid costs and regulations, “employers may consider exiting the health care market and send employees to the Exchanges.”  . . .

Kenneth Huhn, vice president of labor relations at Deere, said in an internal email that his company should look at the alternatives to providing health benefits, which “would amount to denying coverage and just paying the penalty,” and that he felt he already had the ability to make this change under his company’s labor agreement. Caterpillar felt it would have to give “serious consideration” to the penalty option.

You might see these documents as posturing, whimsical make-work*, or simply good business planning.   But I tend to think about this as an example of the Israeli day care problem: when you put prices on conduct that previously was enforced through social norms, you may increase its incidence.** This phenomenon, incidentally, would appear to be even more important when considering how to enforce the individual mandate .

*The whimsy story is supported by the unwillingness of the firms to stand behind their analysis today.

**Of course, you might object that employer-provided health insurance results from market incentives, not social practice, but I’m not so sure those concepts are easily segregated.


Endowment Effects, Confirmation Bias, and the Politics of Health Care Post-Passage

Gavel of Justice, or Hammer of Doom. Your Call. (Chip Somodevilla / Getty Images / March 21, 2010)

Sen. Tom Harkin articulates the new conventional wisdom:

“I can’t wait for this debate [about Health Care reconciliation and repeal] to happen. I look forward to it. I will relish it,” Harkin said, on his way into a weekly Democratic caucus lunch. “Now the bill is passed, its signed into law. Now the American people have something. They own it. It’s theirs. And the Republicans are saying they want to take it away from them.”

This sounds like an argument based on the endowment effect. But it’s actually not all that clear that this “bias” operates in the way that Sen. Harkin posits, i.e., that individuals will value the benefits of a law more after it passes, because they exhibit loss aversion.  This optimism risks ignoring an important limitation on endowment, which (simplifying radically) suggests that how you obtain property seriously affects whether you exhibit an endowment superpreference.  That is: when people think that property is allocated randomly or by grace, they value it less than when they feel they’ve earned it.  It strikes me that Republicans will have every incentive to try to convince the public that health care goods have been allocated randomly or by influence peddling, rather than because the Congress deliberated fairly and divided by desert.  That’s why fighting about reconciliation and in the courts make strategic sense: not because such battles are likely to succeed (they aren’t) but because they reduce general belief in the procedural legitimacy of reform and attachment to its substantive products.

In other news, Prof. Ann Althouse is very defensive about saying “so what if some idiot said a bad word,” referring to the worst word there is.  Of course, what was objectionable was that she first asserted – with no evidence at all – that Representative Lewis had made up the charge  (“It’s one of the oldest dirty tricks.)  Then, she argued that it was actually white politicians who were upset by the protesters who were racist because they were “so quick to think of powerful black politicians as vulnerable and besieged.”  All this while refusing to permit her commentators to actually use the word, presumably because she recognizes that it is uniquely stigmatizing, evil, and, well, racist.

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Milgram on T.V.

At least Milgram Wasn't Doing It For Profit

From the hyper-civilized French comes a new game show:

Game show contestants turn torturers in a new psychological experiment for French television, zapping a man with electricity until he cries for mercy — then zapping him again until he seems to drop dead.

“The Game of Death” has all the trappings of a traditional television quiz show, with a roaring crowd and a glamorous and well-known hostess urging the players on under gaudy studio lights.

But the contestants did not know they were taking part in an experiment to find out whether television could push them to outrageous lengths, and which has prompted comparisons with the atrocities of Nazi Germany.

The better analogy is Stanley Milgram’s Yale experiments, which were the direct inspiration for this show.  Though the article blames television’s “absolutely terrifying power” to compel obedience here, I think the result can be explained much more simply as depending on the power of authority itself.

Maybe we need an IRB for reality show producers.


Contracting (or Arbitrating) Out of Medical Malpractice Liability

Jennifer Arlen came to Temple on Monday to workshop her paper, Contracting Over Malpractice Liability, forthcoming in the Penn Law Review.  I was her commentator.  Prof. Arlen uses fairly traditional economic analysis, assuming that patients are rational, to argue that it not welfare maximizing to permit patients to contract out of the background medical malpractice regime.

The argument is fairly easily to follow. She argues that tort liability, because it is prospective and systemic, motivates providers to invest in precautions that are general and non-rivalrous: a collective good.  Thus, medical safety investments will be underproduced if left to the incentives of individual contracting parties, since each patient will want to free-ride off others’ choices to purchase “liability” from their doctors.  Moving liability to managed care organizations doesn’t help matters, it turns out, because it would simply permit the company to segregate between consumers who need liability protection (ones who are, or are likely to become, sick) and those who don’t (the young and healthy).  Under such a system, MCOs will package “good” health insurance together with liability, meaning that healthy individuals with a taste for liability coverage will need to pay a premium to access it.  This again leads to insufficient amount of liability protection over all patients.

It’s an important paper, not least because the form of argument may generalize to other kinds of contracting over private law.  Isn’t it true for most forms of negligence protection that the benefits are non-rivalrous and hard to exclude?  If so, permitting any contracting out of tort law likely results in a net loss of socially optimal deterrence.  Similarly, contracting out of civil procedure may lead to loss in societal benefits (like, for example, the litigation-generated-spillovers resulting from more information about the content and operation of legal rules.)  That said, as I commented to Prof. Arlen, it’s not clear whether she really maintains that patients are rational maximizers, since some of the argument relies on facts about the world (e.g., bad monitoring by insurance companies, insufficient lawsuits) that are difficult to square with rational choice theory. Also, what does medical error mean anyway?

I thought it would be worthwhile to bring this paper to your attention, since we’re living in a world where contract law’s dominance over torts is becoming ever more evident.  As this law firm circular points out, doctors are requiring patients to sign enforceable arbitration clauses.  It’s my sense that the bleak view that Arlen’s paper gives of contracting out of liability entirely also extends to such agreements.

*Whether they are a true public good or rather a club good is a little bit obscure in the paper.


Spurning Free Kisses and the Iron Laws of Behavioral Psychology

Even Tastier When They're Free

In Free, The Future of a Radical Price, Chris Anderson leverages a few behavioral psychology experiments to assert that companies ought to embrace free distribution as a business model.  In particular, he highlight’s Dan Ariely’s work with Hershey kisses.  As Malcolm Gladwell explained Arielly’s work in his review of Free:

Ariely offered a group of subjects a choice between two kinds of chocolate—Hershey’s Kisses, for one cent, and Lindt truffles, for fifteen cents. Three-quarters of the subjects chose the truffles. Then he redid the experiment, reducing the price of both chocolates by one cent. The Kisses were now free. What happened? The order of preference was reversed. Sixty-nine per cent of the subjects chose the Kisses. The price difference between the two chocolates was exactly the same, but that magic word “free” has the power to create a consumer stampede.

On this narrow reed Anderson concludes that free goods create extraordinary psychic effects.  Both Gladwell and Matt Yglesias, otherwise quite critical of Anderson, embrace the point.  Ygelesias argues that companies will compete away any behavioral effects, and that costs will never actually get to zero.  He observes that, “the whole subject could stand to benefit from a little less good writing and a bit more plodding distinction-drawing.”

Well, I think I am well qualified to be a worse writer than Malcolm Gladwell, so I’ll try plodding for a bit.  To begin with, folks should read the paper.  It offers a readable description of the experimental series.  Or, if you’ve a copy of Ariely’ book, he apparently synopsizes the results.  After you’ve read the paper, return here for three quick questions about the general applicability of Ariely’s work:

First, we don’t know whether those effects are robust.  Even if companies aren’t well-situated to compete away the “free” bonus, is it a universal attribute of human cognition, or something contingent and culturally fleeting?  My sense is that the modern economy makes it much harder for ordinary consumers to know the worth/value of goods.  (I bet this is testable: have people gotten worse, as I’d guess, at the “Final Showcase” estimates at the Price is Right over time?)

Second, will the result will hold up against debiasing?  Most of the studies conducted involved relatively quick decisions in an noisy environment (a school cafeteria).  Would you get the same result if you told people about the “free effect” before exposing them to the choice? I tend to think not — doesn’t engaging in this kind of behavior make the subject into a bit of a sucker?

Third, what about heterogeneity? Ariely doesn’t tell us much about individuals who continued to prefer truffles.  Are the different demographically from the switching individuals?  There’s a very strong nomothetic theme in Ariely’s work (like most BLE work).  But not all individuals fall prey to the pull of free goods.  Maybe we ought to study those who don’t want kisses, before we reform our marketing (and our law) to exploit (or protect) those that do.


Book Review: Divergent Opinions: Why Community Matters — A Review of Sunstein’s Going to Extremes

Going to Extremes: How Like Minds Unite and Divide, by Cass Sunstein. Oxford University Press: New York 2009. Pp. 171. $21.95

Cass Sunstein argues in his new book Going to Extremes: How Like Minds Unite and Divide that extremism is a phenomenon that is enhanced when people of like minds get together to talk. When we think of people that lie at the extremes of society, our minds are often drawn to reclusive characters. People like John the Baptist living in the wilderness “wearing clothes made of camel hair, eating locusts and wild honey;” (Matt. 3:3-4) or people like Raskolnikov from Fydor Doystoyveski’s Crime and Punishment – a reclusive character who develops a radical and warped sense of morality in response to his perception of society’s values. In reality, people that live on the extremes are rarely alone. They are surrounded by a network of like thinkers who confirm the attitudes, beliefs and interpretations of sensory data that those persons embrace as normal. Extremes are about information. That is, where you get your information from; whether you believe that information to be reliable, and how willing you are to accept information outside of your preferred source.

Going to Extremes is about how, when and why extremes develop in communities. The theme of the book is that “[w]hen people find themselves in groups of like-minded types they are especially likely to move to extremes” (p. 2). Sunstein’s work fits into the genre of human behavioral psychology proposed by James Sidanius and others that views extremists’ cognitive complexity as more complex than moderates. See James Sidanius, Functioning Sociopolitical Ideology Revisted, 6 POLITICAL PSYCHOLOGY 637, 639 (1985). This is in contrast to extremism theory, which largely assumes that political extremists display less-sophisticated cognitive behavior than moderates. About the form of extremism we call terrorism, Sunstein writes at one point,

it is tempting to think that terrorism is a product of extreme poverty, lack of education, or a kind of mental illness. It turns out that all of these thoughts are quite wrong. Most of the time, [terrorists] come from middle-income families. Nor have terrorists lacked education. There is no evidence that they suffer from mental illness…. Alan Krueger argues that terrorism is a form of political protest, and those who lack civil rights and civil liberties not having other means of engaging in protest resort to terrorism. To Krueger’s point, we might add that when civil liberties do not exist citizens have only one prominent source of information – the state – and that source cannot be trusted. (p. 115)

Terrorism then becomes a reaction against information that the extreme positions assume can’t be right. Thus, in Sunstein’s work, the why and how of extremisms (like terrorism) can be associated with how individuals interact in communities – the trust they place in the information received, the confidence they derive from like-minded members, and the authority or submission they respond to as a member of the community.

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“I’ve Created a Very Large Microwave . . . And New Year’s Eve I Intend to Enter That Very Large Chamber . . .”

Many professors have turned of late to survey research, which promise to answer long-standing questions about individuals’ relationships with legal institutions and their understanding of the law. Occasionally, if you run these kinds of surveys, you’ll see respondents who aren’t quite taking the task as seriously as you might want them to.   Listen to this pretty awesome recording, and try to figure out what the survey was designed to accomplish.  Regardless, it’s probably a good general rule, in designing such surveys, not to call longmont potion castle.

(H/T: Noted surveyor D.B.)


Penalty Clauses and the Nexus One

nexus-one-europeTech blogs are astir today at the fine print in Google’s Nexus One’s terms of sale. Turns out, if you buy a subsidized phone through google and cancel your phone contract “early”, not only must you pay a fee to the carrier, but google also wants you to pay it the difference between the list price of the phone and the sale price.

“You agree to pay Google an equipment subsidy recovery fee (the “Equipment Recovery Fee”) equal to the difference between the full price of the Nexus handheld device without service plan and the price you paid for the Nexus handheld device if you cancel your wireless plan prior to 120 days of continuous wireless service. For example, if the full price of the Nexus handheld device without service plan was $529 USD and the price you paid for the Nexus handheld device was $179 USD with a service plan, the Equipment Recovery Fee you pay will be $350 USD in the event you cancel within the first 120 days of carrier service . . . You authorize Google to charge the Equipment Recovery Fee directly to your credit card, or other payment method used to purchase the Nexus handheld device, upon cancellation of your wireless plan . . .

You agree that the Equipment Recovery Fee is not a penalty but is for liquidated damages Google will incur as a result of such cancellation. These damages may include, but are not limited to, loss of compensation and administrative costs associated with such cancellation or changing of wireless service provider(s), market changes, and changes in ownership. Please note that the Equipment Recovery Fee is imposed by Google and not your chosen carrier and is in addition to any early termination fees that may be charged by your chosen carrier in connection with termination of your wireless plan prior to fulfillment of your chosen carrier’s service agreement term.”

Notwithstanding the language of agreement that this is a liquidated damages clause, I’m pretty sure that customers could legitimately challenge this fee in court as a penalty .  As many have noted, customers will end up paying more in termination fees than the cost of the phone (since both google and the carrier can charge in this model).  As we all know, liquidated damages must be either a fair estimate of an uncertain harm, or be relatively close to the actual damages suffered by the promisee.  The harm here isn’t at all uncertain, and I don’t think that charging more than the sales price constitutes a good measure of the seller’s actual damages.  Notably, we can’t simply use the difference between list price and sales price as the lost expectation, since the sales price is inflated by the business model (sort of like health care costs charged by hospitals).

The collection method that google built into contract here is also a problem.  It’s a form of self-help which customers ought to be able to challenge with their credit card companies.  Indeed, the clause is so riddled with obvious legal issues that I started to wonder whether google wrote it seeking to take advantage of behavioral research suggesting that liquidated damages clauses change individuals’ feelings about breach.  What do you think?  Is google’s new slogan “Don’t be evil.  But if you must be evil, be really good at it?”


On Brains and Football

There are many candidates for the best visual display of quantitative information.  But how about a prize for worst display of information?  Call it the anti-Tufte. There has been some competition of late.  The graph can’t be merely misleading, or distracting. That’s too darn easy! A really bad display has several characteristics: (1) it has to overstate the certainty of the underlying data; and (2) by using pictures, it must reinforce our biases.  A recent example is the Obama Cabinet/Private Experience graphic.

Here’s another example I’ve been thinking about lately: the claim that offensive linemen are smarter than other players on the field.  Think about it.  Doesn’t it just feel true?  And here’s the graph that popularized the claim:


Ben Fry, a smart fella by all accounts, created the graph.  The size of the circles represent mean scores by position on the Wonderlic, a 12 minute, 50-question, intelligence test which players take during the combine before the NFL draft.  This graphic is often deployed to support the cliché that players closer to the ball have to be smarter. But closer examination has led me to believe that the claim – and the graph – are bunk.  And bunk of a particular sort: misleading empiricism of the sort that reinforces racial stereotypes.

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