Law Commons^™

Uncertainty Revisited: Legal Prediction And Legal Postdiction, Ehud Guttel, Alon Harel

Michigan Law Review

Legal scholarship, following rational-choice theory, has traditionally treated uncertainty as a single category. A large body of experimental studies, however, has established that individuals treat guesses concerning the future differently than guesses concerning the past. Even where objective probabilities and payoffs are identical, individuals are much more willing to predict a future event (and are more confident in the accuracy of their predictions) than they are willing to postdict a past event (and are also less confident in the accuracy of their postdiction). For example, individuals are more willing to bet on the results of a future die toss than …

The Kidney Donor Scholarship Act: How College Scholarships Can Provide Financial Incentives For Kidney Donation While Preserving Altruistic Meaning, Jake Linford

Jake Linford

In the United States, lives are lost on a daily basis due to a significant shortfall in the availability of kidneys for transplantation. The current debate over possible solutions has primarily taken place at two theoretical poles—open markets and pure altruism. This article provides a timely and original response, bridging the gulf between the poles by proposing an educational scholarship to encourage kidney donation, and presenting data which indicates that the scholarship incentive may well increase the availability of transplantable kidneys in a way that preserves altruistic donation and mitigates potentially coercive market pressures. In making this case, this article …

Tax Incentives And The War On Drugs, Thomas J. Berger

Thomas J Berger

Tax incentives and the war on drugs. This article analyzes the idea of employing tax incentives to reduce the demand for illegal drugs. The article includes a theoretical analysis of the novel idea through a traditional and behavioral economic analysis. Also included are practical recommendations for policy-makers interested in implementing the concept.

Against Financial Literacy Education, Lauren E. Willis

Lauren E Willis

The dominant model of regulation in the United States for consumer credit, insurance, and investment products is disclosure and unfettered choice. As these products have become increasingly complex, consumers’ inability to understand them has become increasingly apparent, and the consequences of this inability more dire. In response, policymakers have embraced financial literacy education as a necessary corollary to the disclosure model of regulation. This education is widely believed to turn consumers into “responsible” and “empowered” market players, motivated and competent to make financial decisions that increase their own welfare. The vision is of educated consumers handling their own credit, insurance, …

An Opt-Out Home Mortgage System, Michael S. Barr, Sendhil Mullainathan, Eldar Shafir

Other Publications

The current housing and financial crisis has led to significant congressional and executive action to manage the crisis and stem the harms from it, but the fundamental problems that caused the crisis remain largely unaddressed. The central features of the industrial organization of the mortgage market with its misaligned incentives, and the core psychological and behavioral phenomena that drive household financial decisionmaking remain. While the causes of the mortgage meltdown are myriad and the solutions likely to be multifaceted, a central problem that led to the crisis was that brokers and lenders offered loans that looked much less expensive and …

Law, Biology, And Property: A New Theory Of The Endowment Effect, Owen D. Jones, Sarah F. Brosnan

Vanderbilt Law School Faculty Publications

Recent work at the intersection of law and behavioral biology has suggested numerous contexts in which legal thinking could benefit by integrating knowledge from behavioral biology. In one of those contexts, behavioral biology may help to provide theoretical foundation for, and potentially increased predictive power concerning, various psychological traits relevant to law. This Article describes an experiment that explores that context.

The paradoxical psychological bias known as the endowment effect puzzles economists, skews market behavior, impedes efficient exchange of goods and rights, and thereby poses important problems for law. Although the effect is known to vary widely, there are at …

Behaviorally Informed Financial Services Regulation, Michael S. Barr, Sendhil Mullainathan, Eldar Shafir

Other Publications

Financial services decisions can have enourmous consequences for household well-being. Households need a range of financial services - to conduct basic transactions, such as receiving their income, storing it, and paying bills; to save for emergency needs and long-term goals; to access credit; and to insure against life's key risks. But the financial services system is exceedingly complicated and often not well-designed to optimize house-hold behavior. In response to the complexity of out financial system, there has been a long running debate about the appropriate role and form of regulation. Regulation is largely stuck in two competing models - disclosure, …

Making The Sale On Contingent Valuation, Sameer H. Doshi

Sameer H Doshi

Scholarship and jurisprudence have not seriously considered the question of whether the contingent valuation (CV) technique of monetizing preferences for non-tradeable public goods is consistent with the Daubert standards for scientific evidence. The greatest difficulty is in establishing that CV is testable and has measurable error rates; this problem is consonant with criticisms that economists have leveled at the CV method more generally. Additionally, the “state of the art” of contingent valuation practice has recommended the use of the willingness-to-pay question format for CV, rather than willingness-to-accept. This is misplaced in many cases, particularly in calculating damages in environmental tort …

Endowment Effects In Chimpanzees, Owen D. Jones, Sarah F. Brosnan, Susan P. Lambeth, Mary Catherine Mareno, Amanda S. Richardson, Steven Schapiro

Vanderbilt Law School Faculty Publications

Human behavior is not always consistent with standard rational choice predictions. The much-investigated variety of apparent deviations from rational choice predictions provides a promising arena for the merger of economics and biology. Although little is known about the extent to which other species also exhibit these seemingly irrational patterns of human decision-making and choice behavior, similarities across species would suggest a common evolutionary root to the phenomena.

The present study investigated whether chimpanzees exhibit an endowment effect, a seemingly paradoxical behavior in which humans tend to value a good they have just come to possess more than they would have …

The Law, Marketing And Behavioral Economics Of Consumer Rebates, Matthew A. Edwards

ExpressO

This paper deals with mail-in consumer rebates — a significant, yet controversial marketing practices that has generated thousands of consumer complaints, inspired countless articles in major periodicals, and begun to attract the interest of state and federal legislators. The paper first aims to provide an understanding of the purposes of consumer rebate offerings. It then surveys the main categories of consumer rebate complaints, including that firms impose onerous rebate redemption requirements and that they fail to pay rebate rewards in a timely manner. The paper draws on recent marketing, psychological and behavioral economics research to address the potent claim that …

Valuing Cultural Differences In Behavioral Economics, Justin D. Levinson, Kaiping Peng

ExpressO

Behavioral economic research has tended to ignore the role of cultural differences in economic decision-making. The authors suggest that a systematic bias affects existing behavioral economic theory-- cognitive biases are often assumed to be universal. To examine how cultural background informs economic decision-making, and to test framing effects, morality effects, and out-group effects in a cross-cultural study, the authors conducted an experiment in the United States and China. The experiment was designed to test cultural and cognitive effects on a fundamental economic phenomenon-- how people estimate the financial values of objects over time.

Results of the experiment demonstrated dramatic cultural …

Law And Emotion: A Proposed Taxonomy Of An Emerging Field Special Edition, Terry A. Maroney

Vanderbilt Law School Faculty Publications

Many scholars - from fields as diverse as psychology, law, philosophy, and neuroscience - have begun to study the intersection of emotion and law. I describe that scholarship's development; propose that it is organized along six interrelated but theoretically distinct foci; and suggest directions for future research.

The notion that reason and emotion are cleanly separable - and that law admits only of the former - is deeply engrained, though it recently has come under attack. Law and emotion scholarship proceeds from the beliefs that emotion may be specifically studied, that it is relevant to law, and that its legal …

"Contracting" For Credit, Ronald J. Mann

Faculty Scholarship

On a recent day, I used my credit cards in connection with a number of minor transactions. I made eight purchases, and I paid two credit card bills. I also discarded (without opening) three solicitations for new cards, balance transfer programs, or other similar offers to extend credit via a credit card. Statistics suggest that I am not atypical. U.S. consumers last year used credit cards in about 100 purchasing transactions per capita, with an average value of about $70. At the end of the year, Americans owed nearly $500 billion dollars, in the range of $1,800 for every man, …

The Promise (And Limits) Of Neuroeconomics, Jedediah S. Purdy

Faculty Scholarship

Neuroeconomics — the study of brain activity in people engaged in tasks of reasoning and choice — looks set to be the next behavioral economics: a set of findings about how people make decisions that casts both light and doubt on widely accepted premises about rationality and social life. This Article explains what is most exciting about the new field and lays out some specific research tasks for it.

Emote Control: The Substitution Of Symbol For Substance In Foreign Policy And International Law, Jules Lobel, George Loewenstein

Chicago-Kent Law Review

Historical perspectives, as well as recent work in psychology, converge on the conclusion that human behavior is the product of two or more qualitatively different neural processes that operate according to different principles and often clash with one another. We describe a specific "dual process" perspective that distinguishes between "deliberative" and "emote" control of behavior. We use this framework to shed light on a wide range of legal issues involving foreign policy, terrorism, and international law that are difficult to make sense of in terms of the traditional rational choice perspective. We argue that in these areas, the powerful influence …

Rendered Impracticable: Behavioral Economics And The Impracticability Doctrine, Aaron J. Wright

Articles

No abstract provided.

Price, Path & Pride: Third-Party Closing Opinion Practice Among U.S. Lawyers (A Preliminary Investigation), Jonathan C. Lipson

ExpressO

This article presents the first in-depth exploration of third-party closing opinions, a common but curious – and potentially troubling -- feature of U.S. business law practice. Third-party closing opinions are letters delivered at the closing of most large transactions by the attorney for one party (e.g., the borrower) to the other party (e.g., the lender) offering limited assurance that the transaction will have legal force and effect.

Hundreds, if not thousands, of legal opinions are delivered every week. Yet, lawyers often complain that they create needless risk and cost, and produce little benefit. Closing opinions thus pose a basic question: …

Law And Behavioral Biology, Owen D. Jones, Timothy H. Goldsmith

Vanderbilt Law School Faculty Publications

Society uses law to encourage people to behave differently than they would behave in the absence of law. This fundamental purpose makes law highly dependent on sound understandings of the multiple causes of human behavior. The better those understandings, the better law can achieve social goals with legal tools. In this Article, Professors Jones and Goldsmith argue that many long held understandings about where behavior comes from are rapidly obsolescing as a consequence of developments in the various fields constituting behavioral biology. By helping to refine law's understandings of behavior's causes, they argue, behavioral biology can help to improve law's …

Calabresi And The Intellectual History Of Law And Economics, Keith N. Hylton

Faculty Scholarship

This essay traces the vein of thought represented by Calabresi's "The Costs of Accidents", both backward in time to examine its sources, and forward to its impact on current scholarship. I focus on three broad topics: positive versus normative law and economics, positivist versus anti-positivist thinking in law, and the assumption of rationality in law and economics.

How Relevant Is Jury Rationality?, David A. Hoffman

All Faculty Scholarship

This essay reviews Punitive Damages: How Juries Decide by Cass Sunstein, et al. The book provides a good example of a recent trend: the use of behavioralist research to justify surprisingly paternalistic legal reforms. While critics of behavioralism often contend that its theoretical foundations are weak, this approach is unlikely to prove an effective rejoinder in the new debate about what kinds of paternalism are made permissible by human "irrationality". A better approach: (1) notes the lack of a nexus between behavioralism and the supposed emergent necessity of paternalist reforms; and (2) suggests that juror unwillingness to apply cost-benefit formula …

Thinking Race, Making Nation (Reviewing Glenn C. Loury, The Anatomy Of Racial Inequality), Christopher A. Bracey

GW Law Faculty Publications & Other Works

We live in a race-conscious culture. As Americans, we are a nation of people who self-consciously chose to adopt a vision of society that embraced lofty ideals of individual freedom and democracy for all along with powerful mechanisms for devastating racial oppression. Our history is replete with instances of differential treatment on account of race - slavery being only the most egregious example - that achieved the desired effect of generating remarkable disparities in socioeconomic well-being among individuals and between different racial groups. Such disparities are not simply historical artifacts. They are facts of the contemporary American racial landscape as …

Behavioral Economics And The Sec, Stephen J. Choi, Adam C. Pritchard

Articles

Not all investors are rational. Quite apart from the obvious examples of credulity in the face of the latest Ponzi scheme, there is no shortage of evidence that many investors' decisions are influenced by systematic biases that impair their abilities to maximize their investment returns. For example, investors will often hold onto poorly performing stocks longer than warranted, hoping to recoup their losses. Other investors will engage in speculative trading, dissipating their returns by paying larger commissions than more passive investors. And we are not just talking about widows and orphans here. There is evidence that supposedly sophisticated institutional investors-mutual …

The Fable Of Entry: Bounded Rationality, Market Discipline, And Legal Policy, Avishalom Tor

Michigan Law Review

Legal scholars have recently advanced a behavioral approach to the law and economics school of thought in an attempt to improve its external validity and predictive power. The hallmark of this new approach is the replacement of the perfectly rational actor with a "boundedly rational" decisionmaker who, apart from being affected by emotion and motivation, has only limited cognitive resources. To function effectively in a complex :world, boundedly rational individuals must rely on cognitive heuristics - simplifying mental shortcuts - that inevitably lead people to make some systematic decision errors; as a result, their behavior necessarily deviates from that predicted …

Can Law And Economics Be Both Practical And Principled?, David A. Hoffman, Michael P. O'Shea

David A Hoffman

This article describes important recent developments in normative law and economics, and the difficulties they create for the project of efficiency-based legal reform. After long proceeding without a well articulated moral justification for using economic decision procedures to choose legal rules, scholars have lately begun to devote serious attention to developing a philosophically attractive definition of well-being. At the same time, the empirical side of law and economics is also being enriched with an improved understanding of the complexities of individuals' decision-making behavior. That is where the problems begin. Scholars may have better, more plausible conceptions of well-being in hand, …

Endowment Effects Within Corporate Agency Relationships, Jennifer H. Arlen, Matthew L. Spitzer, Eric L. Talley

Faculty Scholarship

Behavioral economics is an increasingly prominent field within corporate law scholarship. A particularly noteworthy behavioral bias is the "endowment effect" – the observed differential between an individual's willingness to pay to obtain an entitlement and her willingness to accept to part with one. Should endowment effects pervade corporate contexts, they would significantly complicate much common wisdom within business law, such as the presumed optimality of ex ante agreements. Existing research, however, does not adequately address the extent to which people manifest endowment effects within agency relationships. This article presents an experimental test for endowment effects for subjects situated in an …

Can Law And Economics Be Both Practical And Principled?, David A. Hoffman, Michael P. O'Shea

All Faculty Scholarship

This article describes important recent developments in normative law and economics, and the difficulties they create for the project of efficiency-based legal reform. After long proceeding without a well articulated moral justification for using economic decision procedures to choose legal rules, scholars have lately begun to devote serious attention to developing a philosophically attractive definition of well-being. At the same time, the empirical side of law and economics is also being enriched with an improved understanding of the complexities of individuals' decision-making behavior. That is where the problems begin. Scholars may have better, more plausible conceptions of well-being in hand, …

Time-Shifted Rationality And The Law Of Law's Leverage: Behavioral Economics Meets Behavioral Biology, Owen D. Jones

Vanderbilt Law School Faculty Publications

A flood of recent scholarship explores legal implications of seemingly irrational behaviors by invoking cognitive psychology and notions of bounded rationality. In this article, I argue that advances in behavioral biology have largely overtaken existing notions of bounded rationality, revealing them to be misleadingly imprecise - and rooted in outdated assumptions that are not only demonstrably wrong, but also wrong in ways that have material implications for subsequent legal conclusions. This can be remedied. Specifically, I argue that behavioral biology offers three things of immediate use. First, behavioral biology can lay a foundation for both revising bounded rationality and fashioning …

Law, Economics, And The Skeleton Of Value Fallacy, Kyron Huigens

Articles

Experiments in the last decade or so have demonstrated persistent failures on the part of ordinary individuals rationally to pursue self-interest. The experiments pose serious challenges to economics, rational choice theory, and the law and economics school. Some experiments, for example, suggest an "endowment effect", that contradicts the Coase Theorem; the notion that, in the absence of transaction costs, goods will find their most efficient distribution regardless of their initial assignment. Cass Sunstein has collected a set of essays by economists and legal scholars exploring these challenges, in a volume entitled Behavioral Law and Economics.

Reasons Within Passions: Emotions And Intentions In Property Rights Bargaining, Peter H. Huang

Publications

This article discusses the role of emotions (or feelings or affects) in property rights bargaining. Real world people choose bargaining strategies based upon not only rational calculations, but also their gut feelings. This article considers the impact of anger and shame on bargaining over property rights and the Coase theorem. Such emotions may depend on beliefs (expectations or assessments) about whether particular strategic decisions should or will occur. Such beliefs can be viewed as attributions over the intentions of others.

The Legal Implications Of Psychology: Human Behavior, Behavioral Economics, And The Law Symposium: The Legal Implications Of Psychology Human Behavior, Behavioral Economics, And The Law, Stephen D. Hurd

Vanderbilt Law Review

Nearly all interesting legal issues require accurate predictions about human behavior to be resolved satisfactorily. Judges, policy- makers, and academics invoke mental models of individual and social behavior whenever they estimate the desirability of alternative rules, policies, or procedures. Contemporary legal scholarship has come to recognize that if these predictions are naive and intuitive, without any strong empirical grounding, they are susceptible to error and ideological bias. Something more rigorous is thus expected when normative claims are advanced, and the place of the social sciences has expanded in legal discourse to satisfy this expectation.'

Three branches of the social sciences-economics, …