Category: Behavioral Law and Economics

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CIV!!! Or How Simulations May Help Government and Personal Choices

Could Civilization and the SIMs be part of a better informed future? I loved Civilization and played way too many hours of it in college. Turns out that the Colombian government has developed “computer games which are designed to teach pre-teenagers to make sensible choices about everything from nutrition to gang membership.” I wonder whether running a simulation of choices and outcomes over and over would shape behaviors or teach other gaming instincts. For example, most people might find that if they follow certain paths they end up in safe, but relatively happy middle class life and retirement. Heck, the game, Life, was a truly random version of what growing up is (then again maybe everything is so stochastic that Life is correct to rely on the spin of a wheel to see whether one is a doctor or teacher or has kids). Still, a game that reinforced the experience of putting money away now, not having it to play with, but having savings in retirement, i.e., the tradeoffs were more palpable, might sensitize people to choices. I never played SIMs, only Sim City, but if SIMs lets you smoke, take drugs, drink too much, have unsafe sex, etc. and gain near term rewards but then find that the long-term payoffs were poor, that would be interesting. Of course, some outcomes might be you’re a superstar who dies early or worse ends up on a horrid reality show. And, many may say “I was a wild child, had a blast, and ended up on T.V.? Cool!”

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Child Safety, Part III

How might tort law respond, if at all, to the preferences of parents and the general population to invest about twice as much in child safety as adult safety? (see this post for a summary of the data, and this post for a discussion of whether those preferences are normatively defensible).

Here’s my take, which you can read more about here:

Because the studies that I’m drawing from concern the allocation of safety-related resources, they have their most direct implications when we view tort law as (at least partially) a means to make people safer by deterring risky behavior. Those studies create two main implications, one for levels of care and one for damages.

Under a deterrence rationale, the standard of care in tort law reflects what we want potential tortfeasors to invest in accident prevention. The investment patterns from my first post in this series suggest that, at least as a prima facie matter, people want potential tortfeasors to invest twice as many resources in preventing accidents when children are the primary potential victims, even when both children and adults are equally vulnerable.  And if my second post in this series is right, we have reasons to respect those preferences. So when children are among the foreseeable class of victims, courts should require a heightened level of care. Although courts appear to respond to a child’s increased vulnerability to harms—they blindly run out into the street to reach ice cream trucks, for example—I have not found evidence that courts have picked up on the extra value that we appear to place on child safety. I’ve also looked at practitioner treatises, and so far I cannot find any mention that courts or juries are more likely to find a defendant negligent if the victim was a child. So, as a prima facie matter, there are reasons to question whether judges and juries are applying a sufficiently stringent level of care in cases involving children.

To motivate potential tortfeasors to take a heightened level of care for children, damages for child victims should be about twice as high as damages for adult victims. Currently, tort damages tend to exhibit child discounts or mild child premiums. This should not be a surprise. We ask juries to set damages in particular ways that constrain their discretion. For wrongful death, we generally ask them to set damages by looking at the economic contributions that the decedent would have made to her relatives. This puts a very small value on dead children, and results in child discounts even after we add non-economic damages. For permanent injuries, some back-of-the-envelope calculations suggest that juries tend to award children 20-25 percent more than adults. This is approximately what we would expect if juries were awarding damages based on the number of years that a victim will have to live with her injuries, and then discounting those future yearly payouts to arrive at a single lump sum.   But that child premium is significantly lower than the 2 to 1 ratio that a deterrence-oriented tort system might strive for. So, as a prima facie matter, there are reasons to question whether damages for child victims are high enough to generate the amount of deterrence that people appear to desire.

Of course, there is much more to say.

A fuller deterrence analysis would require examining a host of additional factors, such as whether regulatory agencies or market forces or the threat of criminal liability already provide extra protection for children, whether risk compensation or substitution effects operate differently for the adult and child populations, the differences between contractual settings like medical malpractice and stranger cases, how to handle “hidden-child” cases (which would be partially analogous to thin-skull cases), etc. I invite readers to offer their thoughts on these issues. But as a first cut, there are reasons to think that tort law does not offer the desired mix of protection for adults and children.

We could also ask what civil recourse and corrective justice accounts of tort law might contribute to the discussion. But I will leave that for another day.

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Data, A/B Testing, and Sales

A company called Adore Me that was founded in 2010 now has sales ($5.6 million) to rival La Perla has done well in part because they use data and A/B testing. Rather than rely on the intuition of photographers and designers, the company takes versions of an offering and shows them to consumers to see what works. Here are the surprising claims. Blonds don’t sell well. A picture of a model with her hand on her hip will sell less than if she places her hand on her head. According to Fast Company:

Through its research, Adore Me has found that the right model matters even more than price. If customers see a lacy pushup on a model they like, they’ll buy it. Put the same thing on a model they don’t, and even a $10 price cut won’t compel them. Pose matters as well: the same product shot on the same model in a different posture can nudge sales a few percentage points in either direction. Another test found that a popular model can sell a more expensive version of the same garment.

Adore Me also has a plus sized model (although I am sure that others can tell me best whether the company’s definition of size 12 and above is a good one) and presumably will see whether folks may buy more lingerie from someone with a body other than a Barbie-esque one. Of course they may find that the image machine controls how we shop, but I am curious to see whwther they will find ways to challenge and tweak what resonates with consumers. Now that may be unlikely as the author of the article, Rebecca Greenfield, wrote “Scrolling through the site, the models could all be related—long legs, olive skin, dark hair, insanely hot.” Yet when it came to race, the article suggests that pose, styling, and the emotional connection with the photo mattered more than race for selling a given item.

As with all data, the practice raises some difficult questions. Seeing how people behave can help sell. Assuming that one’s offering does not influence how people behave is a mistake. The ethics of what one does with data about buying habits and current preferences is a topic for another post and many papers are being written on the topic. For now, be aware of the practices. For Facebook thought it was cool to run thousands, if not hundreds of thousands, of tests on users. As Ian Ayres noted, people can use Google Ads to see what titles work best for a book. So maybe we care more about emotional manipulation than the variation in ad content. Maybe we care more about whether we see ads for the same item and same price as others than whether that ad is highlighted in red, blue, or green. Maybe we should know that poses and lighting can influence our desires and buying habits. Although business experiments are not new, how they are done and for what purpose forces us to re-examine practices. Along the way, we will re-visit markets versus manipulation versus power versus nudging versus culture versus shaping as we better see what is happening and then ask why and whether about those outcomes.

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Evolving Contract Schemas

A Meeting of the Minds

A Meeting of the Minds?

With co-authors, I’ve been working on a series of experimental papers about contract law that appear to be converging on a theme: what individuals think “contract” means has purchase in the real-world, and that contractual schema is evolving.

A schema is nothing more than a mental model – a framework – to help us organize and process information. A contract schema is the set of background assumptions that we fill in when we think about a legally operative bargain. For those of us who grew up in a largely off-line world, our contract schema involve “doing the paperwork,” “getting it in writing,” and “signing on the dotted line.” (See this article for details). Indeed although most contracts law professors make fun of the metaphor of the meeting of the minds, it captures a real heuristic for a certain segment of society. That so even though form contracts have been part of modern life since the 50s, and almost none of us ever actually negotiate contracts that could end up in court. Indeed, when I started teaching in 2004, students routinely would say “she signed it, she must be bound to it,” even in cases like Specht.  Since this mental model is quite a ways from the reality of online contract, consumers may think they are in contracts when they aren’t, and visa versa.

But what happens when contracts widely explored in pop culture – and presented to you in your formative years – were never signed, never reduced to writing, never negotiated.  The cheerios arbitration debacle, facebook’s demystified terms, your cellphone contract, your cable company’s impossible-to-escape relationship.  What happens when every time you think “contract,” you don’t call up the mental image of a “signature on vellum” but instead “loki on steroids.”  And when companies, realizing this, increasingly pushed “no contract” plans that were actually contracts, just without penalty clauses attached.

Perhaps citizens born after 1980 will have dramatically different attitudes toward contract than those born before. If that’s true, we’ll increasingly find cohort effects in contracting behavior online, as lay intuitions about how to respond to “contract” increasingly turn on the age of the promisee. For those coming of age offline, “click to agree” calls up memories of signature, and consequently infuses bargains with personal honor; for those born digital, “click to agree” means “nothing good is about to happen to me.” Those attitudes toward contract will play out in behavior – in likelihood to breach, to shirk, and to behave opportunistically.

At some point we expect to have direct evidence worth sharing in support of this argument! For now, I thought start discussion by fast forwarding fifteen years, when many judges born in the digital age will have assumed the bench. What changes in contract doctrine follow from changes in contract’s schema? Then again, will there be any contract cases left to decide, or will they all been sucked into arbitration’s black hole?

 

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Economic Dynamics and Economic Justice: Making Law Catastrophic, Middling, or Better?

Contrary to Livermore,’s post,  in my view Driesen’s book is particularly powerful as a window into the  profound absurdity and destructiveness of the neoclassical economic framework, rather than as a middle-ground tweaking some of its techniques.  Driesen’s economic dynamics lens makes a more important contribution than many contemporary legal variations on neoclassical economic themes by shifting some major assumptions, though this book does not explore that altered terrain as far as it might.

At first glance, Driesen’s foregrounding of the “dynamic” question of change over time may, as Livermore suggests, seem to be consistent with the basic premise of neoclassical law and economics:   that incentives matter, and that law should focus ex ante, looking forward at those effects.   A closer look through Driesen’s economic dynamics lens reveals how law and economics tends to instead take a covert ex post view that enshrines some snapshots of the status quo as a neutral baseline.  The focus on “efficiency” – on maximizing an abstract pie of “welfare”  given existing constraints —  constructs the consequences of law as essentially fixed by other people’s private choices, beyond the power and politics of the policy analyst and government, without consideration of how past and present and future rights or wrongs constrain or enable those choices.  In this neoclassical view, the job of law is narrowed to the technical task of measuring some imagined sum of these individual preferences shaped through rational microeconomic bargains that represent a middling stasis of existing values and resources, reached through tough tradeoffs that nonetheless promise to constantly bring us toward that glimmering goal of maximizing overall societal gain (“welfare”) from scarce resources.

Driesen reverses that frame by focusing on complex change over time as the main thing we can know with certainty.  In the economic dynamic vision, “law creates a temporally extended commitment to a better future.” (Driesen p. 52). Read More

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Facebook Privacy Dinosaur

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I have yet to see it “in the wild,” but media outlets are reporting that Facebook has created a Privacy Dinosaur—a little helper that checks in on users in real-time to help ensure that they understand who will see their update or post.   Whether you think of this as “visceral notice,” a privacy “nudge,” or “obscurity by design,” suffice it to say that this development will be of interest to many a privacy scholar.

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‘Cognitive Infiltration': the Dark Side of the Nudge

In their influential book Nudge: Improving Decisions About Health, Wealth, and Happiness, Richard Thaler and Cass Sunstein make the case that the government can and should leverage what it understands about behavioral psychology to “nudge” citizens toward healthier activities and outcomes.  One objection the authors acknowledge is that hacking people’s behavior, while not coercive in the classic sense, is still manipulative.  The authors anticipate this critique and respond by invoking the publicity principle from the work of John Rawls: officials should not nudge people in ways that would raise serious concerns were their methods made public.  “The government should respect the people whom it governs,” write Thaler and Sunstein, “and if adopts policies it could not defend in public, if fails to manifest that respect.”

The publicity principle is not an adequate response to the manipulation critique for a few reasons.  First, the response conflates what is publicly acceptable with what is democratically legitimate.  And second, because it calls for internal deliberation (“could not defend”) rather than actual transparency, the response assumes officials and the public will be on the same page about what methods are objectionable.  This turns out to be a questionable assumption.

I discuss these and other objections to nudging in my recent essay Code, Nudge, or Notice?  What I want to focus on here is the revelation this week that the British government is using psychology to influence and disrupt “hacktivist” and other online communities.  What was particularly astonishing (to me) was that Sunstein advocated for a version of this practice the very year Nudge hit the market.  Specifically, according to reporting by the indomitable Glenn Greenwald, Sunstein co-authored a 2008 memo suggesting the use of “cognitive infiltration” against “anti-government groups.”

I point this out not to demonstrate somehow that Sunstein is a hypocrite.  In addition to being rude and ad hominem, such an allegation finds little support.  I personally have tremendous respect for Sunstein as an intellectual and public servant.  Rather, I offer the example of cognitive infiltration—which, let us be clear, represents the sheep of libertarian paternalism in wolf’s clothing—as a vivid illustration of how a publicity principle falls short.  Some officials in the United States and Great Britain thought it would be just fine to manipulate citizens psychologically in an effort to disrupt inconvenient (if often misguided) ideologies.  Other individuals think the practice is, well, disrespectful.

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UCLA Law Review Vol. 61, Issue 3

Volume 61, Issue 3 (February 2014)
Articles

How to Feel Like a Woman, or Why Punishment Is a Drag Mary Anne Franks 566
Free: Accounting for the Costs of the Internet’s Most Popular Price Chris Jay Hoofnagle & Jan Whittington 606
The Case for Tailoring Patent Awards Based on Time-to-Market Benjamin N. Roin 672

 

Comments

Here Comes the Sun: How Securities Regulations Cast a Shadow on the Growth of Community Solar in the United States Samantha Booth 760
Restoration Remedies for Remaining Residents David Kane 812

 

 

 

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The Dualities of Freedom and Innovation

What a rollercoaster week of incredibly thoughtful reviews of Talent Wants to Be Free! I am deeply grateful to all the participants of the symposium.  In The Age of Mass Mobility: Freedom and Insecurity, Anupam Chander, continuing Frank Pasquale’s and Matt Bodie’s questions about worker freedom and market power, asks whether Talent Wants to Be Free overly celebrates individualism, perhaps at the expense of a shared commitment to collective production, innovation, and equality. Deven Desai in What Sort of Innovation? asks about the kinds of investments and knowledge that are likely to be encouraged through private markets versus. And in Free Labor, Free Organizations,Competition and a Sports Analogy Shubha Ghosh reminds us that to create true freedom in markets we need to look closely at competition policy and antitrust law. These question about freedom/controls; individualism/collectivity; private/public are coming from left and right. And rightly so. These are fundamental tensions in the greater project of human progress and Talent Wants to Be Free strives to shows how certain dualities are pervasive and unresolvable. As Brett suggested, that’s where we need to be in the real world. From an innovation perspective, I describe in the book how “each of us holds competing ideas about the essence of innovation and conflicting views about the drive behind artistic and inventive work. The classic (no doubt romantic) image of invention is that of exogenous shocks, radical breakthroughs, and sweeping discoveries that revolutionize all that was before. The lone inventor is understood to be driven by a thirst for knowledge and a unique capacity to find what no one has seen before. But the solitude in the romantic image of the lone inventor or artist also leads to an image of the insignificance of place, environment, and ties…”.  Chapter 6 ends with the following visual:

 

Dualities of Innovation:

Individual / Collaborative

Radical/Incremental

Accidental /Deliberate

Global /Local

Passion / Profit

Art/Science

Exclusive/Shared

Inscribed/Tacit

 

And yet, the book takes on the contrarian title Talent Wants to Be Free! We are at a moment in history in which the pendulum has shifted too far. We have too much, not too little, controls over information, mobility and knowledge. We uncover this imbalance through the combination of a broad range of methodologies: historical, empirical, experimental, comparitive, theoretical, and normative. These are exciting times for innovation research and as I hope to convince the readers of Talent, insights from all disciplines are contributing to these debates.

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Individuals & Teams, Carrots & Sticks

I promised Victor Fleisher to return to his reflections on team production. Vic raised the issue of team production and the challenge of monitoring individual performance. In Talent Wants to Be Free I discuss some of these challenges in the connection to my argument that much of what firms try to achieve through restrictive covenants could be achieved through positive incentives:

“Stock options, bonuses, and profit-sharing programs induce loyalty and identification with the company without the negative effects of over-surveillance or over-restriction. Performance-based rewards increase employees’ stake in the company and increase their commitment to the success of the firm. These rewards (and the employee’s personal investment in the firm that is generated by them) can also motivate workers to monitor their co-workers. We now have evidence that companies that use such bonus structures and pay employees stock options outperform comparable companies .”

 But I also warn:

 “[W]hile stock options and bonuses reward hard work, these pay structures also present challenges. Measuring employee performance in innovative settings is a difficult task. One of the risks is that compensation schemes may inadvertently emphasize observable over unobservable outputs. Another risk is that when collaborative efforts are crucial, differential pay based on individual contribution will be counterproductive and impede teamwork, as workers will want to shine individually. Individual compensation incentives might lead employees to hoard information, divert their efforts from the team, and reduce team output. In other words, performance-based pay in some settings risks creating perverse incentives, driving individuals to spend too much time on solo inventions and not enough time collaborating. Even more worrisome is the fear that employees competing for bonus awards will have incentives to actively sabotage one another’s efforts.

A related potential pitfall of providing bonuses for performance and innovative activities is the creation of jealousy and a perception of unfairness among employees. Employees, as all of us do in most aspects of our lives, tend to overestimate their own abilities and efforts. When a select few employees are rewarded unevenly in a large workplace setting, employers risk demoralizing others. Such unintended consequences will vary in corporate and industry cultures across time and place, but they may explain why many companies decide to operate under wage compression structures with relatively narrow variance between their employees’ paychecks. For all of these concerns, the highly innovative software company Atlassian recently replaced individual performance bonuses with higher salaries, an organizational bonus, and stock options, believing that too much of a focus on immediate individual rewards depleted team effort.

Still, despite these risks, for many businesses the carrots of performance-based pay and profit sharing schemes have effectively replaced the sticks of controls. But there is a catch! Cleverly, sticks can be disguised as carrots. The infamous “golden handcuffs”- stock options and deferred compensation with punitive early exit trigger – can operate as de facto restrictive contracts….”

 All this is in line with what Vic is saying about the advantages of organizational forms that encourage longer term attachment. But the fundamental point is that stickiness (or what Vic refers to as soft control) is already quite strong through the firm form itself, along with status quo biases, risk aversion, and search lags. The stickiness has benefits but it also has heavy costs when it is compounded and infused with legal threats.