The Psychology of Contract Precautions

Tess Wilkinson-Ryan (Penn) and I have a new draft paper up on SSRN: The Psychology of Contract Precautions.  From the abstract:

“This research tests the intuition that parties to a contract approach each other differently before the contract is formed than they do once it is finalized. We argue that one of the most important determinants of self-protective behavior is whether the promisee considers herself to be in negotiations or already in an ongoing contract relationship. That shift affects precaution-taking even when it has no practical bearing on the costs and benefits of self-protection: the moment of contracting is a reference point that frames the costs and benefits of taking precautions. We present the results of three questionnaire studies in which respondents indicate that they would be more likely to protect their own interests—by requesting a liquidated damages clause, by purchasing a warranty, or by shopping around to ensure the best deal—when the contract is not yet finalized than they would when they understand the agreement to be finalized. We discuss competing explanations for this phenomenon, including both prospect theory and cognitive dissonance. Finally, we explore some doctrinal implications for work on disclosure, modification, and promissory estoppel.”

The paper is a part of a new literature on the moral psychology of contracting — see, e.g., Suckers, Obligations, Liquidated Damages.  That said, it’s been quite a long time in production — I think we first started working on it in 2008 — and I’m thrilled to finally get it out in the open.  It’s in draft form, so any comments you might have would be most welcome.

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4 Responses

  1. PrometheeFeu says:

    This might have to do with the building of a trust relationship. Most business people I’ve spoken to have the same approach to contract-negotiations which is that it’s not about the contract. It’s about establishing trust. Ultimately, if you have to use the contract to enforce the agreement, it was a bad deal all along. So once you’ve established a basis for trust and have finalized what the agreement looks like, why buy warranties or shop around? You’ve already done all the hard parts.

  2. Dave Hoffman says:


    I agree that trust is an explanation for our results (though I don’t think it explains all of our experiments particularly well.)

  3. A.J. Sutter says:

    I was especially interested to read about your methods, and also your section called “limitations” @38-41 in the paper. I remain highly skeptical.

    1. E.g., regardless of your concern for how people might feel if they thought the principles of contract law protected only sophisticated parties, there remains the possibility that very few people other than “sophisticated” commercial actors actually ever do get to negotiate contracts where liquidated damages clauses are an issue. Most folks wind up signing non-negotiable contracts that are thrust at them as the price of getting goods or services. Even I can’t recall such a sophisticated case of negotiation in my own personal life — and I’m I balk at signing form contracts (to say nothing of actually reading them) more often than the average person. Probably were such a complex situation ever to arise in daily life (a pre-nup, for example), most people would engage a lawyer if they wanted to negotiate.

    2. Arguably, in the hypos presented to the participants you yourselves throw in bits of legal advice, e.g. tipping them off that “One option is to ask the moving company to include a specific provision in the contract laying out the amount that the movers will pay in the event of damage.” How many people would have thought of this on their own? Or gone online first to search for advice like this? Could this skew your results in some way?

    3. Another limitation you don’t discuss is that being in an ongoing contract relationship is quite different from imagining you are in one. The imaginary nature of the experiments might also affect your results, and/or your interpretation of them.

    4. “The theory of default rules rests on assumptions about the behavior of legally unsophisticated members of the population–both majoritarian and information-forcing penalty defaults, for instance, rest on (sometimes) informed guesses about the views of the population mean:” what population? Mean with respect to what? And considering your title, psychology of whom? Are the views you mention specific to some sort of cultural background, legal system, etc.? You address the possible relevance of cultural differences only in passing, in a footnote (@41n176).

    5. “It is quite useful to study the behavior of sophisticated commercial parties engaging in contracting …. Bringing such parties into the laboratory, though logistically quite challenging, holds real promise….”: “Into the laboratory”? Are you kidding? Do you also wear white coats and smoke pipes while peering over your eyeglasses as you explain your work to the curious?

  4. AnnaKo says:

    From my point of view this book is extremely useful, especially for those who just start their career way. When you understand psycology of yours as an employee and that of an employer it’s much eaier to make right decisions. So even if the book is going to arouse criticism it’s ok, it means that people are really interested.