Posted by Randy Barnett: Cognititive Psychology and Contracts: http://volokh.com/archives/archive_2005_06_12-2005_06_18.shtml#1118933911
One of the reasons I came to the AALS was to hear Steve Ware and Marcus Cole speak. I have known both since they were law students. Unfortunately Marcus, who was supposed to be on this morning's panel became ill, so is not here. I had thought of skipping the first session, but my duty to you, dear VC reader, impelled me to return to (almost) liveblog the session, which is on the Implications of Limited Rationality for Contract and Commercial Law. Reliance on cognitive psychology to understand how people make decisions has lately been fashionable among contract scholars. This panel is designed to introduce these ideas. The panelists are Danielle Kie Hard of Southwest University and Manuel Utset of Utah (and formerly of BU). I am sitting next to Jay Feinman, one of the founders of the Critical Legal Studies movement back on the 1980s. He wrote some pioneering scholarship back then on critical approaches to contract law, the topic of the second panel of the morning. Bob Hillman is calling for the session to begin. (I should note that I reviewed Hillman's book on contract law here. I rarely get a chance to plug my writings on contract on VC. Consider this the commercial you must sit through to get to the "free" programing.) Hillman explains that this is a joint panel with the commercial law professors who are meeting along with we contracts folks. He is identifying questions he raised about the use of psychology in an article of his. The first question is whether the psych lab tests really apply to contacting situations? Second, do they provide a good account of contracting? He seems to be trying to stretch to make up for the absence of Marcus, but I would rather just hear from the 2 remaining speakers and leave more time for discussion from the floor, which has been rather truncated in previous sessions. But that's just me. (PS: The session ended up going 5 minutes over with very little time for audience participation,) Danielle starts right off criticizing what she calls the âfreedom of contract ideal.â Her complaint this morning is that "disclosure statutes" to correct bargaining imbalances and asymmetric information actually conceal the real problem with freedom of contract, which is disparity of power These statutes assume the classical conception of contract law which assumes that parties are able to make welfare enhancing choices that merit enforcement, provided they are given the relevant information. . . . [To read the rest, click on show] ([1]show) She is now summarizing what she calls classical contract theory. She is reading pretty fast so it is hard to keep up. It is the familiar description of the rational actor model. (This is the model that Marcus was going to critique.) Now she is summarizing the standard critique of the unrealistic nature of the rational actor model based on informational asymmetry, the failure to consider all salient information, and the absence of rationality in the marketplace. She says behavioral economics underscores this critique (which I am incompletely summarizing because she is speaking so fast--not too fast for the audience, just too fast for me to keep up). Human cognitive abilities are limited, says the literature that she is now summarizing, so people use shortcuts. They ignore the statistical data in favor of other less perfect markers. Now she is describing framing effects in which preferences are changed solely because of how the information is presented to her, which puts power into the hands of those who are presenting choices to market actors. Other studies show that people are not truly rational self-maximizers. The example is that people tip though it is not in their interest to do so (a claim that is widely criticized BTW). Market forces require businesses to manipulate information to stay in business, she says. She says the assumptions of the rational actor model underlying classical contract theory are "arguably contestable." All this undermines the feasibility of disclosure statutes because consumers will not process the information accurately and the resulting transaction will still not be wealth maximizing for consumers, which is the classical justification for enforcing contracts. By relying on disclosure statutes we are privileging the classical conception of freedom of contract which, on its own terms, is incoherent. Freedom of contract is only workable as an ideal if its underlying assumptions are sound, and they appear not to be. Freedom of contract, stripped of its underlying justifications leads to the "draconian" conclusion that "contracts should be kept." So what we have instead is a naked abuse of power. "Freedom of contract is essentially being used as a front for the use of contract as power." One problem with this critique is that it is what philosopher's call "radical" which means essentially that it applies so broadly that it equally undercuts the position of the person making the critique. In this case, these inabilities to process information and make value maximizing choices equally (if not more so) undermine democratic theory by which voters choose leaders to pass laws to protect them from unscrupulous businesses. How are THESE choices to be made given the claims of cognitive impairment? The same would apply to the experts like contract law professors who posture that THEY know what the rules should be to compensate for consumer ignorance. What makes them able to transcend the weaknesses of human cognitive abilities. After all, they too are only human. Just attend a faculty meetings some time. The truth is that the so-called classical model of contract is unrealistic, but a more realistic economic model nevertheless supports the decentralization of decisions down to the level of individual, rather than allowing some imperfect persons make choices for others--choices about which they lack knowledge. In addition, it is the individual who has the interest to make better choices for themselves than do enlightened rulers. All this is the thesis of my book, The Structure of Liberty: Justice and the Rule of Law. There I defend "freedom of contract" based, not on perfect information, but on highly imperfect knowledge. But now it's Manuel Utset's turn to speak. He is using Powerpoint, which may make it easier for me to keep up. His talk is about the time-inconsistent preferences...--oops he changed ths slide! Too late to write down his whole thesis. The next slide is about 5 contract law issues, Optimal levels of Reliance, Opportunism, incomplete contracts, damn, the slide is gone now. I better stop reading the slides. Talk about informational impairment! Well that does not help either. The problem is that he is throwing too many concepts at me so I cannot explain them to you and still keep up. (This is what I feared about live blogging.) On the other hand, this illustrates the problem he and Danielle are discussing. I doubt that most in the audience are internalizing much of the information he is throwing at us. Yet these are the very experts upon which Danielle would rely to make value enhancing choices for others. The reality is that the audience is deferring to the knowledge of the speakers, but most of the speakers are deferring to the knowledge of the researchers upon whom their papers are based. Which is how we ALL make a good portion of our decisions. The main difference is that mistakes individuals make primarily harm themselves, whereas the mistakes made by rulers harm many others far and wide. And rulers lack the same incentives to make value maximizing choices for others, that we have for making them for ourselves. Manuel is now discussing the difference between my present self and my future self. My present self wants to commit to do something but my future self will undermine my present choices. At this moment, I can identify with this as my present self wants to stop blogging. No wait, that is my future self who wants to stop and my present self wanted me to blog. Which means that my present-now-past self wanted me to blog but my future-now-present self wants to stop. (Well that's the difference between ex ante and ex post. Got that?) All this is what he means by âtime inconsistent preferences.â So I am now just listening until I can figure out what it is possible to report. The presentation is actually pretty effectively summarizing the cog psych argument for why individual decision making is not "optimal." Once again, however, this resort to optimality creates a straw man. If you took this critique seriously, you would conclude that individuals are incapable of making value maximizing choices--as Danielle seemed to suggest--which we know is not the norm, and we cannot explain why either democratic rule or rule by (human) experts will perform any better given that democratic or expert rulers with highly imperfect information and weaknesses in processing this information rationally will be able to make better choices for others than they can make for themselves. There are possible answers to this challenge of course, but most of these responses (as we shall see) would serve to relax the assumptions on which the critique of individual choice is based, thereby reducing the problem for which democratic rule or rule by experts is supposed to be the solution. I need to stress that, to the credit of its organizers, this panel was originally designed to be balanced. These two speakers were supposed to present the cog psych critique, which both did effectively--despite my inability to keep up with them in this blog--and Marcus was going to provide the response. Which makes it all the more unfortunate that his illness prevented him from attending. I asked the panel about why this cog psych critique does not apply equally to rule by experts or democratic rule. Danielle freely concedes that it does apply across the board, but that larger institutions have the resources to devise and adopt strategies to compensate for these cognitive impairments that individuals and even small business lack. Fair enough, though I think the original critique unduly discounts the strategies that individuals employ to compensate for their cognitive deficiencies. That these strategies are imperfect (as they are) does not mean that they are not still preferable to rule by (imperfect) others. ([2]hide) References 1. file://localhost/var/www/powerblogs/volokh/posts/1118933911.html 2. file://localhost/var/www/powerblogs/volokh/posts/1118933911.html _______________________________________________ Volokh mailing list Volokh@lists.powerblogs.com http://highsorcery.com/cgi-bin/mailman/listinfo/volokh
