The Situationist

Posts Tagged ‘Illusion of Law’

The Illusion of Wall Street Reform

Posted by The Situationist Staff on October 6, 2008

The following op-ed was co-authored by Situationist contribtor Jon Hanson and a Situationist fellow. In crisis, beware illusion of reform” was published in the Providence Journal.

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IN CASE you missed it, global financial markets have been rocked by a series of unsettling events. The collapse of Lehman Brothers and the $700 billion government bailout package are only the latest in a string of shocks — a string that, if investors’ worst fears are realized, represents the beginning of a much more dramatic unraveling of the global financial fabric.

Seven years ago, American markets were in similar turmoil. Such companies as Enron were using “aggressive accounting,” “special-purpose entities” and other balance-sheet tricks to hide risks and represent themselves as healthier than they were.

The accounting scandals of the early 2000s and the reform that followed have much to teach us about our approach to the current crisis. Then, as now, the problem stemmed from convoluted financial instruments that few people could disentangle. Then, as now, corporate behemoths that had seemed invincible came crumbling down (Enron was the biggest bankruptcy in history until WorldCom, which was the biggest bankruptcy in history until Lehman Brothers).

Then, as now, virtually everyone agreed that a big part of the solution was to be found in some sort of additional regulation. Today, Barack Obama calls for “regulatory reform,” while John McCain (a long-term proponent of deregulation) has called for “comprehensive regulations that will apply the rules and enforce them to the full.”

It was that sort of regulatory impulse that, in Enron’s aftermath, gave us the Public Company Accounting Oversight Board and the Sarbanes-Oxley Act of 2002 (“SOX”), which President Bush called the most far-reaching overhaul of America’s business practices since the Great Depression.

Sure sounded promising. The latest bailouts and scandals will no doubt lead to similar reforms, some of which are already in the works. An important question, then, is what those reforms should be — a topic that will occupy many scholars, policymakers and commentators in the upcoming months.

Unfortunately, there is a good chance that those reforms will not have much long-term effect. The real risk is that we get the illusion of reform, not meaningful, substantive and lasting reform. Calls for change come loudly when a crisis rears its head. Inevitably, however, the fervor fades, as workaday duties, dentist appointments, American Idol and the pennant races distract the public and, in turn, policymakers.

While the rest of us turn to other matters, the regulated entities themselves will maintain a steady focus on one question: existing regulations and how to weaken them.

In the aftermath of Enron and WorldCom, corporations, to maintain their legitimacy, initially expressed outrage and wholeheartedly supported new regulations. Members of the Business Roundtable were “appalled, angered and, finally, alarmed” about the problem. President Bush was right, in their view, to berate the bad-apple business executives and to call for more rigorous regulatory standards for all. “We must and will be at the forefront of supporting these reforms,” the Roundtable concluded.

Riding the wave of that consensus, lawmakers took a series of steps, patted themselves on the back, and moved onto other matters, and we all assumed the problem was solved. With that, what had been implicit resistance turned to explicit pressure from the business community to minimize and undo the “reform.”

Consequently, the post-Enron reforms never lived up to the post-Enron rhetoric, and the regulatory teeth that Sarbanes-Oxley initially flashed have been blunted by pro-business revisions. Some provisions never made it into SOX, such as a requirement that lawyers report to the Securities and Exchange Commission if a company’s board failed to respond to warnings about misconduct.

Other provisions exist only on paper, such as Section 404’s “assessment of internal controls,” the compliance date for which has been repeatedly delayed (for nonaccelerated filers) and now stands at Dec. 15, 2009. The Committee on Capital Markets Regulation, with the blessing of Treasury Secretary Henry Paulson and in the name of “U.S. competitiveness,” has promoted several reforms that make it harder for companies to be sued and more difficult for the SEC and others to regulate.

The committee’s members include heavy hitters from the world of business and finance, including Thomas A. Russo, the vice chairman and chief legal officer of Lehman Brothers.

If history is any guide, the same sort of dynamic will unfold this time around. The reforms that we see will be largely procedural, not substantive — check this, sign that, certify here, jump a hoop there — and they will not fundamentally change the situation that produced this crisis. The reform will look sweeping, because it will be broad-based and ballyhooed as “tough.” Soon enough, the business elite will complain that, indeed, it is too tough. We will learn that small-business owners and entrepreneurs, not to mention Fortune 500 firms, are being tangled and tripped up in overregulation and needless compliance costs.

The mantra of “markets good, regulation bad” and the primacy of shareholders will return. Erstwhile concerns about third parties — such as the taxpayers who are bailing out companies — will gradually be eclipsed by claims that those very groups are the most harmed by the new regime. After all, these burdensome regulations go too far and “hurt American competitiveness,” “drive business, jobs and tax revenues overseas,” “increase costs for consumers,” and so forth.

Such is the “law of unintended consequences,” which apparently applies to only regulations and regulators, never markets.

The reform, which might look promising initially, will be rolled back, whittled away and watered down (corporate lobbyists are already positioning themselves to grab a piece of the $700 billion bailout).

That’s the thing about illusions: What appears to exist doesn’t. To address the financial crisis, regulatory reform is certainly needed. But no less important will be mechanisms for girding those regulations against the influence of the regulated. Beware the illusion of reform.

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For a related Situationist post, see “The Situation of Illusion.”

Posted in Deep Capture, Illusions, Law, Politics, Public Policy | Tagged: , , , , | 5 Comments »

Categorically Biased – Abstract

Posted by The Situationist Staff on September 3, 2008

Ron Chen and Situationist contributor Jon Hanson recently posted their article, “Categorically Biased: The Influence of Knowledge Structures on Law and Legal Theory” (77 S. Calif. L. Rev. 1103) on SSRN. Here’s the abstract.

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This Article focuses primarily on one slice of social psychology and social cognition research, namely the vast and vibrant field examining the integral role that knowledge structures play in the way we attend to, remember, and draw inferences about information we encounter and, more generally, the way we make sense of our world.

The human system of processing information is, in many cases, an efficient means of understanding our worlds and ourselves. Classification of people, objects, and other stimuli is often both indispensable and ineluctable. Still, as social psychologists have demonstrated, “virtually any of the properties of schematic functioning that are useful under some circumstances will be liabilities under others.” The categories and schemas that operate, usually automatically, influence all aspects of information processing – from what information we focus on, to how we encode that information, to which features of that information we later retrieve and remember, and to how we draw inferences and solve problems based on that information. Given the unconscious and biasing influence of our schemas, combined with the fact that our schemas themselves will often reflect our unconscious motives, we should be mindful, even distrustful, of our schemas and the conclusions that they generate. These effects, the processes that drive them, and the biases they engender are the primary subject of this Article. A central goal is to offer a broad understanding of how individuals utilize categories, schemas, and scripts to help make sense of their worlds. In doing so, we serve another main objective: to provide a comprehensive (yet manageable) synthesis of a vast body of social psychology literature. This overview shold transform how we make sense of our laws and legal-theoretic world.

Part II of this Article is devoted to describing the significance of knowledge structures. Part III briefly summarizes how legal scholars have thus far applied insights about knowledge structures and argues that their most profound implications have yet to be appreciated. Part III then provides a set of predictions regarding the influence of knowledge structures and the biases they likely engender for legal theories and laws.

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To download a copy of the paper for free, click here.

Posted in Abstracts, Deep Capture, Illusions, Law, Legal Theory, Social Psychology | Tagged: , , , , , , , , , , , | 1 Comment »

The Situation of Illusion

Posted by Jon Hanson on June 25, 2008

Magician - from NYPL GalleryIn a paper that Ronald Chen and I wrote a few years ago (part of our “Illusion of Law” series), we summarized a few of the ways that “magic” happens and the key role played by “the way people think.” Here’s an excerpt from that paper (note: we are quoting Nathaniel Schiffman’s book, Abracadabra! Secret Methods Magicians & Others Use To Deceive Their Audience (1997)).

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Explanations that are outside of our schemas – what we believe or what we want to believe about the things we see – will rarely be activated. It is often the case that we simply cannot fathom that the magician might be doing what he is doing:

. . . when Blackstone did his famous birdcage vanish (a cage with a live bird vanished from his bare hands) he would hold his arms outright in front of him, seemingly presenting the cage to the audience for their inspection. . . . The cage was specially designed to collapse on command. At the appropriate time, Blackstone would toss it forward, and the collapsed cage would be pulled up his sleeve – bird and all. Savvy adults watching the show might shake their heads and say, ‘Nah, it couldn’t go up his sleeve because he wouldn’t want to injure the bird.’. . .

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Actually, in many cases the bird was injured or killed.

Convinced that the magician would never rely on a method that might harm the bird, audience members were unable to see the trick. Their “knowledge” that the magician was not the type to harm a bird simply for the purposes a magic trick blinded them to what was the most obvious explanation for the illusion.

Our inability to see the magician as a particular type of person –- capable of, and willing to do, the unexpected in order to achieve magic –- is, like magic, no coincidence. Relying on our schemas, we make assumptions about the magician and her willingness to follow what we might consider to be the “unwritten Fra Diavolo image from NYPL Galleryrules” of magic. Audiences at a magic show

expect the magician to perform his magic in front of them, in full view, while misdirecting away from those certain actions that constitute the trick-to-the-trick. The audience probably doesn’t realize they are making those assumptions, because they have no reason to believe their assumptions are being broken. But very often a magic trick works because the magician has broken the unwritten rules of theatrical performing.

For psychics or “mentalists,” the unwritten rules include the following: first, the assumption “that the man on stage alone is performing the magic”; second, “that all the magic is done in ‘real time’ as the performance is happening”; and, third, “that the magic is done on stage.” The mentalist’s trick is often in breaking those rules – for example, having assistants eavesdrop on conversations in the audience; collecting juicy morsels of information prior to the time the show begins (and sometimes days before); relaying surreptitiously gathered information from off-stage. Doing unglamorous, tedious detective work prior to the show is often exactly the way that the trick is done.

In the end, magic succeeds when the audience believes what the magician wants them to believe: the idea that “[their] act is so awe-inspiring and mystical and magical that how in the world could that amazing magic be due to such lowly subterfuges as microphones and assistants transmitting information?”

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The July issue of Harper‘s includes a remarkable article by Alex Stone, “The Magic Olympics.” Stone’s first-hand account of The World Championships of Magic is stunning, but I want to focus on just a few of his paragraphs that describe a particular illusion (similar to an illusion that we published in a post two weeks ago and re-publish in this post) and that further illustrates the message in the passage above.

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[W]e’re entertained . . . by a . . . hair-raisng sawed-in-half effect. I’v seen hundreds of bisections, but nothing like this. Dressed as a doctor, he chainsaws his patient in half, and then an attractive nurse wheels the torso around on an ersatz gurney, waving her arms hrough the void where his legs ought to be. No box. No curtains. No mirrors. Nothing. What the hell?

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Take a look at the brief Youtube video below.

Social psychology and related fields have demonstrated repeatedly that what we are prepared to see strongly constrains what we can and do see. Those constraints on our thinking leave us vulnerable to manipulation and victims of many illusions in including, as the following excerpt from Stone’s article suggests, the illusion of an illusion

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I board a small plane back to the States. Several of the artists and competitors are on the flight, all looking as haggard as I do, and feel. After a week of biblical astonishments, I feel hardened. Nothing can faze me. But as I file through business class, I see something for which I am wholly unprepared. In the first row sits the illustionist of last night’s sawed-in-half routine, a meaty, florid man with triangular eyebrows and thin red lips. His trick has been gnawing at me since I saw it. No boxes. No mirrors. How? Now suddenly, I understand. Sitting next to him, in th aisle seat, is a slender dark-skinned man who looks normal in all respects save one: his body terminates just below the waist. No legs. No hips. Nothing. I can’t help but stare, and for a moment I wonder if anyone can hear my mind snap.

Magicians will go to great lengths in pursuit of the ultimate illusion, concealing silk inside a thumb tip, or doves in a coat, or any number of small objects within the delicate folds of a well-hemmed topit. But concealing an entire man–or rather, half a man–and flying him across the glove in service of a five-minute routine is something else entirely, something far stranger, something brilliant, yes, but also sad. Did the half-man, kept hidden in a hotel room, see nothing of Stockholm? What sort of non-disclosure agreement had he signed? Can I, too, buy a half-man at my local magic store?

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Assuming that Stone’s revelation helps to explain the same trick that is captured in the video above (and it may not), how does your reaction compare to Stone’s? Please comment.

Posted in Entertainment, Illusions, Video | Tagged: , , , , , , | 2 Comments »

 
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