The Risky Situation of In-House Lawyers

Donald Langevoort recently posted his worthwhile paper, “Getting (Too) Comfortable: In-House Lawyers, Enterprise Risk and the Financial Crisis” on SSRN.  Here’s the abstract.

In-house lawyers are under considerable pressure to “get comfortable” with the legality and legitimacy of client goals. This paper explores the psychological forces at work when inside lawyers confront such pressure by reference to the recent financial crisis, looking at problems arising from informational ambiguity, imperceptible change, and motivated inference. It also considers the pathways to power in-house, i.e., what kinds of cognitive styles are best suited to rise in highly competitive organizations such as financial services firms. The paper concludes with a research agenda for better understanding in-house lawyers, including exploration of the extent to which the diffusion of language and norms has reversed direction in recent years: that outside lawyers are taking cognitive and behavioral cues from the insiders, rather than establishing the standards and vocabulary for in-house lawyers.

Download the paper for free here.

Related Situationist posts:

• The Situation of Lawyers’ Complicity,
• Gatekeepers Inside Out – Abstract,
• The Situation of Lawyers and Practicing Law,
• Law, Chicken Sexing, Torture Memo, and Situation Sense,
• “Why Do Lawyers Acquiesce In Their Clients’ Misconduct?, Part I, Part II, Part III, and Part IV,
• The Illusion of Wall Street Reform,
• On the Ethical Obligations of Lawyers: Are We Snakes? Are We Supposed to Be?.”
• The Situation of Legal Ethics
• How Situational Self-Schemas Influence Disposition,
• The Situation of John Yoo and the Torture Memos, and
  
• The Affective Situation of Ethics and Mediation.
  

Law and Economics Primer

Situationist Contributor Jon Hanson, Kathleen Hanson, and Melissa Hart, have recently posted their outstanding introduction to law and economics (to be published in Dennis Patterson’s forthcoming volume, “Compantion to Philosophy of Law and Legal Theory) on SSRN.  The chapter includes a brief discussion of the emergence of economic behavioralism and situationism, and it is now available to download for free here.  Here’s the abstract.

* * *

This chapter provides an introduction to the history, uses, methods, strengths, and limits of law and economics. It begins by examining the role of positive and normative approaches to law and economics. To examine the positivist thesis – that the law does in fact tend toward efficiency – the chapter discussed and analyzes the famous Hand Formula developed by Judge Learned Hand in United States v. Carroll Towing. As one of the only traditional cases in which a judge arguably made efficiency his explicit goal, the case presents an excellent opportunity to assess whether, even an efficiency-oriented judge will or can identify the efficient result. The chapter reviews the possible liability rules that might have been applied in Carroll Towing, and uses that review to introduce many of the core concepts and methods of law and economics, including game theory. Ultimately, the chapter concludes that, although the Hand Formula may have led to one of the possible efficient results, there is little reason to be confident, and some reason to doubt, that Judge Hand reached the most efficient outcome. The difficulties inherent in selecting the efficient rule through litigation present a significant challenge to the positivist case for legal economics.

The second part of the chapter considers both the normative support for efficiency and the range of challenges to, and refinements of, the normative position that have developed in recent years. The chapter highlights some of the trade-offs inherent in the law and economics approach and concludes that law and economics has, like any legal theory, both costs and benefits.

* * *

Again, you can download the paper for free here.  For a sample of related Situationist posts, see “Tushnet on Teles and The Situation of Ideas – Abstract,” “Deep Capture – Part X,” “Behavioral Economics and Policy,” and “Emotional Reactions to Law & Economics – Abstract.”

Taking Behavioralism Seriously (Part I) – Abstract and Top Ten List

Doug Kysar and Situationist contributor Jon Hanson recently posted on SSRN their important 1999 article, Taking Behavioralism Seriously: The Problem of Market Manipulation (74 N.Y.U.L. Rev. 363) on SSRN. Here is the article’s abstract.

* * *

For the past few decades, cognitive psychologists and behavioral researchers have been steadily uncovering evidence that human decisionmaking processes are prone to nonrational, yet systematic, tendencies. These researchers claim not merely that we sometimes fail to abide by rules of logic, but that we fail to do so in predictable ways.

With a few notable exceptions, implications of this research for legal institutions were slow in reaching the academic literature. Within the last few years, however, we have seen an outpouring of scholarship addressing the impact of behavioral research over a wide range of legal topics. Indeed, one might predict that the current behavioral movement eventually will have an influence on legal scholarship matched only by its predecessor, the law and economics movement. Ultimately, any legal concept that relies in some sense on a notion of reasonableness or that is premised on the existence of a reasonable or rational decisionmaker will need to be reassessed in light of the mounting evidence that humans are “a reasoning rather than a reasonable animal.”

This Article contributes to that reassessment by focusing on the problem of manipulability. Our central contention is that the presence of unyielding cognitive biases makes individual decisionmakers susceptible to manipulation by those able to influence the context in which decisions are made. More particularly, we believe that market outcomes frequently will be heavily influenced, if not determined, by the ability of one actor to control the format of information, the presentation of choices, and, in general, the setting within which market transactions occur. Once one accepts that individuals systematically behave in nonrational ways, it follows from an economic perspective that others will exploit those tendencies for gain.

That possibility of manipulation has a variety of implications for legal policy analysis that have heretofore gone unrecognized. This article highlights some of those implications and makes several predictions that are tested in other work.

* * *

SSRN has just announced its Journal of Behavioral & Experimental Economics and Journal of Behavioral Economics Top Ten lists for papers posted in the last 60 days.  Taking Behavioralism Seriously made both lists.

To download the paper for free click here.  That link will direct you to the abstract and various download options.  To download the companion article, Taking Behavioralism Seriously: Som Evidence of Market Manipulation (112 Harvard L. Rev. 1420) click here. For a sample of related Situationist posts, see “Promoting Smoking through Situation” and “The Situation of Subprime Mortgage Contracts – Abstract.”

Behavioral Economics and Policy

Last month, Rick Montgomery wrote an interesting article, “Behavioral Economics Is Moving from Theory to Policy,” for the Kansas City Star.  Here are some excerpts.

* * *

As the economy sinks and investors buckle over, the behavior buffs are rising up.

From the lesser-appointed corners of academia, psychologists, sociologists and a youthful breed of economists scoff at the revered mathematical models that have driven economic thought and snared Nobel Prizes.

These preachers of “behavioral economics,” including some on President-elect Barack Obama’s economic team, argue that humans cannot be relied upon to obey the efficient, orderly tenets espoused by free-market thinkers.

Chief among the old-school rules is the assumption that we act rationally with money.

“That’s absurd, counterfactual . . . and now they’ve created a catastrophe,” said William Black, who teaches economics and law at the University of Missouri-Kansas City.

Until now, policymakers showed slight regard for the growing field of study into how mortal gaffes and greed intersect with financial decision-making in ways that can punish us all.

Now some close to Obama suggest government’s role is to “nudge” Americans into behaving in economically smarter ways.

“We need a bit more ‘Psych 101’ in addition to ‘Econ 101’ in the design of public policies,” blogged Peter Orszag, the next chief of the Office of Management and Budget, who just turned 40.

Some traditional economists might ask, “And how do you intend to calculate the effects of herd mentality, blind faith or self-destructive foolishness when dealing with a mortgage broker?”

They might cite the gospel that free markets, like celestial bodies in orbit, move in rational and self-correcting ways. Knowing that, who would ever fall for the gravity-defying performance reports of fund manager Bernard Madoff, who claimed double-digit returns year after year after year?

Human beings, that’s who — now shorn of $50 billion.

In October, behavioral scholars were triumphant when the very oracle of the slide-rule set, Alan Greenspan, delivered in Congress what some called a requiem for decades’ worth of economic teaching.

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity — myself, especially — are in a state of shocked disbelief,” the former Federal Reserve chairman conceded.

Why so shocked?

As many see it, a star of Economics 101 known as the “rational actor” abandoned the stage and left markets a mess.

* * *

Across America, collegiate quarrels have been building ever since economists began calling themselves scientists.

Channeling Isaac Newton, those 20th-century purveyors of empirical truths felt they needed formulas to forecast outcomes and solve economic riddles.

Oh, please, murmured many psychologists, sociologists and political scientists. To them, economists were trying to elevate themselves above the murkier, “softer” sciences.

The creation in 1969 of the Nobel Prize in Economic Science put monetary thinkers in the league of the great laureates of medicine and physics.

The second recipient of the prize was Paul A. Samuelson. His 1947 book, Foundations of Economic Analysis, was among the first to pitch sophisticated mathematics as the key to understanding and addressing problems.

Samuelson is 93 now. And what irritates him about the debate over behavioral economics is its either-or tone.

Most of the time, free markets do follow rational, predictable rhythms, Samuelson told The Star. But history has shown that bubbles can build and “the slide-rule guys can’t smooth out those bubbles.”

“A hopelessly addicted centrist (favoring) limited, sensible regulation,” Samuelson blamed “eight terrible years of deregulation” that saw some of Wall Street’s brightest financial engineers tiptoe from the rational realm to the reckless one.

* * *

You can read the entire article here.  For a list of related Situationist posts, click here.

To read some longer law review articles detailing the history of the “competition” between economics, economic behavioralism, and situationism, check out “Legal Academic Backlash: The Response of Legal Theorists to Situationist Insights” (Emory Law Journal, Vol. 57, No. 5, 2008) available on SSRN, “The Situational Character: A Critical Realist Perspective on the Human Animal” (Georgetown Law Review, Vol. 93, 2004) available on SSRN,” and “Taking Behavioralism Seriously: The Problem of Market Manipulation” (New York University Law Review, Vol. 74, 1999) available on SSRN.

Behavioral Criminal Law and Economics – Abstract

Richard McAdams and Thomas Ulen recently posted their paper, “Behavioral Criminal Law and Economics,” on SSRN.  Here’s the paper’s abstract.

* * *

A behavioral economics literature identifies how behaviorally-derived assumptions affect the economic analysis of criminal law and public law enforcement. We review and extend that literature. Specifically, we consider the effect of cognitive biases, prospect theory, hedonic adaptation, hyperbolic discounting, fairness preferences, and other deviations from standard economic assumptions on the optimal rules for deterring potential offenders and for regulating (or motivating) potential crime victims, legislators, police, prosecutors, judges, and juries.

* * *

For those interested in a more detailed summary, we have excerpted portions of the paper’s introduction below.

* * *

The standard theoretical law‐and‐economics account of criminal behavior begins from the observation that potential criminals are rational decisionmakers. Becker (1969). The theory assumes that potential criminals compare the expected costs and benefits of criminal activity, where the expected benefits include the anticipated monetary and nonmonetary returns to the crime, discounted by their probabilities of realization, and the expected costs of the crime, which include formal and informal sanctions (the latter including loss of lawful employment opportunities, social stigma, and guilt), discounted by the probabilities of detection. If the expected benefits exceed the expected costs, then the rational potential criminal commits the crime; otherwise, he or she does not. Moreover, the rational potential criminal compares the expected costs and benefits of criminal activity with those of legitimate activity and rationally allocates her time and other resources between those alternatives so that the marginal net benefit is equated.

Similarly, the standard law‐and‐economics account of other participants in the criminal justice system—police, judges, prosecutors, defense attorneys, juries, and legislators—also presumes rational decisionmaking. So, the police—both individually and collectively—may choose to allocate their limited resources according to rational calculations about costs and benefits, choosing, for example, between the investigation of detected crimes and prevention of crimes so that the marginal productivity of additional resources devoted to either activity is equal. Not only has this account received theoretical elaboration and extension, it has also been tested empirically. For a review, see Levitt & Miles (2007). The early empirical literature—that of the 1970s—was often done in alternating turns by those favorably disposed toward the rational‐choice‐theory account and those critical of that theory. In the late 1970s a panel of the National Academy of Sciences surveyed the empirical literature and reached the conclusion that “deterrence works”—that is, that the predictions of the rational‐choice‐theory explain observed patterns of criminal behavior.

These theoretical accounts of decisionmaking by criminals and other participants in the criminal justice system have had a profound influence on legal scholarship over the past 40 years and an equally important impact on criminal justice policy. For example, the United States Sentencing Commission, created by Congress in the early 1980s, was charged to rationalize federal criminal sentencing by, among other things, reducing the variability of sentences on the ground that indeterminate sentencing was not as deterring as determinate sentencing. And in the debates to explain the remarkable decline in crime that began in the early 1990s, some have argued that that decline is partly attributable to the deterrence‐based policies of the 1980s and 1990s, such as the remarkable increase in the frequency with which criminals have been incarcerated. Levitt (2004).

But at the same time as these rational‐choice‐theory‐based arguments have become so important, a significant and broad criticism of rational choice theory and of its application to issues of criminal law has been made. That criticism is called “behavioralism.” Importantly, behavioralism is not a theoretical criticism of rational choice theory. Rather, it is a criticism based almost entirely on experimental and other empirical studies that find the predictions of rational choice theory to be inaccurate. To illustrate with one example, rational choice theory predicts that in making decisions under uncertainty, decisionmakers accurately ascertain the probabilities of the various alternatives open to them, apply those probabilities to payoffs of the alternatives, and choose that alternative that maximizes their expected subjective utility. But psychologists and economists have discovered that most decisionmakers facing an uncertain set of options use far simpler heuristics to make a decision, such as choosing that alternative that is most “salient.”

The findings of behavioralism have become so thorough and well‐established as to make it difficult to begin any analysis of decisionmaking from the position of rational choice theory. This, of course, has profound implications for many areas of law and public policy, including criminal law. Many of the policy changes championed or implemented after the impact of Becker’s revolutionary insight stand or should stand on less firm foundations than had been previously thought to be the case. The central purpose of this chapter is to indicate how some of the central findings of the behavioral literature erode the rational‐choice‐theoretic foundations of criminal law and policy and to show how a recognition of the behavioral literature might lead to a rethinking of the legal and policy conclusions of the past 30 or so years.

* * *

You can download the entire paper for free here.

Dan Kahneman’s Situation

In the following video, Harry Kreisler interviews Princeton Psychology Professor and Nobel Laureate Daniel Kahneman about his life as well as his research on intuition and decision making.

A Situationist Critique of Legal Theory – Abstract

Situationist contributor David Yosifon has recently posted his excellent article, “Legal Theoretic Inadequacy and Obesity Epidemic Analysis” (forthcoming 15 George Mason Law Review (2008)) on SSRN.  Here’s the abstract.

* * *

This Article explores crucial analytic and normative limitations in presently dominant and ascendant approaches to legal theory. The approaches’ failure to provide a satisfying framework for analyzing the obesity epidemic presently raging undeterred in American society reveals these limitations. Conventional law and economics scholars writing on the subject have deployed familiar frameworks to reach predictable conclusions that are neither intellectually nor morally justifiable. This Article argues that recent theoretical innovations promulgated within the burgeoning law and behavioralism movement have thus far provided no more reliable a framework for legal analysis of the obesity epidemic than has conventional law and economics. This Article critiques in particular the behavioral law and economics concepts of “libertarian paternalism” and “asymmetric paternalism,” as well as the concept of “expressive overdeterminism,” recently developed by proponents of “cultural cognition theory.” This project is undertaken as part of a broader effort to develop an alternative approach to legal theory that previous co-authors and I call “critical realism.” The theoretical arguments herein are broad, but this Article aims to also advance obesity epidemic analysis in particular. Part V briefly discusses specific public policy implications of my assessment, with special reference to a policy innovation based in the reform of corporate law.

* * *

To download a copy of Professor Yosifon’s paper for free, click here.

For those interested, here is a list of related Situationist posts to date: “Big Calories Come in Small Packages,” “The Situation of Eating – Part II,” “The Situation of Eating,” “The Situation of the Dreaded ‘Freshman 15′,” “Our Situation Is What We Eat,” “Social Networks,” “Common Cause: Combating the Epidemics of Obesity and Evil,” “The Situation of Fatness = Our ‘Obesogenic’ Society,” “Innovative Policy: Zoning for Health,” “Situational Obesity, or, Friends Don’t Let Friends Eat and Veg,” “McDonalds tastes better than McDonalds, if it’s packaged right,” “The Science of Addiction, The Myth of Choice,” “The Situation of our Food – Part I,” “The Situation of Our Food – Part II,” “The Situation of Our Food – Part III,” and “The Situation of our Food – Part IV.”

Legal Academic Backlash – Abstract

Situationist contributors Adam Benforado and Jon Hanson have posted their latest article, Legal Academic Backlash: The Response of Legal Theorists to Situationist Insights (Emory Law Journal, Vol. 57, No. 5, 2008) on SSRN. Here is the abstract.

* * *

This article is the third of a multipart series. The first part, “The Great Attributional Divide,” argues that a major rift runs across many of our major policy debates based on our attributional tendencies: the less accurate dispositionist approach, which explains outcomes and behavior with reference to people’s dispositions (i.e., personalities, preferences, and the like), and the more accurate situationist approach, which bases attributions of causation and responsibility on unseen influences within us and around us.

The second part, “Naive Cynicism,” explores how dispositionism maintains its dominance despite the fact that it misses so much of what actually moves us. It argues that the answer lies in a subordinate dynamic and discourse, naive cynicism: the basic subconscious mechanism by which dispositionists discredit and dismiss situationist insights and their proponents. Without it, the dominant person schema – dispositionism – would be far more vulnerable to challenge and change, and the more accurate person schema – situationism – less easily and effectively attacked. Naive cynicism is thus critically important to explaining how and why certain legal policies manage to carry the day.

Naive cynicism often takes the form of a backlash against situationism that involves an affirmation of existing dispositionist notions and an assault on (1) the situationist attributions themselves; (2) the individuals, institutions, and groups from which the situationist attributions appear to emanate; and (3) the individuals whose conduct has been situationalized. If one were to boil down those factors to one simple naive-cynicism-promoting frame for minimizing situationist ideas, it would be something like this: Unreasonable outgroup members are attacking us, our beliefs, and the things we value.

We predict that naive cynicism is a pervasive dynamic that shapes policy debates big and small. We argue that it can operate at a particular moment or over long periods of time, and that it is embraced and encouraged by both elite knowledge-producers and the average person on the street.

This Article examines the reactions of prominent academics to situationist scholarship. As we argue in this Article, na¿ve cynicism, operating as we predict above, has played a significant role in retarding the growth and influence of more accurate situationist insights of social psychology and related fields within the dominant legal theoretical frameworks of the last half-century.

* * *

To download the article for free, click here. To read a collection of related Situationist posts, click here.

Situationism’s Improving Situation

In July Dan Finkelstein had a nice article in The Times titled “The social psychology revolution is reaching its tipping point.” In it, Finkelstein describes how relatively situationist ideas are beginning to influence policy theory and policy itself. Here are some excerpts.

* * *

[A]n intellectual revolution is under way that will change the way we think about public policy just as the free market economists did in the 1980s. . . .

Those who doubt that there is something going on in the world of ideas should get themselves a publisher’s catalogue. One month there is a book called Nudge, the next a book called Sway. A volume called Predictably Irrational follows another called Irrationality. Since the success of Malcolm Gladwell’s Tipping Point, books on tipping points have reached a tipping point.

Behind this publishing explosion, with its PR hoopla, is real and solid intellectual progress. It comes from two streams of thought, developing alongside each other. The first is the idea of evolutionary psychology.

The breakthrough came with E.O. Wilson‘s controversial work Sociobiology, first published in 1975. Since then a number of academics, including familiar names such as Richard Dawkins and Steven Pinker, have illuminated aspects of human behaviour by explaining how they arise from our Darwinian struggle. For example, we reciprocate favours because we are the genetic descendants of those who survived to breed because they reciprocated favours.

Why was this work controversial? Because it argued that behaviour is partly inherited, offending against those who believe that we are born completely free of such influence. . . .

The second stream of thought is behavioural economics. For twenty years now, some economists have been looking at the psychology of economic decision-making. Instead of seeing humans as rational calculating machines, behavioural economists have been conducting experiments to assess how real choices are made. On paper, two alternatives may look economically identical. But the way that they are framed and the context will, in the real world, determine the choice. Human beings are, for instance, highly loss-averse. They will take risks to avoid a loss, while behaving conservatively when a possible gain is in the offing.

This work has revolutionised economic thinking and helped to win Daniel Kahneman the Nobel Prize for Economics in 2002. This was the prize that Milton Friedman won in 1976, just before monetarism swept all before it.

All this . . . suggests that there is such a thing as society and you can’t understand the impact of policy on individuals unless you realise that. We are not just individuals. We abide by social norms, reciprocate favours, stick by our commitments, are desperate to remain consistent and are tribal.

And you can see already this work seeping into the political mainstream. . . . George Osborne has written this week of social psychology, and his Tory frontbench colleague Greg Clark takes a close interest. On the Labour side James Purnell shows some familiarity and the former Blair aide Matthew Taylor is turning the Royal Society of Arts into one of the leading think-tanks in this area.

The most important step forward has come with David Cameron‘s correct insistence that social change is as likely, or more likely, to come through influencing behaviour as it is through regulation.

Yet the integration of the academic work on human behaviour into politics is still very much in its infancy. It is roughly now where economic understanding was in about 1978, before the Thatcher revolution. It is possible, indeed usual, to have entire policy debates in which the science of human behaviour doesn’t figure at all.

For instance, in the past two weeks we have had discussion of obesity and of knife crime. Social norms have hardly figured. If everybody thinks that everybody else is getting fat, then more people will put on weight. The campaigns designed to reduce obesity may be spreading it. Similarly the very idea that every young person is carrying a knife increases knife crime. The obvious route of making such behaviour seem odd and isolated appears not to have occurred to any major politician.

Similarly, the work of social psychologists on the power of public commitments is entirely absent from the debate on marriage and on reducing delinquency; and our struggle to overcome our tribal instincts doesn’t figure in the discussion of immigration.

It now seems hard to imagine political debate without rudimentary economic understanding. But we haven’t always had it. It’s quite a recent thing. The time will come when we feel the same about social psychology.

* * *

To read the entire article, click here. For related Situationist posts, see “Changing Choices by Changing Situations,” “Free To Not Choose,” and “Predictably Irrational.” For some posts on the situational sources of obesity, click here.