George Mason School of Law Contracts I Paternalism

George Mason School of Law Contracts I Paternalism F. H. Buckley fbuckley@gmu. edu 1

The New Paternalism o Unlike the old Paternalism, the new Paternalism does not discriminate o It is also based on better science 2

The New Paternalism: When might our desires misfire? o When might we agree to let the Paternalist second-guess our decisions? n Judgment Biases: Because we miscalculate what is good for us n Akrasia: Because we lack the strength of will to pursue what we know is good for us 3

Judgement Biases o Do we always calculate correctly?

Judgement Biases o Do we always calculate correctly? o We should have to be monsters of calculation, like Laplace’s Demon? 5

Laplace’s Demon o An intellect which at a certain moment would know all forces that set nature in motion, and all positions of all items of which nature is composed, if this intellect were also vast enough to submit these data to analysis, it would embrace in a single formula the movements of the greatest bodies of the universe and those of the tiniest atom. o For such an intellect nothing would be uncertain and the future just like the past would be present before its eyes. 6

Pierre-Simon Laplace o Napoleon: “M. Laplace, They tell me you have written this large book on the system of the universe, and have never even mentioned its Creator. ” o Laplace: “Sire, I had no need of that hypothesis. " 7

Our brains are not wired like Laplace’s supercomputer o Instead we get through life by relying on heuristics or mental shortcuts: n Intuitions n Hunches n Emotions 8

Otherwise we couldn’t walk and chew gum at the same time Gerald Ford 9

Judgment Biases: Some readings o Vern Smith, Nobel Address 2002 o Gigerenzer, Adaptive Thinking (2000) o Sunstein, Behavioral Law and Economics (2000) 10

Cognitive Paternalism: Judgment Biases o Even if our heuristics and hunches are satisfactory in average cases, they seem to mislead in anomalous cases. o The case of judgment biases o The cognitive paternalist would de-bias us. 11

Judgment Biases Probability Theory: Monty Hall 12

Judgment Biases Probability Theory: Monty Hall O. C. You’re a participant in a game show, facing three doors. Monty tells you that, behind one of three doors, there is a new car, which you’ll get to keep if you pick the right door. The other two doors have goats behind them. Let’s say you pick door 3. 13

Judgment Biases Probability Theory: Monty Hall Monty tells you that, behind one of three doors, there is a new car, which you’ll get to keep if you pick the right door. The other two doors have goats behind them. Let’s say you pick door 3. Monty knows the door behind which the prize is hidden. He now says “I’m going to help you. I’m going to tell you that the prize is not behind door 1. Do you stay with door 3 or do you switch to door 2? 14

Judgment Biases Probability Theory: Monty Hall You should always switch. The probability associated with each door was 1/3. When Monty opened door 1, he did not change the 1/3 probability associated with door 3. So the probability associated with door 2 must be 2/3. 15

Judgment Biases Probability Theory: Monty Hall Look at it this way. Before you picked, the probability that the prize was behind either doors 1 and 2 was 2/3. Opening door 1 to reveal the goat did not change this. So after door 1 is eliminated, the probability that the prize is behind door 2 must be 2/3. 16

Paternalism: Some Judgment Biases o The Availability Bias n Pauline Kael on the 1972 election 17

Some Judgment Biases o The Anchoring Bias n I spin a roulette wheel and it comes up 25. Now I ask you how many African members there are in the UN n I spin and it comes up 65. I ask again. 18

Some Judgment Biases o The Gambler’s Fallacy n You are at a casino. At the roulette table, the numbers are either red or black. Black has come up six times in a row. What is the probability that it will come up black on the next turn? (Assume a fair table. ) 19

Some Judgment Biases o The Gambler’s Fallacy n You are at a casino. At the roulette table, the numbers are either red or black. Black has come up six times in a row. What is the probability that it will come up black on the next turn? (Assume a fair table. ) 50%. (You thought the table had a memory? ) 20

Some Judgment Biases o The Hindsight Bias n You watch a baseball game. The pitcher (ERA of 2. 11) has given up two walks in the eighth inning. The manager leaves him in. The next batter up hits a home run. “Idiot!, ” you say. “I would have taken the pitcher out. ” 21

Do judgment biases justify Paternalism? o Do we underestimate small probability events? n Mandatory seat belt laws n Mandatory catastrophic medical insurance 22

George Mason School of Law Contracts I Paternalism F. H. Buckley fbuckley@gmu. edu 23

Where we are… o Before: An explanation why contracts are presumptively enforceable o Now: An explanation why in some cases they aren’t enforceable 24

Paternalism/Capacity o Judgment Biases o Akrasia/Weakness of the Will 25

Are our heuristics dumb? o Gigerenzer’s fast and frugal heuristics Gerd Gigerenzer 26

Are our heuristics dumb? o Gigerenzer’s fast and frugal heuristics n Which city has more people: o Winnipeg or Vancouver? 27

Are our heuristics dumb? o Gigerenzer’s fast and frugal heuristics n Which city has more people: o Sydney or Brisbane? 28

Are our heuristics dumb? o Gigerenzer’s fast and frugal heuristics n “Take the best” cue 29

Are our heuristics dumb? o Gigerenzer’s ecological rationality: how well do our heuristics fit in the world we inhabit. 30

Do judgment biases justify Paternalism? o Are some biases corrected through learning? n How to hit a curve ball. o Can market processes help? n Would inefficient heuristics tend to get excluded in markets? 31

Moral Heuristics n Our reaction to evil is unthinking and immediate. o We don’t have to calculate cost vs benefit o Our moral judgments are coded with an emotional response 32

Edmund Burke We are generally men of untaught feelings, that, instead of casting away all our old prejudices, we cherish them to a very considerable degree, and, to take more shame to ourselves, we cherish them because they are prejudices; and the longer they have lasted and the more generally they have prevailed, the more we cherish them. 33

Moral Heuristics Police Battalion 101 in 1942. Goldhagen, Hitler’s Willing Executioners Gerd Gigerenzer, Gut Feelings 34

Do judgment biases justify Paternalism? o What about the Paternalist’s judgment biases? n The hindsight bias and negligence liability? n The availability bias and inefficient pollution regulations. 35

George Mason School of Law Contracts I Paternalism F. H. Buckley fbuckley@gmu. edu 36

Next day o Fraud o Statute of Frauds? 37

Rational Choice: Six Assumptions o o o 38 Full Information Choices are Freely Made Non-satiation Completeness or comparability No third party effects (externalities) Perfect rationality

Paternalism: Akrasia: the “non-ruled” Doré, Weak-willed St. Peter Denies Christ for the third time 39

Akrasia o Does weakness of the will justify: n Mandatory insurance under Affordable Care Act? n Prohibition (drugs, alcohol) n Mandatory Social Security n Restrictions on surrogacy contracts? 40

Varieties of Akrasia Reversal of preferences? 41

Varieties of Akrasia The Divided Self I was neither wholly willing not wholly unwilling. So I was in conflict with myself and was dissociated from myself. 42 Gozzoli, St. Augustine departing for Milan

Varieties of Akrasia Overwhelming passion: Φαίδρα Racine, Phèdre III. v Phèdre, Thesée, Hippolyte 43

Varieties of Akrasia Self-deception I’m going to have just one cookie and then I’ll have the strength of will to stop … 44

Varieties of Akrasia Discounting the Future o You have a choice between immediate consumption and saving for deferred consumption. How do you decide? 45

Varieties of Akrasia Discounting the Future o You have a choice between immediate consumption and saving for deferred consumption. How do you decide? n Do you prefer today’s person to that of tomorrow? 46

Varieties of Akrasia Discounting the Future Doré, The Prodigal Son 47

Does Akrasia exist? o A reversal of preferences does not imply akrasia o For the rest, are we sure what the subject’s deep preferences might be? n What is the optimal savings decision? n Might it make sense to prefer today’s person to tomorrow’s person? 48

The Counter-arguments 1. Bad Faith 49

The Counter-arguments 2. The state’s informational problem o The State might easily get it wrong: 50

The Counter-arguments 3. Self-help o If we might be weak-willed, can we address the problem without the help of legal barriers? n Social sanctions n Self-binding 51

Examples of self-binding o Marriage o Home purchases 52

The Counter-arguments 4. The value of autonomy o Even if autonomy is merely a means, things can matter as means. n The abstract value of freedom o Autonomy strengthens self-control 53

Where we are… o I. An explanation why contracts are presumptively enforceable o Now: An explanation why in some cases they aren’t enforceable 54

Where we are… o Interfering with personal preferences comes down to perfectionism or paternalism 55

An application Farmer owns two contiguous properties Property I 56 Property II

Farmer buys combine from Sehler on credit 57

Special credit terms o Sehler takes a mortgage on Property II but agrees that on Farmer’s default Sehler will not seek any recovery from Property I n Any problems so far? 58

Special credit terms o Farmer incorporates Farm. Co, sells Property II to Farm. Co, and Farm. Co buys the combine n Any problems? 59

Special credit terms o Sehler sells the combine to Farm. Co and asks for a personal guarantee from Farmer n Any problems? 60

If there is a problem… o Can it be traced back to a violation of the assumptions of rational choice? o If it can’t, is it a pseudo-problem? 61

George Mason School of Law Contracts I Duress F. H. Buckley fbuckley@gmu. edu 62