George Mason School of Law

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

2. Free bargaining makes people better off… • Provided that we assume that their choices satisfy the assumptions of rational choice

3. Rational Choice: Six Assumptions • Full Information (later) • No mistakes • No misrepresentations • No informational assymetries

4. Rational Choice: Six Assumptions • Full Information • Choices Are Freely Made (later) • No duress

5. Rational Choice: Six Assumptions • Full Information • Choices Are Freely Made • Non-satiation • More is always better

6. Non-satiation: B > A Good 1 More is always better B A Good 2 0

7. Non-SatiationIs this the same thing as saying “Greed is good”? Michael Douglas as Gordon Gekko in Wall Street

8. Rational Choice: Six Assumptions • Full Information • Choices Are Freely Made • Non-satiation • Completeness or comparability

9. Comparability: No incommensurabilities No black holes

10. IncommensurabilityTragic Choices • Sophie’s Choice • You are a member of a hospital’s ethics committee. You have to choose between allocating a kidney to an alcoholic former sports idol or a mother of two. • Can you think of other examples?

11. Rational Choice: Six Assumptions • Full Information • Choices are Freely Made • Non-satiation • Completeness or comparability • No third party effects (externalities)

12. Third party effects: Bargaining with a third person Mary Ann Representing Ann’s utility on a third dimension Bess

13. What happens if third parties can’t be joined? • Paretian norms don’t work—if it’s an external cost • Externalities and Tort Law • Social Perfectionism

14. But nearly everything has third party effects… • Do we then abandon the concept of efficiency? • A more relaxed standard: Kaldor-Hicks efficiency • A transformation is Kaldor-Hicks efficient when the winners could compensate the losers (“Potential Pareto-Efficiency”)

15. Examples of Kaldor-Hicks Efficiency • It is proposed to abandon steel tariffs that impose costs of $10B on the economy but provide steel manufacturers with a gain of $1B. • The bankruptcy of a failing business imposes a cost to shareholders of $1M, but provides a benefit of $5M to creditors.

16. C is Kaldor-Hicks Efficient to A At C Bess is better off than she is at A; She could also give up CB roses to move to B and still be better off than she was at A, while Mary would be no worse off Bess A  B C   Mary

17. Rational Choice: Six Assumptions • Full Information • Choices are Freely Made • Non-satiation • Completeness or comparability • No third party effects (externalities) • Now—Perfect rationality

18. Relaxing the Rationality Assumption:Transitivity: A Technical Definition • If A is preferred to B and B is preferred to C, then A is preferred to C • A>B, B>C A>C • AB, BC  AC

19. Transitivity: A>B, B>C A>C Time 1 A B C Time 2 0

20. Transitivity: Indifference curves can’t touch If a ~ c and c~ b, then a ~ b. But b > a Time 1 A violation of transitivity b · · a · c Time 2 0

21. Relaxing the rationality assumption:Paternalism • Suppose we knew we would harm ourselves in our choices in certain cases • Might we not then wish to delegate to the paternalist to choose for us?

22. Relaxing the rationality assumption:Byron, The Prisoner of Chillon At last Men came to set me free – I asked not why, and recked not where-- It was at length the same to me, Fettered or fetterless to be-- I learned to love despair… My very chains and I made friends, So much a long Communion tends To make us what we are, even I Regained my freedom with a sigh

23. Infants: Kiefer • Restatement § 14

24. What if a fake ID is presented?

25. Why an exception for necessities?

26. Shields v. Gross Gee Thanks, Mom! Brooke Shields at age 10 in Sugar and Spice Magazine

27. Brooke Shields two years later

28. Federal Child Pornography Laws Mandatory Minimum of 15 years (2) (A) “sexually explicit conduct” means actual or simulated— (v) lascivious exhibition of the genitals or pubic area of any person; (8) “child pornography” means any visual depiction, including any photograph, film, video, picture, or computer or computer-generated image or picture, whether made or produced by electronic, mechanical, or other means, of sexually explicit conduct, where— (A) the production of such visual depiction involves the use of a minor engaging in sexually explicit conduct;

29. There is justice, after all… People Exclusive Brooke Shields: Tabloid Checked My Mother Out of Nursing Home Friday May 15, 2009 06:30 PM EDT Brooke Shields's mother, who suffers from dementia, was checked out of a New Jersey nursing home Thursday by a journalist seeking a "tabloid story," the outraged actress tells PEOPLE.

30. Mental Illness • Restatement §§ 12-13, 15-16 • Faber • Uribe

31. Paternalism’s questionable historySo you want to help victims? How about… • Restrictions on women • Slavery • “The benevolent have a tendency to colonize, whether geographically or legally.” Arthur Leff

32. The New Paternalism • Unlike the old Paternalism, the new Paternalism does not discriminate • It is also based on better science

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

34. Cognitive Paternalism:Judgment Biases • Rationality as a scarce resource: the need to rely on heuristics and hunches • Even if these are satisfactory in average cases, they seem to mislead in anomalous cases. • The rise of cognitive paternalism

35. We need our hunches to navigate through life… Gerald Ford, trying to walk and chew gum

36. Judgment Biases:Some readings • Vern Smith, Nobel Address 2002 • Kahneman, Slovic and Tversky, Judgment Under Uncertainty (1982) • Gigerenzer, Adaptive Thinking (2000) • Sunstein, Behavioral Law and Economics (2000)

37. Judgment Biases • A bat and a ball together cost $1.10. • The bat costs $1.00 more than the ball • How much does the ball cost?

38. Paternalism:Some Judgment Biases • The Availability Bias • Pauline Kael on the 1972 election • How likely is a divorce?

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

40. Some Judgment Biases • The Gambler’s Fallacy • 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.)

41. Some Judgment Biases • The Gambler’s Fallacy • 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?)

42. Some Judgment Biases • Regret • You attend a boring lecture in law-and-economics. On returning to your flat you discover that you missed a visit from a long-lost friend. You feel great regret even though, ex ante, attending the lecture seemed the best thing to do.

43. Some Judgment Biases • The Hindsight Bias • 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.”

44. Do judgment biases justify Paternalism? • Do we underestimate small probability events? • Mandatory seat belt laws • Mandatory no-fault divorce • Incentives to put savings into a pension plan • Nudge: Sunstein and Thaler

45. Do judgment biases justify Paternalism? • Are our hunches dumb? Gigerenzer’s fast and frugal heuristics • Ecological rationality: how well do our heuristics fit in the world we inhabit. • Is there an inner logic to availability, regret and other heuristics?

46. Do judgment biases justify Paternalism? • Is there an inner logic to availability, regret and other heuristics? • Anchoring and availability ordinarily are efficient • Regret pierces through egotism • The Hindsight Bias underlines the lesson we are taught.

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

48. Judgment Biases:Emotional and Moral Heuristics • Our emotions are coded with knowledge • Deep preferences as a solution to PD games • Of disgust and hatred… • Moral Heuristics • Gigerenzer • Romola

49. Do judgment biases justify Paternalism? • What about the Paternalist’s judgment biases? • Lord Denning and the hindsight bias. • The business judgment rule. • The availability bias and inefficient pollution regulations.

50. Paternalism:Akrasia • The akratic are “not-ruled” • Pictures of akrasia • Dostoyevsky’s gambler • The disciples in the garden: “The spirit is willing but the flesh is weak.” • St. Peter