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Based on the premise that people are rational maximizers of their own utility, economic analysis has a fairly successful record in correctly predicting human behavior. This success is puzzling, given behavioral findings that show that people do not necessarily seek to maximize their own utility. Drawing on studies of motivated reasoning, self-serving biases, and behavioral ethics, this article offers a new behavioral foundation for the predictions of economic analysis. The behavioral studies reveal how automatic and mostly unconscious processes lead well-intentioned people to make self-serving decisions. Thus, the behavioral studies support many of the predictions of standard economic analysis, without committing to a simplistic portrayal of human motivation. The article reviews the psychological findings, explains how they provide a sounder, complementary foundation for economic analysis, and discusses their implications for legal policymaking.
Corporate governance reform in Japan was triggered by the introduction of a new corporate governance code in 2015. The code is notable for requiring the addition of two or more independent directors to the boards of listed firms, which previously had consisted largely of internally promoted directors enjoying lifetime employment. Applying the framework of behavioral law and economics, we analyze the change from the two aspects of “offense” and “defense” by the board of directors, meaning, respectively, enhancing the quality of group decision-making by producing collective intelligence, and preventing corporate misconduct by introducing the viewpoints of outsiders. The former is not immune to psychological biases such as groupthink and escalation of commitment, but these can be mitigated by ensuring equal consideration of all participants’ viewpoints, and, notably, the participation of women. The latter is affected by other biases, such as obedience to authority and diffusion of responsibility, but establishing an internal system for reporting misconduct, with outside directors at the top, can be effective if the outsiders’ position is perceived as credible.
In the past few decades, economic analysis of law has been challenged by a growing body of experimental and empirical studies that attest to prevalent and systematic deviations from the assumptions of economic rationality. While the findings on bounded rationality and heuristics and biases were initially perceived as antithetical to standard economic and legal-economic analysis, over time they have been largely integrated into mainstream economic analysis, including economic analysis of law. Moreover, the impact of behavioral insights has long since transcended purely economic analysis of law: in recent years, the behavioral movement has become one of the most influential developments in legal scholarship in general. Behavioral Law and Economics offers a state-of-the-art overview of the field. The book surveys the entire body of psychological research underpinning behavioral analysis of law, and critically evaluates the core methodological questions of this area of research. The book then discusses the fundamental normative questions stemming from the psychological findings on bounded rationality, and explores their implications for establishing the aims of legislation, and the means of attaining them. This is followed by a systematic and critical examination of the contributions of behavioral studies to all major fields of law-property, contracts, consumer protection, torts, corporate, securities regulation, antitrust, administrative, constitutional, international, criminal, and evidence law-as well as to the behavior of key players in the legal arena: litigants and judicial decision-makers.
Individuals working in groups often egocentrically believe they have contributed more of the total work than is logically possible. Actively considering others’ contributions effectively reduces these egocentric assessments, but this research suggests that undoing egocentric biases in groups may have some unexpected costs. Four experiments demonstrate that members who contributed much to the group outcome are actually less satisfied and less interested in future collaborations after considering others’ contributions compared with those who contributed little. This was especially true in cooperative groups. Egocentric biases in responsibility allocation can create conflict, but this research suggests that undoing these biases can have some unfortunate consequences. Some members who look beyond their own perspective may not like what they see.
Prescriptive legal theories have a tendency to cannibalize themselves. As they develop into schools of thought, they become not only increasingly complicated but also increasingly compromised, by their own normative lights. Maturation breeds adulteration. The theories work themselves impure. This Article identifies and diagnoses this evolutionary phenomenon. We develop a stylized model to explain the life cycle of certain particularly influential legal theories. We illustrate this life cycle through case studies of originalism, textualism, popular constitutionalism, and cost-benefit analysis, as well as a comparison with leading accounts of organizational and theoretical change in politics and science. And we argue that an appreciation of the life cycle counsels a reorientation of legal advocacy and critique. The most significant threats posed by a new legal theory do not come from its neglect of significant first -order values-the usual focus of criticism-for those values are apt to be incorporated into the theory. Rather, the deeper threats lie in the second- and third -order social, political, and ideological effects that the adulterated theory's persistence may foster down the line.
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the 'separation and control' issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears the costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.
Public choice theory (PCT) has had a powerful influence on political science and public administration. Based on the premise that public officials are rational maximizers of their own utility, PCT has a quite successful record of correctly predicting governmental decisions and policies. This success is puzzling, given behavioral findings that show that officials do not necessarily seek to maximize their own utility. Drawing on recent advances in behavioral ethics (BE), this article offers a new behavioral foundation for PCT’s predictions, by delineating the psychological processes that lead well-intentioned people to violate moral and social norms. We review the relevant findings of BE, analyzes their theoretical and policy implications for officials’ decision-making, and sets an agenda for future research.
This is the first comprehensive critical evaluation of the use of rational choice theory in political science. Writing in an accessible and nontechnical style, Donald P. Green and Ian Shapiro assess rational choice theory where it is reputed to be most successful: the study of collective action, the behavior of political parties and politicians, and such phenomena as voting cycles and Prisoner's Dilemmas. In their hard-hitting critique, Green and Shapiro demonstrate that the much heralded achievements of rational choice theory are in fact deeply suspect and that fundamental rethinking is needed if rational choice theorists are to contribute to the understanding of politics. In their final chapters, they anticipate and respond to a variety of possible rational choice responses to their arguments, thereby initiating a dialogue that is bound to continue for some time.
We introduce a new model of bounded ethicality which helps explain three persistent puzzles of ethical behavior: when moral awareness is or is not present, when ethical behavior is more or less consistent with past behavior, and when blind spots obscure our ethical failures. The original conception of bounded ethicality (Chugh, Banaji, & Bazerman, 2005) described the systematic psychological constraints on ethical behavior and has contributed to our field's understanding of the phenomena of everyday, "ordinary" unethical behavior. In this more detailed model, we delineate these systematic processes and mechanisms and show how concepts of automaticity, self-view, and self-threat play critical roles in our ethical decision-making. The model describes distinct, asymmetric patterns of (un)ethical behavior and pinpoints the contingency which determines which pattern is more likely to unfold, including when we will trend to more or less automaticity and more or less ethical behavior. Our model integrates and synthesizes many of the key models and findings in recent behavioral ethics research into a single, overarching model of ethical decision-making, offering an anchor for new questions and a new realm of study.
Despite our optimistic belief that we would behave honestly when facing the temptation to act unethically, we often cross ethical boundaries. This paper explores one possibility of why people engage in unethical behavior over time by suggesting that their memory for their past unethical actions is impaired. We propose that, after engaging in unethical behavior, individuals' memories of their actions become more obfuscated over time because of the psychological distress and discomfort such misdeeds cause. In nine studies (n = 2,109), we show that engaging in unethical behavior produces changes in memory so that memories of unethical actions gradually become less clear and vivid than memories of ethical actions or other types of actions that are either positive or negative in valence. We term this memory obfuscation of one's unethical acts over time "unethical amnesia." Because of unethical amnesia, people are more likely to act dishonestly repeatedly over time.
Growing recognition in both the psychological and management literature of the concept of “good people” has caused a paradigm shift in our understanding of wrongful behavior: wrongdoings that were previously assumed to be based on conscious choice – that is, deliberate decisions – are often the product of intuitive processes that prevent people from recognizing the wrongfulness of their behavior. Several leading scholars have dubbed this process as an ethical “blind spot.” This study explores the main implications of the good people paradigm on the regulation of employees’ conflicts of interest. In two experiments, we examined the efficacy of traditional deterrence- and morality-based interventions in encouraging people to maintain their professional integrity and objectivity at the cost of their own self-interest. Results demonstrate that, while the manipulated conflict was likely to “corrupt” people under intuitive/automatic mindset (Experiment 1), explicit/deliberative mechanisms (both deterrence- and morality-based) had a much larger constraining effect overall on participants’ judgment than did implicit measures, with no differences between deterrence and morality (Experiment 2). The findings demonstrate how little is needed to compromise the employees’ ethical integrity, but they also suggest that a modest explicit/deliberative intervention can easily prevent much of the wrongdoing that may otherwise result.
As law and economics turns forty years old, its continued vitality is threatened by its unrealistic core behavioral assumption: that people subject to the law act rationally. Professors Korobkin and Ulen argue that law and economics art reinvigorate itself by replacing the rationality assumption with a more nuanced understanding of human behavior that draws on cognitive psychology, sociology, and other behavioral sciences, thus creating a new, scholarly paradigm called "law, and behavioural science." This article provides an early blueprint for research in this paradigm. The authors first explain the various ways the rationality assumption is used in legal scholarship and why it leads to unsatisfying policy prescriptions. They then systematically examine the empirical evidence inconsistent with the rationality assumption and, drawing on a wide range of substantive areas of law, explain how normative policy conclusions of law and economics will change and improve under the law-and-behavioral-science approach.
This Article develops an account of the role and significance of managerial power and rent extraction in executive compensation. Under the optimal contracting approach to executive compensation, which has dominated academic research on the subject, pay arrangements are set by a board of directors that aims to maximize shareholder value. In contrast, the managerial power approach suggests that boards do not operate at arm's length in devising executive compensation arrangements; rather, executives have power to influence their own pay, and they use that power to extract rents. Furthermore, the desire to camouflage rent extraction might lead to the use of inefficient pay arrangements that provide suboptimal incentives and thereby hurt shareholder value. The authors show that the processes that produce compensation arrangements, and the various market forces and constraints that act on these processes, leave managers with considerable power to shape their own pay arrangements. Examining the large body of empirical work on executive compensation, the authors show that managerial power and the desire to camouflage rents can explain significant features of the executive compensation landscape, including ones that have long been viewed as puzzling or problematic from the optimal contracting perspective. The authors conclude that the role managerial power plays in the design of executive compensation is significant and should be taken into account in any examination of executive pay arrangements or of corporate governance generally.
Winning a competition engenders subsequent unrelated unethical behavior. Five studies reveal that after a competition has taken place winners behave more dishonestly than competition losers. Studies 1 and 2 demonstrate that winning a competition increases the likelihood of winners to steal money from their counterparts in a subsequent unrelated task. Studies 3a and 3b demonstrate that the effect holds only when winning means performing better than others (i.e., determined in reference to others) but not when success is determined by chance or in reference to a personal goal. Finally, study 4 demonstrates that a possible mechanism underlying the effect is an enhanced sense of entitlement among competition winners.
We use the cross-state, cross-time variation in bank deregulation across the U.S. states to assess how improvements in banking systems a§ected the labor market opportunities of black workers. Bank deregulation from the
1970s through the 1990s improved bank e¢ ciency, lowered entry barriers facing nonÖnancial Örms, and intensiÖed competition for labor throughout the economy. Consistent with Beckerís (1957) seminal theory of racial iscrimination, we Önd that deregulation-induced improvements in the banking system boosted blacksírelative wages by facilitating the entry of new Örms and reducing the manifestation of racial prejudices in labor markets.
Using a vast swath of data spanning the past six decades, Unequal Democracy debunks many myths about politics in contemporary America, using the widening gap between the rich and the poor to shed disturbing light on the workings of American democracy. Larry Bartels shows the gap between the rich and poor has increased greatly under Republican administrations and decreased slightly under Democrats, leaving America grossly unequal. This is not simply the result of economic forces, but the product of broad-reaching policy choices in a political system dominated by partisan ideologies and the interests of the wealthy. Bartels demonstrates that elected officials respond to the views of affluent constituents but ignore the views of poor people. He shows that Republican presidents in particular have consistently produced much less income growth for middle-class and working-poor families than for affluent families, greatly increasing inequality. He provides revealing case studies of key policy shifts contributing to inequality, including the massive Bush tax cuts of 2001 and 2003 and the erosion of the minimum wage. Finally, he challenges conventional explanations for why many voters seem to vote against their own economic interests, contending that working-class voters have not been lured into the Republican camp by "values issues" like abortion and gay marriage, as commonly believed, but that Republican presidents have been remarkably successful in timing income growth to cater to short-sighted voters. Unequal Democracy is social science at its very best. It provides a deep and searching analysis of the political causes and consequences of America's growing income gap, and a sobering assessment of the capacity of the American political system to live up to its democratic ideals.
When confronted with an ethical dilemma, most of us like to think we would stand up for our principles. But we are not as ethical as we think we are. InBlind Spots, leading business ethicists Max Bazerman and Ann Tenbrunsel examine the ways we overestimate our ability to do what is right and how we act unethically without meaning to. From the collapse of Enron and corruption in the tobacco industry, to sales of the defective Ford Pinto and the downfall of Bernard Madoff, the authors investigate the nature of ethical failures in the business world and beyond, and illustrate how we can become more ethical, bridging the gap between who we are and who we want to be.Explaining why traditional approaches to ethics don't work, the book considers how blind spots like ethical fading--the removal of ethics from the decision--making process--have led to tragedies and scandals such as the Challenger space shuttle disaster, steroid use in Major League Baseball, the crash in the financial markets, and the energy crisis. The authors demonstrate how ethical standards shift, how we neglect to notice and act on the unethical behavior of others, and how compliance initiatives can actually promote unethical behavior. Distinguishing our "should self" (the person who knows what is correct) from our "want self" (the person who ends up making decisions), the authors point out ethical sinkholes that create questionable actions.Suggesting innovative individual and group tactics for improving human judgment,Blind Spotsshows us how to secure a place for ethics in our workplaces, institutions, and daily lives.
Politically active individuals and organizations make huge investments of time, energy, and money to influence everything from election outcomes to congressional subcommittee hearings to local school politics, while other groups and individual citizens seem woefully underrepresented in our political system.The Unheavenly Chorusis the most comprehensive and systematic examination of political voice in America ever undertaken--and its findings are sobering. The Unheavenly Chorusis the first book to look at the political participation of individual citizens alongside the political advocacy of thousands of organized interests--membership associations such as unions, professional associations, trade associations, and citizens groups, as well as organizations like corporations, hospitals, and universities. Drawing on numerous in-depth surveys of members of the public as well as the largest database of interest organizations ever created--representing more than thirty-five thousand organizations over a twenty-five-year period--this book conclusively demonstrates that American democracy is marred by deeply ingrained and persistent class-based political inequality. The well educated and affluent are active in many ways to make their voices heard, while the less advantaged are not. This book reveals how the political voices of organized interests are even less representative than those of individuals, how political advantage is handed down across generations, how recruitment to political activity perpetuates and exaggerates existing biases, how political voice on the Internet replicates these inequalities--and more. In a true democracy, the preferences and needs of all citizens deserve equal consideration. Yet equal consideration is only possible with equal citizen voice.The Unheavenly Chorusreveals how far we really are from the democratic ideal and how hard it would be to attain it.
This book attempts to resolve the Great Rationality Debate in cognitive science-the debate about how much irrationality to ascribe to human cognition. It shows how the insights of dual-process theory and evolutionary psychology can be combined to explain why humans are sometimes irrational even though they possess remarkably adaptive cognitive machinery. The book argues that to characterize fully differences in rational thinking, we need to replace dual-process theories with tripartite models of cognition. Using a unique individual differences approach, it shows that the traditional second system (System 2) of dual-process theory must be further divided into the reflective mind and the algorithmic mind. Distinguishing them gives a better appreciation of the significant differences in their key functions: the key function of the reflective mind is to detect the need to interrupt autonomous processing and to begin simulation activities, whereas that of the algorithmic mind is to sustain the processing of decoupled secondary representations in cognitive simulation. The book then uses this algorithmic/reflective distinction to develop a taxonomy of cognitive errors made on tasks in the heuristics and biases literature. It presents the empirical data to show that the tendency to make these thinking errors is not highly related to intelligence. Using a tripartite model of cognition, the book shows how, when both are properly defined, rationality is a more encompassing construct than intelligence, and that IQ tests fail to assess individual differences in rational thought. It then goes on to discuss the types of thinking processes that would be measured if rational thinking were to be assessed as IQ has been.
Reasoning research suggests that people use more stringent criteria when they evaluate others' arguments than when they produce arguments themselves. To demonstrate this "selective laziness," we used a choice blindness manipulation. In two experiments, participants had to produce a series of arguments in response to reasoning problems, and they were then asked to evaluate other people's arguments about the same problems. Unknown to the participants, in one of the trials, they were presented with their own argument as if it was someone else's. Among those participants who accepted the manipulation and thus thought they were evaluating someone else's argument, more than half (56% and 58%) rejected the arguments that were in fact their own. Moreover, participants were more likely to reject their own arguments for invalid than for valid answers. This demonstrates that people are more critical of other people's arguments than of their own, without being overly critical: They are better able to tell valid from invalid arguments when the arguments are someone else's rather than their own.
Research on behavioral ethics is flourishing, providing new insight into the cognitive, situational, and social factors that influence ethical decisions. Although many common approaches to dealing with legal ethics assume that unethical behavior is a result of conscious decision making driven by economic self-interest, the psychology of behavioral ethics makes clear that ethical decision making is far more complex than bad actors making conscious decisions to act unethically for their own economic advancement. This article reviews recent work on behavioral ethics, bringing together research findings about cognitive and social factors that influence ethical decision making and focusing on those with particular application to the legal context. The ethical issues faced by lawyers provide a rich context within which to apply the findings of existing research and to conduct new research that explores both the unexceptional and unique structures and pressures on ethical decision making in legal practice.
Cooperation is essential for completing tasks that individuals cannot accomplish alone. Whereas the benefits of cooperation are clear, little is known about its possible negative aspects. Introducing a novel sequential dyadic die-rolling paradigm, we show that collaborative settings provide fertile ground for the emergence of corruption. In the main experimental treatment the outcomes of the two players are perfectly aligned. Player A privately rolls a die, reports the result to player B, who then privately rolls and reports the result as well. Both players are paid the value of the reports if, and only if, they are identical (e.g., if both report 6, each earns €6). Because rolls are truly private, players can inflate their profit by misreporting the actual outcomes. Indeed, the proportion of reported doubles was 489% higher than the expected proportion assuming honesty, 48% higher than when individuals rolled and reported alone, and 96% higher than when lies only benefited the other player. Breaking the alignment in payoffs between player A and player B reduced the extent of brazen lying. Despite player B's central role in determining whether a double was reported, modifying the incentive structure of either player A or player B had nearly identical effects on the frequency of reported doubles. Our results highlight the role of collaboration-particularly on equal terms-in shaping corruption. These findings fit a functional perspective on morality. When facing opposing moral sentiments-to be honest vs. to join forces in collaboration-people often opt for engaging in corrupt collaboration.
Confirmation bias, as the term is typically used in the psychological literature, connotes the seeking or interpreting of evidence in ways that are partial to existing beliefs, expectations, or a hypothesis in hand. The author reviews evidence of such a bias in a variety of guises and gives examples of its operation in several practical contexts. Possible explanations are considered, and the question of its utility or disutility is discussed.
The process of exchange is almost continual in human interactions, and appears to have characteristics peculiar to itself, and to generate affect, motivation, and behavior that cannot be predicted unless exchange processes are understood. This chapter describes two major concepts relating to the perception of justice and injustice; the concept of relative deprivation and the complementary concept of relative gratification. All dissatisfaction and low morale are related to a person's suffering injustice in social exchanges. However, a significant portion of cases can be usefully explained by invoking injustice as an explanatory concept. In the theory of inequity, both the antecedents and consequences of perceived injustice have been stated in terms that permit quite specific predictions to be made about the behavior of persons entering social exchanges. Relative deprivation and distributive justice, as theoretical concepts, specify some of the conditions that arouse perceptions of injustice and complementarily, the conditions that lead men to feel that their relations with others are just. The need for much additional research notwithstanding, the theoretical analyses that have been made of injustice in social exchanges should result not only in a better general understanding of the phenomenon, but should lead to a degree of social control not previously possible. The experience of injustice need not be an accepted fact of life.
This chapter develops a framework for predicting S2 intervention that is based on metacognitive experiences associated with S1 processes. In particular, it develops the argument that the outcome of a given reasoning attempt is determined not only by the content of the information which is retrieved by S1 and analysed by S2, but also by a second-order judgement. This metacognitive judgement is largely based on the experience associated with the execution of S1 and S2 processes, and it is this judgement that determines whether, and how, S2 processes are engaged.
There are at least five functionalist metaphors that have guided justice theory and research in social psychology: people as lay or intuitive (a) economists, (b) politicians, (c) scientists, (d) prosecutors, and (e) theologians. These frameworks consider what people care about when thinking about fairness by suggesting that fairness serves different needs and goals. This chapter reviews each of these broad categories of justice research, and concludes by proposing a functional pluralism model of justice. The adaptive challenges people confront in their everyday lives require the ability to move fluidly between different goal states or motives. People have to resolve the problems of (a) competing for scarce resources, such as wages or jobs (the economist), (b) how to get along with others and secure their standing in important groups (the politician), (c) making useful inferences about others' goals, behavior, and trustworthiness (the scientist), (d) defending themselves and others from harm (the prosecutor), and (e) building a meaningful sense of existence (the theologian). The functional pluralism model's position is that people are economists, politicians, scientists, prosecutors, and theologians, and how they reason about fairness depends on their frame of reference and goal states at any given time. Which orientation guides people's thinking depends on the current goal orientation of the actor and the salience of various situational cues that could activate one or another of these mind-sets.Keywords:distributive justice;procedural justice;retributive justice;fairness;deonance;morality
Each of four theoretical traditions in the study of American politics-which can be characterized as theories of Majoritarian Electoral Democracy, Economic-Elite Domination, and two types of interest-group pluralism, Majoritarian Pluralism and Biased Pluralism-offers different predictions about which sets of actors have how much influence over public policy: average citizens; economic elites; and organized interest groups, mass-based or business-oriented. A great deal of empirical research speaks to the policy influence of one or another set of actors, but until recently it has not been possible to test these contrasting theoretical predictions against each other within a single statistical model. We report on an effort to do so, using a unique data set that includes measures of the key variables for 1,779 policy issues. Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism.
Unethical behavior by “ordinary” people poses significant societal and personal challenges. We present a novel framework centered on the role of self-serving justification to build upon and advance the rapidly expanding research on intentional unethical behavior of people who value their morality highly. We propose that self-serving justifications emerging before and after people engage in intentional ethical violations mitigate the threat to the moral self, enabling them to do wrong while feeling moral. Pre-violation justifications lessen the anticipated threat to the moral self by redefining questionable behaviors as excusable. Post-violation justifications alleviate the experienced threat to the moral self through compensations that balance or lessen violations. We highlight the psychological mechanisms that prompt people to do wrong and feel moral, and suggest future research directions regarding the temporal dimension of self-serving justifications of ethical misconduct.
The study reported here uses learning theory to examine how performance feedback affects the probability of risky organizational changes that are consequential to an organization's performance. The theory predicts how decision makers interpret organizational performance by comparing it with historical and social aspiration levels. Empirical analysis of the consequences of performance short-falls on the probability of strategic change in the radio broadcasting industry shows clear sensitivity to social and historical aspiration levels. It also shows that changes seen or done by the station predict future change, suggesting that the recent experiences of organizations cause differences in capabilities and perceived opportunities, leading to differences in organizational inertia.
This article asks what public choice can teach about legal institutions and their governing framework of public law. The chapter begins with an overview and assessment of two important components of public choice: social choice theory (stemming from Arrow’s Theorem) and interest group theory. It then considers the use of public choice models to explain the behavior of legislatures, agencies, and courts. The core public choice insight is that institutional structures are responses to fundamental problems relating to collective action. The chapter concludes, however, that normative use of specific public choice models should be undertaken with caution. The models are likely to be most useful when (1) they are informed by deep familiarity with specific institutional contexts; (2) reforms are context-specific; and (3) proposed changes are at the margin rather than involving major structural changes.