George Mason School of Law

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

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

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

Judgement Biases • Do we always calculate correctly?

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

Laplace’s Demon • 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. • For such an intellect nothing would be uncertain and the future just like the past would be present before its eyes.

Pierre-Simon Laplace • 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.” • Laplace: “Sire, I had no need of that hypothesis."

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

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

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

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

Judgment BiasesProbability Theory: Monty Hall

Judgment BiasesProbability 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.

Judgment BiasesProbability 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?

Judgment BiasesProbability 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.

Judgment BiasesProbability 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.

Paternalism:Some Judgment Biases • The Availability Bias • Pauline Kael on the 1972 election

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.

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.)

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?)

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.”

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

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

Paternalism/Capacity • Judgment Biases • Akrasia/Weakness of the Will

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

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

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

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

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

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?

Moral Heuristics Our reaction to evil is unthinking and immediate. We don’t have to calculate cost vs benefit 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.

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

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

Next day • Fraud • Statute of Frauds?

Rational Choice: Six Assumptions • 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

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

Varieties of AkrasiaReversal of preferences? 41

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

Varieties of AkrasiaOverwhelming passion: Φαίδρα Racine, Phèdre III.v Phèdre, Thesée, Hippolyte

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 AkrasiaDiscounting the Future You have a choice between immediate consumption and saving for deferred consumption. How do you decide? 45

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

Varieties of AkrasiaDiscounting the Future Doré, The Prodigal Son 47

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

The Counter-arguments1. Bad Faith

The Counter-arguments2. The state’s informational problem • The State might easily get it wrong:

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