Amos Tversky's contributions to legal scholarship: Remarks at the BDRM session in honor of Amos Tversky, June 16, 2006

Judgment and Decision Making, Vol. 1, No. 2, November 2006, pp. 174–178
Amos Tversky’s contributions to legal scholarship: Remarks at the
BDRM session in honor of Amos Tversky, June 16, 2006
Paul Brest?
William and Flora Hewlett Foundation
Abstract
Together with his long-time colleague Daniel Kahneman, Amos Tversky, provided the intellectual infrastructure for
contemporary behavioral law and economics. Prospect theory undermines the Coase Theorem, which is the bedrock
of traditional law and economics; and the heuristics and biases research questions the fundamental idea of a rational
self-interested decisionmaker, which is also challenged by subsequent studies of the role of affect in judgment and
decisionmaking.
Keywords: Tversky, behavioral law and economics, Coase Theorem, prospect theory, availability heuristic, paternalism.
To place Amos Tversky’s contributions to legal schol-
tion and other inputs in a variety of markets”
arship in context, I’ll begin with an incredibly brief and
(Becker, 1998, pp. 3–4).
oversimpli?ed history of the role of the social sciences in
the legal academy.
These are, of course, the same principles that underlie
Except for the short ef?orescence of Legal Realism in
the axioms of expected utility theory.
the early twentieth century and its slender offshoot, the
The Coase Theorem, which predicts how economically
Law and Society movement, American legal scholarship
rational individuals will behave in free markets, is partic-
for the ?rst two hundred years of the Republic was highly
ularly important to legal rules and procedures. It asserts
insular and oblivious to the social sciences.
that, in the absence of transaction costs, no matter on
Then came the law and economics (L&E) movement,
whom the costs or liabilities of engaging in an activity are
founded by Guido Calabresi of Yale Law School, Richard
imposed, the parties will bargain to achieve the socially
Posner then of Stanford (now Chicago) — with Chicago
optimal level of that activity. For example, if liability for
economists Ronald Coase and Aaron Director as godfa-
pollution is imposed on a power plant, the plant will pol-
thers. Calabresi’s 1970 book, The Cost of Accidents, em-
lute and compensate the victims if pro?ts from polluting
ployed microeconomics to provide a coherent conceptual
exceed the harm to the victims, and it will shut down if
scheme for the law of torts — of accidents. Richard Pos-
the harm to the victims exceeds the bene?ts of pollut-
ner’s 1973 Economic Analysis of Law gave readers both a
ing; and if the costs are imposed on the victims — by not
positive and normative economic survey of virtually ev-
making the power plant liable — the victims will pay the
ery area of law, from antitrust to criminal to family law.
plant to shut down if the harm to the victims exceeds the
These books signaled the beginning of an intellectual
bene?ts of polluting to the plant, but not otherwise. This
movement that has had enormous in?uence on legal aca-
analysis counsels against regulations that would impede
demic thinking and — though this is harder to assess
voluntary ef?ciency-producing market transactions.
— that has also in?uenced regulatory policy and judicial
Much of L&E scholarship consists of applying the mi-
doctrine. The core of the economic analysis of law is mi-
croeconomic model to legal questions, for the most part
croeconomics supplemented by the Coase Theorem. The
assuming or asserting that people’s goal is to maximize
model of the individual is homo economicus. In Gary
wealth. (Many of the scholars understood that including
Becker’s words: “all human behavior can be viewed as
values other than wealth, such as one’s “taste” for fairness
involving participants who
or justice, threatened to undermine the model’s elegant
simplicity and power.)
1. maximize their utility
Before the arrival of L&E, legal analysis was organized
2. from a stable set of preferences and
largely by conceptual schemes internal to the law. The
3. accumulate an optimal amount of informa-
economic analysis of law provided a more comprehensive
and apparently policy-relevant way of ordering the messy
?Paul Brest is president of the William and Flora Hewlett
Foundation and former dean of Stanford Law School.
Email:
domains of legal doctrine and policy. Like the large ma-
PBrest@hewlett.org
jority of legal scholars who preceded the movement, most
174

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Judgment and Decision Making, Vol. 1, No. 2, November 2006
Tversky in the law school
175
of the core L&E scholars were not empiricists and did
stance. Tversky analogized preferences to the umpire’s
not pay much attention to whether the model ?t the real
assertion that balls and strikes “ain’t nothing till I call
world. To the extent they did empirical work, it was based
’em” (Tversky & Thaler, 1992).
on a sort of sociological or anthropological observation1
3rd: Because of the ways that people process infor-
rather than on either econometric or experimental meth-
mation, having accurate information does not necessar-
ods.2
ily improve decisionmaking, and sometimes may detract
At least some proponents of L&E acknowledged that
from it. Moreover, rather than accumulate the optimal
individuals do not always make rational choices. Af-
amount of information, individuals often uncritically ac-
ter all, Herbert Simon’s “Behavioral Model of Rational
cept information that con?rms their beliefs while over-
Choice” was published in 1955, around the same time as
critically rejecting discon?rming data; they are overcon-
Coase’s work. But if humans were only “boundedly ra-
?dent in their judgments; and are prone to base judg-
tional,” the bounds were not very constraining and, more
ments on information that is vivid and available to mem-
important, they did not bias decisions in any systemati-
ory rather than more accurate but pallid and unmemo-
cally predictable manner.
rable.
And then came Amos Tversky and Daniel Kahneman
I will focus on the in?uence on legal thought of T&K’s
(T&K). While so-called “behavioral law and economics”
work on framing and the processing of information.
(BLE) has not replaced the neoclassical tradition — and
The endowment effect, a corollary of the loss aversion
indeed has been strongly resisted by the neoclassicists —
described by prospect theory, signi?cantly undermines
it has similarly been applied to virtually every area of
the Coase Theorem. Indeed, it raises a problem for much
the law, both to explain behavior and prescribe normative
legal doctrine, which assumes that an individual places
substantive and procedural rules.
the same value on a good or legal entitlement whether or
I will focus on T&K’s particular contributions — es-
not she currently possesses it — that willingness to pay is
pecially prospect theory and the biases and heuristics re-
the same as willingness to accept. The endowment effect
search. But though the domain of BLE extends beyond
thus suggests that the ability of private markets to reallo-
their work, and in some cases is orthogonal to it, their
cate legal entitlements may be weaker than the Coase the-
in?uence is so pervasive that it would be almost as fool-
orem, and traditional law and economics analysis more
hardy to disentangle their impact on the ?eld as it would
generally, would have us believe.
be to try to separate Amos’s particular contributions from
For example, contingent valuation is a common
Danny’s.
method for placing a value on environmental goods or
While T&K do not undertake to unseat the idea that
harms. It is used in litigation as well as administrative
much human behavior is rational, their work presents se-
policymaking. On the assumption that WTP and WTA
rious challenges to each of Becker’s views of homo eco-
are identical, affected individuals are surveyed to deter-
nomicus.
mine how much they would pay to gain an environmen-
1st: The distinction between decision utility (what one
tal good or how much they would accept to suffer its
expects or predicts at the time of the decision) and expe-
loss. But it turns out that WTP and WTA often diverge
rienced utility problematizes the core concept of utility.
widely. Russell Korobkin reports on a study in which
In fact, individuals often do not maximize their utility —
duck hunters were willing to pay an average of $247 per
or to the extent they do, it is the result of complex interac-
person per season for the right to prevent the development
tions of the poor affective forecasting and psychological
of wetlands so they could hunt, while they demanded an
adaptation studied by Dan Gilbert, Tim Wilson, and oth-
average of $1044 dollars to give up an entitlement to hunt
ers.
there (Korobkin, 2003).
2nd: BLE replaces the idea of a stable set of pref-
(I should note that Korobkin is one of three Stanford
erences, which under classical L&E can only be in?u-
Law School graduates in the mid-90’s — the other two
enced by countervailing incentives, with preferences that
being Jeff Rachlinski and Chris Guthrie — all now in le-
are sometimes created by the way the choice is framed,
gal academia, who had the good fortune to study with
and which, therefore, may be in?uenced by someone’s
Amos and his colleagues at the Stanford Center on Con-
attempting to manipulate the frame or simply by happen-
?ict and Negotiation.)
Korobkin conducted an interesting series of experi-
1Actually, in an important project along these lines, Robert Ellickson
(then at Stanford, now Yale) discovered that the Coase theorem did not
ments that showed that the parties negotiating a contract
seem to explain relationships between farmers and ranchers in Shasta
treated default contract terms as the status quo or refer-
County, California (Ellickson, 1991).
ence point for assessing gains or losses (Korobkin, 1998).
2I hasten to say that there are some empirically-inclined economists
For example, in some jurisdictions the default rule makes
who study legal issues; but their research — some of which is exem-
pli?ed in popular form by Levitt and Dubner (2005), is not particularly
a shipper absolutely liable for the consequences of losing
concerned with the microeconomics model I have described.
or damaging a package — liable whatever the reasons for

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Judgment and Decision Making, Vol. 1, No. 2, November 2006
Tversky in the law school
176
the loss or damage — while in others, the shipper is only
iar to everyone in this audience: Judgments of probability
liable for reasonably foreseeable harm. But contracting
are based on how readily salient examples come to mind.
parties in either jurisdiction can negotiate to change the
A recent study of Canadians’ and Americans’ percep-
damage rule.
tions of the risks of SARS or terrorist attacks highlights
Subjects playing the roles of lawyers for a shipper con-
how vivid media coverage can substitute for arcane and,
tracting a long-term agreement with a mail-order mer-
in any event, pallid statistical data. Canadians thought
chandise house were randomly assigned to a jurisdiction
they were more likely to be killed by SARS, Americans
that had one or the other rule. It turned out that they de-
thought they were more likely to be killed by terrorists,
manded considerably more to relinquish their limited li-
and both greatly overestimated the probabilities.
ability in a jurisdiction that had the “reasonably foresee-
In recent years, a purely cognitive explanation of the
able damages rule” than they were willing to pay to ac-
phenomenon has been supplemented by one that focuses
quire limited liability in a jurisdiction that made them ab-
on affect. Cass Sunstein, a professor of law at Chicago,
solutely liable. (A subsequent experiment demonstrated
has coined the term probability neglect to describe how,
that the contracting parties might treat the terms embod-
when emotions run high — for example, when contem-
ied in a standard form contract, rather than the jurisdic-
plating dreadful risks — people tend to greatly over-
tion’s default rule, as the status quo, thus demonstrating
weight probabilities or to ignore them altogether and fo-
how malleable the reference point can be.)
cus only on the horri?c, worst-case outcome. Indeed, af-
Prospect theory also provides an insight into the
fect is playing an increasingly important role in behav-
paradigmatic legal activity of litigation.
Nothing in
ioral economics more broadly — for example, in under-
economic theory suggests that plaintiffs and defendants
standing dynamically inconsistent preferences or hyper-
would have different risk attitudes. But prospect the-
bolic discounting. Although this was not the major focus
ory (accurately) predicts that plaintiffs tend to be risk-
of Amos Tversky’s work, the lines of thought certainly
averse and defendants risk-seeking. As Chris Guthrie
trace back to him, for example through the pioneering
notes (2003):
work of his collaborator Paul Slovic.
BLE’s insights about the effects of framing, availabil-
In most lawsuits, plaintiffs choose either to ac-
ity, and emotions raise fundamental questions both about
cept a certain settlement from the defendant or
individual decisions — for example, whether to undergo
to proceed to trial in hopes of obtaining an even
a risky medical procedure — and about public policies
more favorable judgment; most defendants, by
made by legislatures. With respect to the former, Guthrie
contrast, must choose either to pay a certain
and Korobkin have suggested that, though lawyers may
settlement to the plaintiff or to gamble that fur-
be no less prone to framing effects and biases than any-
ther litigation will reduce the amount they must
one else, their disinterest may allow them to play the role
pay. Thus, plaintiffs generally choose between
of “cognitive counselor” for their clients.
options that appear to represent gains, while de-
fendants generally choose between options that
The insights of the availability heuristic and what
appear to represent losses.
Slovic has termed the affect heuristic have given rise to
a vigorous policy controversy over “paternalism.” If peo-
In a number of experiments, in which law students
ple living in ?ood- and earthquake-prone areas tend to
were randomly assigned to the roles of plaintiffs or de-
buy insurance only in the aftermath of disasters, should
fendants in litigation scenarios, Jeff Rachlinski demon-
legislatures counter the tendency of such risks to be-
strated a considerable difference in the parties’ risk toler-
come unavailable over time by making insurance manda-
ance: Defendants tended to be mildly risk seeking, while
tory. If accurately informing individuals of the hazards
the plaintiffs were highly risk averse.3 The experiments
of consumer goods may lead to alarm, to over-reactions
provide a persuasive explanation for the nontrivial num-
or to deadweight hedonic losses from fear or (say, in the
ber of civil cases that go to trial rather than being settled.
case of cigarettes) self-loathing, should manufacture or
Let me turn from prospect theory to the availability
use of the products be regulated instead? Jolls, Sun-
heuristic. The availability heuristic explains a variety of
stein, and Thaler (1998) have argued that the insights of
judgment and decisionmaking phenomena, and plays a
BLE at least call for an “anti-anti paternalistic” stance,
role in the behaviors of lawyers, clients, and courts. Some
and have argued for what they call “soft paternalism” in
of the most interesting legal issues concern how availabil-
some circumstances: Since government must inevitably
ity affects perceptions of risk. The phenomenon is famil-
determine initial entitlements and default rules, let those
be rules that are likely to encourage enlightened self-
3In another experiment, in which federal magistrates presided over
interested behavior — for example (to return to the issue
hypothetical settlement conferences, magistrates who were presented
the facts from the plaintiff’s point of view were more prone to advise
of discounting), a default of being enrolled in a retirement
settlement than those with the defendant’s perspective.
plan rather than having to take active steps to enroll.

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Judgment and Decision Making, Vol. 1, No. 2, November 2006
Tversky in the law school
177
Even the proponents of soft paternalism temper their
fectly legitimate to approach them with skepticism born
prescriptions with concerns about a democratic govern-
of one’s Bayesian priors. The BLE observational stud-
ment manipulating its citizens. And critics have sug-
ies are . . . well . . . observational — and often not strongly
gested that soft paternalism may be particularly perni-
econometric. And the laboratory experiments raise gen-
cious precisely because it is “soft” and therefore will not
uine questions about methodology and external validity.
mobilize the same sort of focused opposition as hard reg-
But I think the strongest explanation for the perse-
ulatory policies.
verance of the economic model of human behavior is
I have touched on some of the major differences be-
the absence of a strong competitor as a comprehensive
tween classical L&E and BLE. But Amos Tversky’s in-
model. As proponents of traditional L&E bob and weave
?uence on legal scholarship is far broader. For example,
to accommodate the insights of psychology (e.g., Posner,
in an interesting set of experiments, Mark Kelman and his
1998), the elegance and power of the paradigm becomes
colleagues demonstrated the strong context-dependent ef-
compromised. Yet, notwithstanding arguments by Deb-
fects on juries that were given a choice between con-
orah Frisch and some others who question the norma-
victing a defendant of either of two grades of homi-
tive status of expected utility theory, BLE provides a cor-
cide (as some jurisdictions do) or three (as others do).
rective rather than a substitute for the traditional model.
Jeff Rachlinski has documented how the negligence stan-
Homo psychologus is essentially homo economicus with
dard for torts and investment errors invites hindsight bias
bounded rationality, bounded willpower, and bounded
and he has proposed structural solutions to the problem.4
self-interest (Jolls et al., 1998; and see Kelman, 1998, for
Rachlinski, Guthrie, Andrew Wistrich, and others have
a response). Even if one believes that the bounds bind a
shown the susceptibility of jury awards for damages to
lot, thus signi?cantly constraining rational judgment and
the anchoring and (insuf?cient) adjustment phenomenon
behavior, they do not provide an alternative paradigm.5
(Guthrie et al., 2001; Sunstein et al., 2002). Linda Bab-
I doubt that Amos Tversky thought or hoped otherwise.
cock and George Loewenstein (1997) have demonstrated
Although he designed some of the cleverest “gotcha” ex-
how self-serving biases affect litigants’ willingness to set-
periments in the history of social psychology, Amos was
tle. In addition to his foundational work on inferential
the quintessential rationalist who, I imagine, wished that
errors, Lee Ross, who was Amos’s long-time colleague
humankind could do somewhat better than his research
and friend, has expanded the agenda to the important area
disclosed.
of negotiation. A relatively new legal scholar, Jeremy
Blumenthal, who studied with Dan Gilbert, is applying
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