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1 George Mason School of Law Contracts II Paternalism F.H. Buckley

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1 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 2

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

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

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

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

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

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

9 9 No black holes Comparability: No incommensurabilities

10 10  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? Incommensurability Tragic Choices

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

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

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

14 14  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”) But nearly everything has third party effects…

15 15  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. Examples of Kaldor-Hicks Efficiency

16 16 Mary Bess A  B   C 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

17 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 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 19 Transitivity: A>B, B>C A>C Time 1 0 Time 2 C B A

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

21 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 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 23

24 What if a fake ID is presented? 24

25 Why an exception for necessities? 25

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

27 Brooke Shields two years later 27

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; 28

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 ShieldsBrooke 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. 29

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

31 31 Paternalism’s questionable history So 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 32 The New Paternalism  Unlike the old Paternalism, the new Paternalism does not discriminate  It is also based on better science

33 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 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 35 We need our hunches to navigate through life… Gerald Ford, trying to walk and chew gum

36 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 38 Paternalism: Some Judgment Biases  The Availability Bias Pauline Kael on the 1972 election How likely is a divorce?

39 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 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 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 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 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 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 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 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 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 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 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 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

51 51 Varieties of Akrasia  Overwhelming passion: Phèdre  The Divided Self: To which self are we allied?  Reversal of preferences: Mary Beth Whitehead  Self-deception: Denial is not a river in Egypt…  Discounting the future: criminals

52 52 Does Akrasia argue for paternalism?  The akratic might wish for laws that address their weakness of will.  Can you think of examples?

53 53 The Counter-arguments  Is addiction per se bad? Might it ever make sense ex ante to become an addict?

54 54 Gary Becker: Rational and irrational addiction Utility 0 Time Gary Becker, Accounting for Tastes (1996) Preferences for commodities over time

55 55 Gary Becker: Rational and irrational addiction Utility 0 A B Time Gary Becker, Accounting for Tastes (1996) classical music Over time the preference for classical music increases —but this is a benign addiction Subject suffers from “withdrawal” if music taken away from him

56 56 Gary Becker: Rational and irrational addiction Utility 0 A B C Time classical music coffee Unlike classical music, there comes a time when the subject would like to stop drinking coffee. Though he finds he cannot do so, his ex ante decision to start drinking coffee is still rational

57 57 Gary Becker: Rational and irrational addiction Utility 0 A D B C Time classical music coffee hard drugs Ex ante, the decision to start taking hard drugs is irrational

58 58 The Counter-arguments  Can the state distinguish between rational and irrational addiction?  Just how would you categorize the taste for the following: Tobacco Ice cream Lotteries

59 59 The Counter-arguments  If we might be weak-willed, can we address the problem without the help of legal barriers? Social sanctions Self-binding

60 60 The Counter-arguments Self-binding as a response to akrasia Jon Elster, Ulysses and the Sirens (1984)

61 61 Examples of self-binding  Marriage  Home purchases  Leverage

62 62 The Counter-arguments  Is there such a thing as excessive self-control? Prohibition The addict and the teetotaler

63 63 Aristotle’s anaisthēsia No booze for you, INSECT! Carrie Nation

64 64 Is there such a thing as excessive will-power? Ainslie in Elster, Getting Hooked (1999) Bergson: “Life demands not only that we live but that we live well.” Chardin, The House of Cards ca. 1735

65 65 Impugning Individual Choice: Paternalism and Perfectionism  Paternalism: Interfere with personal choices to make subject better off  Perfectionism: Interfere with personal choices to promote a moral goal

66 66 Perfectionism Paternalism Impugning Individual Choice The two strategies overlap

67 67 Impugning Individual Choice Two kinds of paternalism  Soft Paternalism overrules personal choices in order to satisfy subject’s deepest preferences  Judgment biases and akrasia  Hard Paternalism overrules personal choices when the subject’s deepest preferences are immoral and “he doesn’t know what’s good for him”

68 68 PerfectionismSoft Paternalism (good preferences) Impugning Individual Choice: Varieties of Paternalism Hard Paternalism (immoral preferences)

69 69 Social Perfectionism Soft Paternalism Varieties of Perfectionism Private Perfectionism (Hard Paternalism)


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