An article in today's Life section of USA Today titled Movies tap into anger at Wall Street describes how 3 movies in current release mirror public angst over economic inequalities and inequities: Tower Heist, In Time, and the already mentioned in 2 Glom blogs, Margin Call.

This autumn's documentary Chasing Madoff recounts Harry Markopolos’ multi-year crusade to expose the multi-billion dollar Ponzi scheme perpetrated by Bernie Madoff. Alleged victims of this massive fraud include the celebrity couple of Kyra Sedgwick (star of The Closer on TNT) and Kevin Bacon (of the original Footloose (1984) fame). The Dodd-Frank Wall Street Reform and Consumer Protection Act included a broad set of whistleblower provisions under which the Securities and Exchange Commission adopted specific rules and procedures to incentivize potential whistleblowers by way of cash rewards and protection from retaliation.

There is also a 2009 documentary about the subprime mortgage fiasco, which is now available on DVD, American Casino. 2001 economics Nobel laureate Joseph Stigltiz described it as being "a powerful and shocking look at the subprime lending scandal. If you want to understand how the US financial system failed and how mortgage companies ripped off the poor, see this film." 

This May, the HBO Films production of Too Big to Fail, based on the book of the same name with the subtitle of The Inside Story of How Wall Street and Washington Fought to Save the Financial System--and Themselves depicted the autumn 2008 U.S. financial crisis and the sequence of (less than intertemporally consistent) policy responses by the Treasury department, the Federal Reserve, and other financial regulators.

Last autumn's Inside Job made a compelling argument in five parts about how the American financial services industry systematically and systemically corrupted the United States government and in so doing brought about changes in banking practices and legal policies that led directly to the Great Recession.

Although the documentary Client 9: The Rise and Fall of Eliot Spitzer focused primarily on the interaction of ego, hubris, power, scandal, sex, and politics, it also touched upon Wall Street and efforts by Spitzer to reform its excesses.

Of course, no list of movies related to the recent financial crises would be complete without including documentary film-maker Michael Moore's 2009, Capitalism: A Love Story, which criticizes the current American economic system in particular and capitalism in general. At one point, it asks if capitalism is a sin and whether Jesus would be a capitalist, who wanted to maximize profits, deregulate banking, and have the sick pay out of pocket for pre-existing conditions via clips from Jesus of Nazareth. Moore asks if one could patent the sun and questions how the brightest American youth are drawn towards finance and not science. He proceeds to Wall Street asking for non-technical explanations of derivative securities in general and credit default swaps in particular. Both a former vice-president of Lehman Brothers and current Harvard University economics professor Kenneth Rogoff fail to clearly explain either term. Moore thus concludes that our complex economic system and its arcane terminology exist simply to confuse people and that Wall Street effectively has a crazy casino mentality. 

Finally, the PBS Nova episode, Mind Over Money, which originally aired on April 26, 2010 asks whether markets can possibly be rational when people clearly are not. In other words, is there a version of the efficient markets hypothesis that can be true in a world populated by at least some boundedly rational actors? In posing this question, the show offers an entertaining, yet quite informative survey of elements of behavioral economics and finance. Its companion website provides additional resource materials concerning the role of emotions in financial decision-making. The debate which it depicts between the University of Chicago school of economics and the behavioral economics approach (including scenes of Dick Thaler playing pool) is a bit overdone and perhaps unintentionally comical, but it raises the question of whether it matters for law and policy how people make their financial judgments and decisions? Of course, the natural follow-ups of if so, then how and if not, then why not, are questions about which business law professors, Glom readers, and policy makers are likely to have perhaps quite strong and certainly divergent opinions.

A television program that has become quite popular is the USA network's original dramatic series White Collar, which is based upon the premise of an F.B.I. agent solving white collar crimes with the assistance of consultant who is a former (and current?) art thief and con man extraordinaire. Episodes have featured a black widow, baby selling, bank robbery, black market kidneys, bond theft, collusion, corporate espionage, derivatives, financial fraud by a Wall Street brokerage firm, identity theft, and political corruption.  

It is reminiscent of the 1960's campy, classic, and tongue-in-cheek television series, It Takes A Thief.

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I recently saw the movie, Margin Call, which is currently playing in theaters and is available on demand at Comcast. There are curretly 34 reviews of it by viewers at imdb, where it has a rating of 7.3 out of 10.

I also just finished reading this paper, Fear, Greed, and Financial Crisis: A Cognitive Neuroscience Perspective, prepared for a forthcoming handbook on systemic risk. This chapter is by finance professor Andrew Lo, who is the director of the MIT laboratory for financal engineering. He also wrote another excellent paper which Glom readers are likely to find of interest, namely Reading About the Financial Crisis: A 21-Book Review, that was prepared for the Journal of Economic Literature.

In the interests of full disclosure, I taught at Temple law school a seminar titled Law, Emotions, and Neuroscience and co-taught at Yale law school with professor Dan Kahan a seminar titled Neuroscience and the Law. The seminars covered some basic materials about affective,cognitive, and social neuroscience before analyzing the potential and limits of applications to business law, conflict resolution, criminal law, ethics,  evidence, morality, paternalism, and social policy. Media coverage of neuroscience and law has a tendency to focus almost exclusively on such controversial issues as free will and responsibility in the criminal law context. Glom readers are more likely to focus on neuroeconomics and neurofinance, two nascent fields that ask how human brains engage in JDM (Judgment and Decision Making) in general and over time and under risk in particular.

Also, as cognitive neuroscientist Michael Gazzaniga recently stated: responsibility, like generosity, love, pettiness, and suspiciousness, is a strongly emergent property, which although being derived from biological mechanisms, has fundamentally distinct properties, just like the case of ice and water. The press and the public also seem to be fascinated with very colorful fMRI brain scans because they like the idea of being as the Wall Street Journal science writer, Sharon Begley, calls them: cognitive papparazi.

My system 1 believes in synchronicity, so this post, as evidenced by its title's homage to Lo's chapter, approaches the movie Margin Call from a cognitive neuroscience perspective informed by Lo's chapter. Lo provides a brief history of what we know about brains. He then explains how fear and the amygdala can exacerbate financial crises. He also demonstrates how the reward of money appears to share the same neural system and the release of the neuortransmitter dopamine into the nucleus accumbens as these rewards do: beauty, cocaine, food, music, love, and sex.

Lo proceeds to discuss a neurophysiological explanation for Kahneman and Tversky's experiment demonstrating people's aversion to sure loss. Lo proposes a neuroscientifically informed view of rationality that differs very much from an economic rational expectations conception, with the key difference being the role that emotion plays in JDM. Lo extends his analysis from individuals to groups by explaining the neurophysiology of mirror neurons, theories of mind, social interactions, and the efficient markets hypothesis. He concludes his neuroscience survey by describing the marvels and limits of the human prefrontal cortex, also known as the "executive brain." Of particular interest to Glom readers is decision fatigue, documented recently among judges rendering favorable parole decisions around 65% of the time at the start of and close to 0% by the end of each of 3 daily sessions that were separated by 2 food breaks (a late morning snack and lunch). This empirical finding that parole rates increased after food breaks is consistent with recent experimental research finding that glucose can reverse decision fatigue and the common adage to not make important decisions when tired. 

Lo provides several practical and reasonable suggesions based upon cognitive neurosciences about how policymakers can engage in financial reform to deal with systemic risk. He concludes by advocating that financial economists utilize the great recession to re-conceptualize, rethink, and revamp neoclassical economics by forging a consilience between the neurosciences and financial economic theory. Building a deeper and better understanding of economic phenomena through improved economic models and intellectual frameworks can and should lead to a more appropriate financial regulatory infrastructure.

And now onto a few comments about the movie Margin Call. Without giving away the plot for those who may want to see it without any knowledge of its ending, this movie raises ethical and moral questions about individual versus social optimality, trading on the basis of private information, panic selling, professional codes or norms of behavior, and the costs a company may impose on society and pay to others to survive. There is certainly lots of fear and greed on display in this film. Set over the course of a day and sleepless night in NYC, the movie viscerally illustrates various forms of JDM and how individuals and groups of individuals can persevere under stress and time pressures. It is a movie that can and should provoke discussion about what could have been done differently by individuals, financial firms, and regulators. It is a film that I'm going to put on the list of movies at the start of the chapter about business law in the text, Law and Popular Culture: Text, Notes, and Questions (LexisNexis Matthew Bender, 2007) by David Ray Papke, Melissa Cole Essig, Christine Alice Corcos, Lenora P. Ledwon, Diane H. Mazur, Carrie Menkel-Meadow, Philip N. Meyer, Binny Miller, and myself that we are revising for a second edition.

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As promised at the conclusion of my first post, this post concerns a riddle that Danny Kahneman posed about how our experiencing selves differ systematically from our remembering selves. Based upon a number of subjective well-being (SWB) surveys and neuroscience studies, people's remembered emotions are usually rosier than people's experienced emotions, and people are motivated to make choices based upon their predicted emotions which tend to coincide with their emotional memories. In a TED talk, Kahneman nicely illustrates his central thesis that anticipated memories of experiences as opposed to the actual anticipated experiences themselves motivate people’s behavior by stating that very frequently and to a large degree people take vacations in service of their remembering selves. 

As comedian Dave Barry jokingly points out, "the human race is far too stupid to be deterred from tourism by a mere several million years of bad experiences, and today we’re traveling in larger numbers than ever." In fact, empirical studies find that not only do prospective reports of vacation enjoyment and retrospective ones converge, but also both predicted and remembered affect are more positive than affect concurrently reported during vacations. Another study that compared students’ predicted, concurrently experienced, and remembered affect respectively before, during, and after their spring break vacations found that predicted and remembered affect is both more positive and more negative than concurrently experienced affect, but remembered affect best predicts undergraduates’ desires of taking similar vacations in the future.

Despite the many expected and inevitable hassles of travel, it seems intuitively plausible that some people would prefer to actually experience a vacation in addition to having fond memories of that vacation. The idea that some people may not just want anticipated memories is viscerally illustrated by a debate among characters in the science fiction thriller, Total Recall, about utilizing the services of Rekall, Inc. which is a corporation that provides implanted false memories of ideal virtual holidays. 

Of course, none of us remembers every single moment in our lives and of those moments that we do remember, not all of them are remembered with equal clarity or emphasis. Naturally, our memories are fallible and imperfect. But such an observation compares human memories to records of a computer or some other infallible and perfect recording device left on 24/7. Such a comparison misconstrues human memory as having a goal of perfect recall. Psychologist William James pointed out, "[s]election is the very keel on which our mental ship is built. And in this case of memory its utility is obvious. If we remembered everything, we should be on most occasions be as ill off as if we remembered nothing." Instead, we remember to help us derive meaning from and make sense of all the moments in our lives. People only remember that which is personally meaningful, and what is meaningful to people often changes during their lifetimes in light of subsequent events (e.g. divorce or infidelity).

Father Guido Sarducci, a famous, fictional character on the National Broadcasting Company late night program Saturday Night Live in the 1970s and 1908s that original cast member comedian Don Novello created and played, proposes in a very entertaining monologue to start a new university that would teach in five minutes only that information which students on average would remember five years after leaving college. For example, he jokes that his Five Minute University Spanish class teaches only "¿Como está usted?" which means "how are you" and "muy bien" which means "very well" because that is pretty much all that most students remember five years after taking four semesters of college Spanish. Similarly, his economics class teaches "Supply and Demand" only. He concludes by saying: "I'm not sure, but I'm pretty sure, right next door to the five minute university, I might open up a little law school. You got another minute?"

Of course, his central point that most college students remember only very little of the vast amount of material that they study in four years of college or three years of law school applies not only to students, but also people more generally. An influential expert on human memory and law, psychologist Elizabeth Loftus points out that people’s memories not only are constructed rather than being played back liked a video recording, but also can be influenced by suggestive language and images. In a justifiably famous experiment of 120 people who had visited Disneyland or Disney World, Elizabeth Loftus and Jacquie Pickrell found that 30% of people who had read a phony advertisement for Disneyland with a photograph of Bugs Bunny just outside of the Magic Kingdom reported that indeed they remembered, or knew, they had actually seen and met Bugs Bunny at Disneyland and even shook his hand (or paw). That memory has to be false though because Bugs Bunny is a Warner Brothers character and not part of the Disney universe.

Psychological research confirms that people’s emotional memories depend on their current emotions, current appraisals and interpretations of past experiences, and coping efforts in addition to personality traits. Psychologists Linda Levine, Martin Safer, and Heather Lench point out that misremembering emotions can promote such goal-directed behavior as authoring articles, climbing mountains, conducting research, having children, and raising children. They also explain how incomplete and inaccurate affective memories also can facilitate people’s abilities to cope with ongoing challenges. A study by a leading marriage and parenting expert, John Gotmman, found that even implicit measures of couples’ affective memories of their marriage can predict divorce better than observational measures of marital problem solving and better than self-reports of current marital satisfaction that can be informed by explicit memories.

It is important to realize that emotional memories record ongoing relationships between past events and people’s goals implies that such emotional records are more accurate if people update them based upon their current goals and beliefs. As As Levine, Safer, and Lench nicely state it, "[i]n the same way, updating a map when new roads are built makes it more accurate." The chief purpose of people's memory could be to guide their future behavior instead of maintaining a faithful record of their past.

Neuroscientists Larry Cahill, James McGaugh, and Elizabeth Parker discovered that a small number of people are able to recall detailed moment-to-moment events from their entire lives. They proposed the term hyperthymesia to describe such extremely superior autobiographical memory. Actress Marilu Henner, who is perhaps best known for her starring role as Elaine O'Connor-Nardo on the popular television program Taxi, is the only one of (at that time) six Americans diagnosed to have such nearly endless memories, that has children or is married (her current marriage is her third), suggesting that having a good relationship might be related to being able to forget and so lose some arguments. Marilu Henner is a technical consultant for a new television program called Unforgettable, starring Poppy Montgomery as Carrie Wells, a New York City police detective, who utilizes her hyperthymesia, to help solve homicide cases.

Psychologist Pascal Boyer suggests that "distorted" memories can be part of a highly efficient and functional biological system that balances costs of information storage and retrieval of past experiences against benefits of utilizing memories to improve present fitness-enhancing decision-making. Incomplete and selective memories, viewed as beliefs about past occurrences, can thus be seen to be particular examples of functionally adaptive misbeliefs generally. Viktor Mayer-Schönberger, a professor of internet governance and regulation, explains how forgetting played important roles during the history of humankind, ranging from facilitating forgiveness that provides opportunities for second chances to helping people make sound decisions that are not encumbered by their past. He also analyzes how digital technology makes it possible to end forgetting and illustrates problems from and solutions to everlasting digital memory.

As behaviorial economist George Loewenstein and philosopher Jon Elster observed, the moral philosopher Jeremy Bentham realized that much of people’s experiences of pleasure and pain are due not from direct experiences, but instead from indirect contemplation of experiences in their past or future, that is, from anticipations and memories of experiences. Differences in how people remember versus experience affect in general and happiness in particular poses a fundamental normative question of which one, if either, is more important. In a fascinating article, organizational psychologist and management scholar Robert Sutton hypothesizes that visitors to Disneyland are likely to remember and report positive bygone feelings they experienced during their visits, but forget and fail to report negative bygone feelings they experienced during their visits. Sutton offers these well-documented psychological forces to explain such inaccurate reconstruction of people’s emotions: (1) a Pollyanna effect, (2) editing of memories to maintain cognitive consistency, and (3) pressures of social norms in reconstructing past feelings. Sutton further hypothesizes this inclination to remember pleasant feelings but forget unpleasant emotions is accentuated by people taking photographs during their visits. Sutton also suggests that somewhat inaccurate positive anticipations, experiences, and memories of visits to Disneyland and most other events in life can be healthy and self-fulfilling. Recently, Disneyland and Walt Disney World launched a "Let the Memories Begin" marketing campaign to feature vacationers’ photographs and videos in television commercials and social media. Memories and photographs of moments in our lives are intimately related. As novelist Milan Kundera states about how people remember love affairs, "memory does not make films, it makes photographs."

Kahneman believes that when people think of the future, they do not usually think of lived experiences, but instead think of anticipated memories. He therefore believes that people actually choose between memories of experiences as opposed to between actual experiences. He sums up his viewpoint quite nicely with a compelling metaphor about one’s remembering self tyrannically dragging along one’s experiencing self through experiences that one’s experiencing self does not require and had no voice in choosing. As psychologist Frederic Bartlett states, "the past is continually being re-made, reconstructed in the interests of the present."

Just yesterday psychologists Andrew Steptoe and Jane Wardle published an empirical study in the Proceedings of the National Academy of Sciences finding that positive affect self-reported by 3,853 people aged 52 to 79 years old at different times over a single day utilizing ecological momentary assessment, which is a technique for measuring experienced well-being, predicted the rates of death five years later after controlling for demograhic factors, depressed mood, health behaviors, health indicators, and negative affect. In other words, people's experiences of positive emotions on just one day predicted their survival rates five years later! Of course a lot more future research can and should follow up this one study. But, the relationship between happiness and mortality has to be quite robust given the relatively small sample size of people and observations just being on a single day. This latest study contributes to an already growing body of research sugegsting that positive affect is correlated with benefical health-relevant cardiovascular, inflammatory, and neuroendocrine outcomes.

I have written a working paper which advocates that law and policy should care more about people's experiences than memories if and when those experiences result in chronic health or stress consequences that either (1) societies care about more than individuals do (because of externalities, public bads, or public goods) or (2) individuals also care about, but were unaware of, do not remember, or are unable to act upon (due to self-control problems). My draft analyzes examples of chronic health or stress effects from such experiences as dense and long commutes, discrimination, unhealthy eating, lack of regular physical exercise, sedentary behavior, and poor or no financial/retirement planning.

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If you are at Law & Society this Friday and Saturday, come to the mini-conference on Entrepreneuship & Law that Brian Broughman (Indiana - Maurer School of Law) and our own Gordon Smith (BYU) have organized.  Here is the line up:

Friday, June 3, 2011

8:15 am to 10:00 am Regulating Entrepreneurs 2122 (Chair: Brian Broughman)

• Mira Ganor (Texas), The Power to Issue Stock
• Erik Gerding (New Mexico), Shadow Banking, Financial Innovation, and Regulatory Arbitrage
• Michelle Harner (Maryland), Mitigating Financial Risk for Entrepreneurs
• Poonam Puri (Toronto), The Regulatory Burden of Corporate Law
• Discussants: Kristin Johnson (Seton Hall) & Sarah Lawsky (UC Irvine)

12:30 pm to 2:15 pm Governance Structure of Entrepreneurial Firms 2322 (Chair: Brian Broughman) 

• Brian Broughman (with (Jesse Fried & Darian Ibrahim), Delaware Law as Lingua Franca: Evidence from VC-Backed Startups

• George Geis (Virginia), Organizational Contracting and Third Party Rights
• Alicia Robb (Kauffman Foundation), Entrepreneurial Finance and Performance: A Transaction Cost Economics Approach
• Discussant: Bobby Bartlett (UC Berkeley) 

Saturday, June 4, 2011

8:15 am to 10:00 am Law, Entrepreneurship, and Innovation 3116 (Chair: Gordon Smith)

• Mike Burstein (Harvard), Exchanging Information without Intellectual Property

• Sean O’Connor (Univ. of Washington), Transforming Professional Services to Build Regional Innovation Ecosystems
• Peter Lee (UC Davis), The Accession Insight and Patent Infringement Remedies
• Karl Okamoto (Drexel), Law and Entrepreneurship: An Assessment Approach

4:30 pm to 6:15 pm Global Entrepreneurship 3519 (Chair: Gordon Smith)

• Afra Afsharipour (University of California, Davis), US Private Equity Investments in India

• Sofia Johan (York Univ.)(with April Knil and Nathan Mauck), Determinants of Sovereign Wealth Fund Investment in Private Equity
• Gordon Smith, Stability and Adaptability

###

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Vic Fleischer and some of my other future colleagues at Colorado are holding a faculty reading group this summer that will cover some of the "classic" (or destined to be classic) law and economics articles from the last ten years. 

To generate a syllabus (or canon), let's crowdsource.  What would you pick as the most influential law & economics articles since 2000?  I'll cull a list for a later post from your comments below.  Ideas in business law fields (widely construed) would be particularly welcome.  

Here is one rough, provocative list just to get the discussion rolling (and of course any list is going to be woefully incomplete):

Theory of the Firm

Henry Hansmann & Reinier Kraakman, The Essential Role of Organizational Law, 110 Yale L. J. 387 (2000) 

Henry Hansmann, The Ownership of Enterprise (Harvard University Press 1996)

Edward M. Iacobucci & George G. Triantis, Economic and Legal Boundaries of Firms, 93 Va. L. Rev. 515 (2007)

Corporate Governance

Ron Gilson & Reinier Kraakman, Reinventing the Outside Director: An Agenda for Institutional Investors, 43 Stan. L. Rev. 863 (1991)

Rob Daines, The Incorporation Choices of IPO Firms, 77 NYU L. Rev. 1559 (2002)

John Coates, Explaining Variation in Takeover Defenses: Blame the Lawyers, 89 Cal. L. Rev. 1301 (2001)

Entrepreneurship

Ron Gilson, Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. Rev. 575 (1999)

Bankruptcy, Consumer, and Commercial Law

Douglas Baird & Bob Rasmussen, The End of Bankruptcy, 55 Stan. L. Rev. 751 (2002)

Elizabeth Warren & Oren Bar-Gill, Making Credit Safer, 157 U. Pa. L. Rev. 1 (2008-2009)

Law Firms

William Henderson & Marc Galanter, The Elastic Tournament: A Second Transformation of the Big Law Firm, 60 Stan. L. Rev. 1867 (2007-2008)

# # #

What would you recommend for readings in political economy?  For financial regulation?  For the topic of network effects?

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Let's assume that the applicant data noted by Erik, the WSJ, and countless gleeful business school admissions officers, are a real turning point. The bubble has burst.  What follows for how the ABA should conduct the accreditation process?

I'll start with a Lewisian anecdote.  I've the honor of chairing Temple's self-study committee this year, as we prepare for our sabbatical site visit next fall.  As a part of the "accreditation process," I attended an ABA workshop in the summer of 2010 for site accreditors and law school representatives.  The room, at an airport hotel in Chicago, was full - Gordon Smith was in the house! -  and the plenary session sometimes informative.  I'd also estimate that it cost the attendees an aggregate of $250,000 to attend, taken from student tuition dollars, when fully all of the benefit could have been achieved with podcasts, online presentations, and e-materials.

As the conference began, the ABA's Representative gave a speech lauding the standards, which he argued could be employed to good ends.  He comforted us by noting that no one, ever, emerges from accreditation without a demerit requiring correction.  That is, the accreditation process is set up so that a law school must engage with the ABA's corrective hand. But the highlight was the Representative's joyful boast that several new schools had been guided toward a successful accreditation, and there were an additional handful of prospective schools in the pipeline.  He neglected to mention that we were then in the middle of the worst job market for new lawyers in several generations. As I recall, his announcement was met with applause.  I felt like a guy on the Titanic, watching the band play on.

Indeed, there was something profoundly odd about the whole shebang.  (And I say that hopefully without any prejudice to Temple's re-accreditation, which I expect will go as smoothly as one could expect.)The ABA folks have convinced themselves that the Standards are welfare maximizing, and that the ABA must keep law schools honest by dictating small details of their operations (45,000 class minutes, antiquated and paternalistic attendance policies, written strategic plans and self studies, study spaces, ugly tables on websites, matches between catalogues and offered courses, etc.)  At the same time, the ABA doesn't want to engage in substantive regulation - suggesting that there are perhaps too many mediocre law schools in particular regions, asking whether it is smart to pay $50,000 to go to a new law school in California. Cynics would attribute the former characteristic to bureaucratic mission creep, the latter to antitrust concerns.

So the result is this: the ABA accreditation standards meddle into law schools operations and resist innovation in pedagogy. They therefore significantly raise the cost of educating students at existing law schools.  But the standards don't ultimately serve as an effective check on entry, meaning that students (who pay more than they should for education) are competing in a world of lower demand for their services but higher supply of graduates.  This is the worst of all possible worlds.  The legal education market would be much better off if the ABA were replaced by an accreditation agency that didn't have the same guild-driven stake in the status quo.

But we're not in that world, nor will be soon.  So what should the ABA do?  Rather than nipping schools for failing to achieve some sets of metrics, or not utilizing a particular internal operating procedure, or having classrooms with noisy air conditioners, the ABA should act more like the SEC, and require (merely) disclosure of facts deemed material to "market" actors -- alumni, prospective faculty, prospective students.  Auditing would also seem appropriate - coupled with punishment for severe violations. The ABA has a really powerful weapon at its disposal that other accrediting agencies do not - the power of licencing.  It ought to use it to clean up the data, right quick.

What information should be disclosed?  It's not obvious that the current focus on employment and salary statistics is the right approach.  That's not to say that law school should hide employment statistics - or obscure them - but rather that having the Bar mandate a particular form of disclosure is a bad idea in a world where Bar-driven employment outcomes are the most variable and therefore most important part of the USNews rankings, which desperately needs a constantly changing set of measures to stave off the wolves at the door. (Having done some research into the determinants of rankings, let me just say this to Bob Morse: your plea for data transparency was funny and profoundly ironic.)  I also worry that disclosure of salary data will have anticompetitive effects in the smaller firm part of the labor market.  I could be convinced otherwise, but it strikes me that a better set of accreditation-driven disclosures would include the following:

1. Actual law school cost: what was the retail price paid by every member of the class (anonymous, of course, and probably displayed in a histogram with 50 or so bins).  How did the school account for scholarships (was it a real dollar cost out of endowment, or a setoff).  What percentage of students ended up paying more than their originally bargained retail price?  What was the distribution of incidental costs?
2. Actual law school debt: how many students took on debt, how much debt, and under what terms;
3. Bar Passage: for every member of the class, the passage statistics, no matter how many times the test was taken;
4. A Retrospective Survey: some kind of nationally-designed survey, patterned after LSSSE, that evaluates whether graduates were happy with their education and the opportunities it brought them. Time series data would be really helpful in informing applicants.  A key reporting question: "did you get your money's worth"?;
5. Law School Budgeting:  This is a complicated topic, but the basic idea would be to provide each student a school specific version of the taxpayer receipt.  How is money spent?  This would give applicants, students, faculty, staff and alumni a good sense of the school's priorities.  At the same time, the budget could disclose the law school's relationship to the central university.

I'd largely dump the substantive & strategic Standards and focus energy on enforcing these disclosure principles.  I'd cancel site visits.  Generally, I think prospective students and consumers would be better off if schools, and States Bars, picked their own paths. But the big purpose to these reforms would be to permit innovation & to reduce costs, which I think crucial to the future of domestic legal education.

Who would be made worse off were we to substitute disclosure for regulation?  Current faculty members, prospective faculty members, and (I think) practicing lawyers, all of whom would expect to see lower rents.  Also, perhaps, we'd reduce the likelihood of law professors and administrators taking politically unpopular positions, and representing politically unpopular clients.  This strikes me as a cost that is worth bearing, though many of my friends and colleagues, who are both wise and reasonable, disagree.

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If you are in San Francisco for the AALS Meeting in 2 weeks, check out the AALS Insurance Law Section's program on behavioral economics and Insurance regulation on Saturday, January 8th from 10:30 AM-12:15 PM in the Hilton. Daniel Schwarcz (Minnesota) will be moderating the following panel:

Tom Baker (University of Pennsylvania Law School);

Michelle E. Boardman (George Mason University School of Law);

Russell Korobkin (University of California, Los Angeles School of Law);

Joshua C. Teitelbaum (Georgetown University Law Center)

As an editorial aside, there is still much good work to be done in the application of behavioral economics to law, particularly as this field grows out of its adolescence.  We are past the stage of whether behavioral biases and cognitive limitations affect individual decision-making and moving to much more difficult questions such as: which of the laundry list of biases is at work on any given decision?  When and to what extent does a particular bias affect a particular decision?  How do different groups of inviduals exhibit different biases?  The low hanging fruit has been picked clean.  There are lots of data in all sorts of fields showing anomalies inconsistent with rational actor models.  But the challenge is now to move beyond speculating that a particular bias causes the anomaly and then proposing a policy remedy towards providing clearer links between particular biases and particular changes in behavior.  If the easy pickings are gone, there is still a lot of ripe fruit higher up in the tree.  Check out this section meeting!

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The "free to choose" blogposium, with many interesting contributors both pro and con behaviorial L&E, is here.  Do give it a look.

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Almost all economists, and certainly most of the well-cited ones, are quantitative empiricists now (and really a particular kind of empiricist, now they don't do big regressions, they look for instruments or experiments) - that's up from circa zero empiricists 50 years ago.  Political science is a bit more heterogeneous, but APSR is almost exclusively the domain of quantitative empiricists, leading some in that field to observe, as Brian Leiter did yesterday re empirical legal studies, that the field is risking becoming arcane and narrow (here's Josh Wright and Professor Bainbridge on it too). 

When will law follow suit?  I think it will take a while, not least because the sort of state of the art that people with Ph.Ds are expected to do is a very far cry from the sort of work almost any law professor could be expected to do.  I like my colleagues in the Finance Department, in other words, but I don't submit to the Journal of Finance (here's the latest edition - some of the subjects are of interest, but do have a look at the methods sections).  In a discipline where only a tiny minority of the faculty have social science Ph.Ds, the tipping point towards technical empiricism is harder to identify than it probably is for economics and political science ... and that's not counting the possibility of buyer's remorse in those fields, or in this one, the conflation of the Ph.D with the ability or desire to do empirical work, the prospect that a subgroup will go down an unproductive rabbit hole (as far as I can tell, the law and courts people are still trying to decide whether the law constrains people, especially judges), and so on. 

But look, corporate law and law and economics have been acquainted with empiricism as long as anyone, and one way of looking at how ELS is doing would be to see how those scholars are being cited, and for that we might consider Leiter's own invaluable empirical research.

Here's the corporate law list:

On which I count between 2 and 4 empiricists.  Here's the law and economics list:

On which I count between 4 and 6 (though I may be missing some).  For a total of between 6 and 10 out of 31.  This is the senior list, but I've got to tell you, I don't think lists of juniors would be that different (you could look at the youngest members of Leiter's list and consider whether they would characterize themselves as empiricists or not).  And those are the most economically-oriented fields.  With everyone at every school doing scholarship now, I predict that there will be many scholars who write and cite work that isn't empirical, or the kind of empirical that social scientists understand as empirical, for years.  Of course, social scientific empiricists won't care who cites them if they get jobs that they like, but still, you take the point.

Anyway, I'm not sure what to make of this.  Nobody wants solely doctrinal scholarship or totally ungrounded theory.  I do some "empirical" work, but I do it to be an upstanding member of the community, to take first cracks at developing data that someone else might use, to add context to nonempirical papers, and to steel myself to keep reading that literature.  I wouldn't advise anyone else to do anything more than that, unless they've got their Ph.D and go to social science conferences, but your mileage may vary.

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Disputes about the substance of marriage have obscured questions about the statutes governing marriage procedure.  The states license marriages under statutes that assumed fairly standard forms during the twentieth century.  

Banns developed in England to prevent clandestine marriages which undercut parents' and communities' ability to stop objectionable marriages.  Licensing emerged in the U.S. as an improvised replacement, given the lack of a state church to supervise a regime of banns.  Couples have, nonetheless, for generations defeated efforts to stop them from using state law to formalize their relationship. 

In his memoir of growing up in Wharton, Texas, the late playwright Horton Foote recounts the story of his parents' marriage against firm parental disapproval by his mother’s parents.  Albert Horton Foote and Harriet Gautier Brooks sneaked over to a nearby Texas town called El Campo, got a license, and came back to Wharton, where a minister married them in a house six blocks from Harriet’s parents' house.  They set up housekeeping in Wharton and were snubbed by her parents until the day her mother called and said, "I thought I'd come over to see you this afternoon if you're going to be home."  Her mother had yielded to the hardy practice of couple autonomy.

Horton Foote's parents were tame compared with the couples who went to "Gretna Greens," or to Las Vegas, to marry despite reasons (often, the age of a girl) for someone to intervene and stop them.  The record of marriage is clear about one point.  Marriage licensing simply does not support goals of marriage regulation and preservation of tradition.  It never has, not in Las Vegas in the 1960s, not in Horton Foote's Texas, and not today. 

What does licensing do?  Very little.  It asserts no control over the decision-making by couples. It generally does not impose health checks on the parties.  It doesn't force disclosure by one person to the other.  Waiting periods are almost all gone.  Historically, licensing has served as a means to support anti-miscegenation laws and forms of religious discrimination.  It's hard to view marriage licensing as useful, except insofar as it serves the purpose of formality, open consent to marriage, ceremonial affirmations celebrated by a community, and clear records.  

At its best, licensing is about the state's serving as a facilitator of the creation and recognition of a legal status.  In that way, the state is doing something similar to what it does when it facilitates the formation of other legal relationships, such as the corporation or binding agreements, all subject to autonomous party choices for their creation.  Indeed, the Massachusetts marriage statute avoids the term, "license."  Massachusetts’s statutory usage recognizes the parties’ control over the marriage and the role of the state as a facilitator, recorder, and source of publicity.

Despite the similarity of the state role in marriage formation to its role in facilitating other legal relations, the states have been timid and unimaginative about creating innovations in marriage procedure.  Marriage statutes contain odd rigidities, little regulatory clout, and a continuing insistence that couples use the marriage license within the state that issues it.  Licensing sounds like something that protects a tradition, even as its main use has been to exclude some pairings, create needless complications for couples who are physically separated, and defeat couples' occasional preferences about ceremonial details. 

Adam Candeub and I have posted a paper exploring the possibility of bringing a new energy to the states' facilitative role in marriage solemnization.  For shorthand, we've labeled the idea e-marriage.  We suggest that, with careful study and deliberation, states could enhance their facilitative and record-keeping role by modernizing the statutes governing marriage ceremonies.  For marriages of same-sex couples, states that authorize the marriages could take the next step in the logic of federalism by allowing couples in distant states to use their marriage-authorization laws. 

For controversial marriages, states that do not recognize them would still be able to refuse recognition. But the couples could engage in an expressive activity, with legal meaning in many jurisdictions, in their own community.   Couples already travel to marry in places like Massachusetts, returning to reside in states that refuse their marriage recognition, so such couples clearly value an official legal blessing provided by another jurisdiction.

We have tentatively planned a conference on November 12, 2010, in East Lansing, to explore the many ramifications of our idea.  We will have legal scholars, legislators, economists, and English professors gather for a stimulating discussion of the possibilities for innovation in the regime governing marriage formation.  We'd welcome suggestions for types of relevant commentary and for specific names of persons from business schools with expertise in evaluating proposed business models, experts in e-government and government record-keeping and statistics generation, and any other source of insight about the notion of improving current marriage formation procedure.

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I’ve been watching a lot of Winter Olympics with my six year old. I’ve developed an ambitious research agenda on the law and economics of the Winter Games and also thought about a few implications for scholarship:

1. Medal prediction model: I’ve developed the following complex model to predict the medal haul of each nation:

Medal count of a nation = 1/total medals * (gross annual production of cheese * gross winter sales of spandex + 1.34 * total male population named “Lars” or “Jan”).

How has the model done in predicting medals in past years? Wunderbar!

There have been a few kinks that need to be worked out. The model tends to under-predict the medal count of China and Korea. It also tends to predict too high of a medal count for Denmark, Metallica, and 80’s übershow Airwolf.

2. The Efficient Markets Hypothesis: In a surprising twist, the notes to Liechenstein’s national hymn, the Banksekretenlied, seem to predict that country’s stock market performance over the past year. But I am hesitant to publish my results for fear of no longer being invited to the Vaduz Junior Scholars Workshop next year.

3. Optimal Scholarship: It has been sobering to watch the games and realize that years of training by an elite athlete can all go down the tube based on tiny split second errors. Lesson learned: I make one Blue-Book error and I’m never going to teach at Oxford.

4. Training runs: I’ve also decided to videotape all of my workshop talks and invite commentators to give color analysis live. Here is an example:

“Gerding explodes out of the gate with his talk. Great, great form by the youngster. Oh, what a nice tight line he takes through the tricky methodology section. Picking up speed. Picking up speed.

Oh no! Disaster! He catches an inside edge trying to run through the Regressions. He’ll never catch Ron Gilson now. He’ll have to wait 4 more years to get another shot. You can just see the disappointment on his face.

At least he’ll get to keep the spandex.”

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I've been working away on a draft symposium piece for the NeXus Journal at Chapman where I present a model of deregulation that explains banking deregulation in Sweden leading up to that country's financial crisis in 1990.  The model may also help us understand how the deregulation of Freddie & Fannie, the repeal of Glass Steagall, and bank OTC derivatives trading contributed to our own financial crisis. 

The piece is called Deregulation Pas de Deux: Dual Regulatory Classes of Financial Institutions and the Path to Financial Crisis in Sweden and the United States and can be downloaded here.  Here's the abstract: 

This article presents the following model of two regulatory classes of financial institutions interacting in financial and political markets to spur deregulation and riskier lending and investment, which in turn contributes to the severity of a financial crisis:

1) Regulation creates two categories of financial institutions. The first class faces greater restrictions in lending or investment activities but enjoys regulatory subsidies, such as an explicit or implicit government guarantee, while the second class is more loosely regulated and can make riskier loans or investments and earn additional profits.

2) These additional profits leads to calls for deregulation to enable the first class to participate in lucrative lending or investment markets.

3) Deregulation allows the first class of institution either to compete with the second class in formerly restricted markets or to invest in the second class, in either case, while retaining its regulatory subsidy.

4) Deregulation spurs additional lending in two ways:

i) subsidy leakage, which occurs when the first class can use subsidized funds to make riskier investments (including investments in the second class) without regulation compensating for moral hazard; and

ii) displacement, which occurs when subsidized competition pushes the second class into riskier market segments.

5) Additional lending increases leverage in the financial system and fuels a boom in an asset market.

6) Asset prices collapse and threaten the solvency of financial institutions.

This model explains financial deregulation in Sweden in the 1980s, which led to a 1990 bank crisis. The model also provides a framework for scholars to examine whether deregulation in the United States involving the following dual classes of institutions contributed to the current crisis:

¶ GSEs (Freddie Mac and Fannie Mae) and sponsors of “private label” mortgage-backed securities;

¶ Commercial and investment banks with respect to the Glass-Steagall repeal; and

¶ Banks and hedge funds with respect to OTC derivatives.

The model would support the premises of the proposed Volcker Rule, which would restrict investment activities of banks, but suggests that imposing those restrictions may not be sustainable in the long run.

Comments are welcome!

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While there are behavioral biases in entrepreneurial finance – e.g., entrepreneurs are overconfident and VCs fall prey to the availability heuristic – they don’t seem as prevalent as in public securities markets, or at least don’t lend themselves to the same calls for regulatory reform. Still, with recent notable works like Nudge and thought-provoking posts like this one from Josh Wright (on Jones v. Harris), it’s hard not to spend some time figuring out into which camp – rational choice or behavioral law and economics – you more firmly plant your flag.

The behavioral camp has much to offer. But several observations made by others persuade me not to dip my toes too deep into the behavioral waters. Here’s a quick list:

--Regulatory responses are challenging because different individuals have different biases, and even the same individual may have competing biases that negate each other;

--While individuals have biases, so do regulators (see Choi & Pritchard comparing the biases of investors with those at the SEC);

--The rational choice model works pretty well most of the time (and critics sometimes seem to forget that it’s only meant as a model, not a full-on reflection of the real world); and

--Taking into account behavioral biases in policy prescriptions removes incentives for correction. Tom Ulen has a nice discussion of this in a short article at 10 Lewis & Clark L. Rev. 177, 179-80 (2006) (it doesn’t appear to be on SSRN). There he differentiates between our “software” biases that can be corrected, including the entertaining Monty Hall three-door problem, and our “hardware” biases that are much harder to correct. Regulatory responses seem more appropriate for hardware biases, education for software biases.

There are also persuasive critiques of the rational choice model, and they get a lot of play these days. But regulatory responses based on the behavioral model are far from easy or perfect, and rational choice has proved highly instructive in my work on sophisticated entrepreneurial parties. I for one am not ready to toss it out just yet.

UPDATE: I should put this post in context, since the topic is like so 2005 (or whenever). I just finished Nudge (where have I been, I know!) and had sort of a negative gut reaction to it. To me the paternalism part overwhelmed any mitigating libertarian influence. I'm not a raging libertarian or anything, but I find myself uncomfortable with paternalism in many contexts. I'll get a chance to flesh out the issue more when Todd Henderson visits my class in a couple of weeks to talk about his provocative new paper The Nanny Corporation. Todd's paper first argues that paternalism for corporate employees is inevitable because stakeholders will demand it (e.g., to cut health care costs), then engages in a comparative analysis of who should supply it, markets or the state. I have doubts about the premise, but assuming its validity, I agree with Todd that markets are the preferential provider.

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In writing my latest article, "The Windfall Myth," I coded the use of the word "windfall" in various contexts:  media, court cases, and congressional testimony.  This post will report the findings of my media research.  I used electronic databases that contained articles from the New York Times and the Wall Street Journal to read articles in which the word "windfall" was used between January 1, 2007 and July 1, 2007.  I then coded these uses to attempt to categorize the types of economic gains that were labeled as windfalls in these articles.  In alphabetical order, the following groups emerged:  Attorney Fees, Breach of Contract, Business Profits, Campaign Finance, Charitable Gifts, Criminal Evidence, Gambling, Government Budgets (Government Receipts and Government Payment), Illegal Kickbacks, Inheritances, Intellectual Property, Litigation, Oil & Gas (Foreign Oil & Gas and Domestic Oil & Gas), Real Property, Salaries and Bonuses, Securities (Investments and Entrepreneurship), Other (nonmonetary), and Unspecified.  Which were the big targets of windfall rhetoric?

(findings below the fold)

The paper splits out the NYT and the WSJ dataset, but for the sake of the blogging short form, I'll just include the combined dataset here.  The NYT had 117 instances in 110 documents (excluding proper names).  Eerily similar, The WSJ had 116 instances in 101 documents.  The combined dataset then had 233 instances.  Of those, 155 (2/3 or just over 66%) were what I term "marketplace gains":  Oil & Gas, Securities, Business Profits, Salary/Bonuses, Real Property, and Intellectual Property.  For purposes of the paper, I call these alleged Excess Earned Windfalls.  I was surprised that lawful, earned profits were being characterized as windfalls.  Historically, windfalls were profits brought to you by the vagaries of the winds, and in law, windfalls are measures of damages we try to avoid awarding because they will grant double recoveries or compensated nonexistent losses.  Here, these profits are earned, and even negotiated.  They generally do not even fall into the category of contract payments we frown upon because of mistake or an exogenous shock that renders the contract void. 

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• Here's a gloss on the Federal Circuits new limits on business method patents.  Here's a good one too, from Michael Risch.
• The usual timeline is collapse, congressional hearing, criminal investigation, civil suits.  Good to see that Bear is following the script.
• Speaking of politics, Washington DC and environs account for 15 of the 20 zip codes that donate the most of House members.
• Parade!

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