Here is an old saw: the best way to predict bubbles is to look at the industry to which Harvard MBA grads are flocking. I used this as a laugh line when I spoke to David’s students at Wharton in October. Now Matt O’Brien at the Washington Post Wonkblog extends the analysis to Crimson undergrads.
O’Brien’s article is the latest salvo in the analysis of what makes “Organization Kids” flock to finance. Kevin Roose’s Young Money made a splash when it was published earlier this year. Academics looking to understand students should consider delving into what makes students who enter finance and law with more than a dismissive lament of “kids these days.” Indeed, the modern university seems designed specifically to create organization kids. Think of how the bizarre gatekeeping rituals of college admissions filter down to create an achievement junky culture that begins in middle school if not earlier. Students and parents seek to anticipate the divinations of middle aged oracles who themselves attempt to divine meaning from personal statements and lists of extracurriculars.
The Harvard MBA Indicator is a fun parlor game. But it also suggests that in trying to understand deep questions such as why bubbles begin and how financial institutions operate, we might look at a broader set of disciplines than just economics. Some very interesting legal scholarship on bubbles, financial markets (think Stuart Banner’s history) and financial institutions (Annelise Rile’s sociological studies of Japanese firms) serves as examples of the possibilities. If academics lament their students being organization kids, they should have a little self-awareness and step outside their own institutional comfort zone.
Law and Society has its usual strong contingent of corporate law panels - Anne Tucker has the details. I'll be presenting at the conference early early early Sunday morning on international financial regulation; do come say hello, if you like that sort of thing.
This Thomas Edison quote comes from Paul Volcker in a short interview in the Washington Post Wonkblog. The source of Tall Paul's consternation: the decline of schools of public administration in universities and the shift in many of these schools from "public administration" to "public policy." (Here is one example of what Volcker describes: the lawsuit (over 5 years ago) brought against Princeton by the heirs to the A&P fortune that alleged that the Woodrow Wilson School was not using an endowment to educate students for careers in government).
Everybody likes to talk about big issues of war and peace and how we take care of poor people and what we do about other social problems in the United States or elsewhere. They do all this talking but they too seldom know how to implement what they’re talking about.
The legal academy ought to take heed. Much of the interesting spadework in financial regulation scholarship involves questions of institutional design rather than substance. That is, not what is the right legal rule, but how do make sure agencies have the capacities and incentives to write, interpret and enforce rules in the right way and over the long haul.
In terms of education, should law schools look to fill part of the gap in teaching public administration that Volcker identifies?
Increasing the space for public administration or public policy in the law school curriculum faces some challenges. One challenge is economic: how much gold is in them hills? Will this help students find jobs and build careers? A more daunting challenge is philosophical. Law schools largely teach rhetoric. Public administration/policy programs are about making decisions. Just because the first word is the same doesn't mean that policy arguments and policy analysis belong to the same genus.
Still, there are some pearls for law schools even in Volcker's short interview, for example, teaching statistics and how statistics should and should not be used.
After spending a great few days in Boston, I decided to broaden my reading list. (Law & Society seems to attract about 10x the number of hipsters as AALS). A few samples:
He loves to take the punch bowl away: Ben Bernanke questions meritocracy (among other things), at, of all places, Princeton's commencement.
Too close to home: Does Colorado have a republican form of government? Or did a anti-tax amendment to the state constitution deprive us of one?
Stride la vampa!
A few links to tide you over during your tryptophan-induced torpor:
- Many law faculty dream (or so I’ve heard) of splitting their school in two and separating themselves from various colleagues (mimicking the good bank/bad bank model). Well Penn State is doing just that with its two campuses. (See the Dan Filler’s short post at the Faculty Lounge and the comments thereto);
- In the NY Review of Books, Elaine Blair reviews Every Love Story is a Ghost Story, D.T. Max’s bio of David Foster Wallace. It’s fascinating discussion of how Wallace drew on his own experience in addiction recovery, to create not only characters but a map out of the intellectual wilderness of “self-consciousness and hip fatigue” in American culture high and low;
- David Nasaw has slices of his new book, The Patriarch: The Remarkable Life and Turbulent Times of Joseph P. Kennedy at Slate;
- In the New Yorker, Nick Paumgarten explores the eternal musical afterlife in the Grateful Dead tape archives;
- Steve Bainbridge on vino for Thanksgiving (what about post-Thanksgiving?) and shareholder empowerment and banks.
- Track grandma’s flight home at FlightRadar24.
So, this post is sort of a stretch for me, and I need to make some disclaimers: (1) I love dogs and am lovingly tolerant of cats; (2) I eat animals, though not dogs, and make use of animal by-products; (3) I prefer to eat animals that have been humanely raised and killed, but do not go to great lengths to do so; (4) I'm not particularly against gun control law, though I have always had guns in the house; and (5) I'm a poodle-person, not a pit bull-person.
So, the ABA House of Delegates has passed a resolution urging cities and states to pass dangerous dog laws that are breed neutral. (Friend of the Glom Rebecca Huss is on the committee that wrote the report.) OK, so let's get a sense of what a breed-discriminatory law looks like compared to a breed-neutral one. (I will say that the report is a little light on breed-discriminatory cites and I could only find a few more, suggesting these laws may not be that prevalent.)
Illinois (breed-neutral) -- Counties must pass ordinances in line with Animal Control Act, which provides for a process to determine if a dog is a "vicious dog," which includes investigations, medical records, interviews, expert testimony, etc. The burden is on the petitioner, and the standard is "clear and convincing evidence." If a dog is deemed a vicious dog, the owner must pay a fine, the dog must be spayed and microchipped, and the dog must be fenced. if not, the dog will be impounded. If the impoundment isn't appealed, then the dog is euthanized. Sounds like sufficient (some might say "due" process).
Prince Georges County, MD (breed-discriminatory) -- prohibits the ownership or keeping of Staffordshire Bull Terriers, American Staffordshire Bull Terriers, American Pit Bull Terriers, or "dogs which have the appearance of being predominantly of the breed of" those listed breeds. (The county also prohibits wild animals, poisonous snakes and reptiles, hogs, skunks, raccoons, possum, foxes, bears, wolves and any member of the cat family besides the domesticated cat.) Dogs that meet that definition are impounded, and then you know what happens then.
So, the ABA report argues that laws like the Prince George's County ordinance are bad for a number of reasons, which seem to fall into two categories: the law is stupid and the law is unfair.
Bad Idea Jeans Law -- According to the ABA report, a study found that the PGC lawmakers must have ahd on their "bad idea jeans" because the no pit bull law has been extraordinarily expensive for PGC. And, if this was a nationwide law, it would cost hundreds of millions of dollars to impound and euthanize every dog "which has the appearance of" a pit bull. Perhaps 7% of the nation's dogs would fit this definition. And, if the goal is to prevent dog attacks/dog bites, this doesn't seem to be the best way to do this. This may be a variation of the "stop and frisk" argument. If you have to stop and kennel every dog that looks like a pit bull, this takes resources away from the problem. And, unfairly targets innocent dogs, which brings us to. . . .
Unfair -- vague. What does "have the appearnce of a pit bull terrier" mean? I vaguely remember something from first-year con law on "void for vagueness." Of course, this has to be unfair to the owner, not the dog. Dogs are property. I saw this repeatedly and make my Torts students say it out loud. I knwo that bar examiners (and Torts exam writers) like to make you forget that dogs are property for purposes of Torts, but the law treats them as property. Any duties we owe to dogs are derivative of the duty we owe their owners. Which brings us to. . . .
Unfair -- due process. So, this argument is that before the State deprives someone of their property, the State must afford some sort of "process." The Illinois state law requires a lot of process before declaring a dog to be "vicious." The PGC ordinance just says that all pit bull-like dogs are prohibited, assuming that they are all vicious or dangerous. So, I'm on board with saying that before the State takes a dog I own and destroys it, I need to be afforded process. But I'm not sure about dogs I don't own yet. The PGC grandfathers in already-owned pit bull-like dogs, though there is some fencing, spaying sorts of requirements. Otherwise, it just prohibits them, like other sorts of property, including poisonous snakes, foxes, raccoons, hogs, etc. Each individual fox may not be dangerous, but they are all prohibited. I think I'm ok with that. I'm not sure how I feel about people who move to PGC with previously-owned pit bulls though. There, my thinking gets a little clouded. I imagine a pit bull rescue center on the county line, with foxes and chickens and other things. But lastly. . . .
Unfair -- generally (not law-based). This argument is pit bulls are not solely responsible for all dog attacks, and studies are conflicted as to whether they are responsible for more than their fair share. Pit bull owners definitely think that these dogs have gotten a bum rap and so owners who wish to have them should be allowed to have them. I would put this argument in the same pile as residents who want to have chickens or clotheslines. There are a lot of good reasons to have backyard chickens and clotheslines, so I would urge folks in a community to allow residents to do that. But, I'm not sure I have a moral right to these things or even a moral right to be able to keep a certain kind of dog within city limits. (that doesn't sound very American, though.)
Finally, what's sort of interesting to me is that the base of the argument is that "pit bulls don't attack people; bad pit bull owners negligently let pit bulls attack people." Pit bulls aren't inherently vicious; bad owners mistreat/don't train pit bulls, who then may become vicious. This is sort of like guns, right? Except guns can't get free and round around.
Here is a highly productive way for business law professors to procrastinate from grading exams:
The National Bureau of Economic Research just circulated a new version of a paper that provides a medieval complement to the law & finance literature and to Gilson's lawyer as transaction cost engineer idea. The paper by Davide Cantoni and Noam Yuchtman presents evidence that the training of commercial lawyers by new universities contributed to the expansion of economic activity in medieval Germany. Here is the abstract:
We present new data documenting medieval Europe's "Commercial Revolution'' using information on the establishment of markets in Germany. We use these data to test whether medieval universities played a causal role in expanding economic activity, examining the foundation of Germany's first universities after 1386 following the Papal Schism. We find that the trend rate of market establishment breaks upward in 1386 and that this break is greatest where the distance to a university shrank most. There is no differential pre-1386 trend associated with the reduction in distance to a university, and there is no break in trend in 1386 where university proximity did not change. These results are not affected by excluding cities close to universities or cities belonging to territories that included universities. Universities provided training in newly-rediscovered Roman and Canon law; students with legal training served in positions that reduced the uncertainty of trade in medieval Europe. We argue that training in the law, and the consequent development of legal and administrative institutions, was an important channel linking universities and greater economic activity.
A very interesting read.
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Time Magazine’s “person of the year” is the “protestor.” Occupy Wall Street’s participants have generated discussion unprecedented in recent years about the role of corporations and their executives in society. The movement has influenced workers and unemployed alike around the world and has clearly shaped the political debate.
But how does a corporation really act? Doesn’t it act through its people? And do those people behave like the members of the homo economicus species acting rationally, selfishly for their greatest material advantage and without consideration about morality, ethics or other people? If so, can a corporation really have a conscience?
In her book Cultivating Conscience: How Good Laws Make Good People, Lynn Stout, a corporate and securities professor at UCLA School of Law argues that the homo economicus model does a poor job of predicting behavior within corporations. Stout takes aim at Oliver Wendell Holmes’ theory of the “bad man” (which forms the basis of homo economicus), Hobbes’ approach in Leviathan, John Stuart Mill’s theory of political economy, and those judges, law professors, regulators and policymakers who focus solely on the law and economics theory that material incentives are the only things that matter.
Citing hundreds of sociological studies that have been replicated around the world over the past fifty years, evolutionary biology, and experimental gaming theory, she concludes that people do not generally behave like the “rational maximizers” that ecomonic theory would predict. In fact other than the 1-3% of the population who are psychopaths, people are “prosocial, ” meaning that they sacrifice to follow ethical rules, or to help or avoid harming others (although interestingly in student studies, economics majors tended to be less prosocial than others).
She recommends a three-factor model for judges, regulators and legislators who want to shape human behavior:
“Unselfish prosocial behavior toward strangers, including unselfish compliance with legal and ethical rules, is triggered by social context, including especially:
(1) instructions from authority
(2) beliefs about others’ prosocial behavior; and
(3) the magnitude of the benefits to others.
Prosocial behavior declines, however, as the personal cost of acting prosocially increases.”
While she focuses on tort, contract and criminal law, her model and criticisms of the homo economicus model may be particularly helpful in the context of understanding corporate behavior. Corporations clearly influence how their people act. Professor Pamela Bucy, for example, argues that government should only be able to convict a corporation if it proves that the corporate ethos encouraged agents of the corporation to commit the criminal act. That corporate ethos results from individuals working together toward corporate goals.
Stout observes that an entire generation of business and political leaders has been taught that people only respond to material incentives, which leads to poor planning that can have devastating results by steering naturally prosocial people to toward unethical or illegal behavior. She warns against “rais[ing] the cost of conscience,” stating that “if we want people to be good, we must not tempt them to be bad.”
In her forthcoming article “Killing Conscience: The Unintended Behavioral Consequences of ‘Pay for Performance,’” she applies behavioral science to incentive based-pay. She points to the savings and loans crisis of the 80's, the recent teacher cheating scandals on standardized tests, Enron, Worldcom, the 2008 credit crisis, which stemmed in part from performance-based bonuses that tempted brokers to approve risky loans, and Bear Sterns and AIG executives who bet on risky derivatives. She disagrees with those who say that that those incentive plans were poorly designed, arguing instead that excessive reliance on even well designed ex-ante incentive plans can “snuff out” or suppress conscience and create “psycopathogenic” environments, and has done so as evidenced by “a disturbing outbreak of executive-driven corporate frauds, scandals and failures.” She further notes that the pay for performance movement has produced less than stellar improvement in the performance and profitability of most US companies.
She advocates instead for trust-based” compensation arrangements, which take into account the parties’ capacity for prosocial behavior rather than leading employees to believe that the employer rewards selfish behavior. This is especially true if that reward tempts employees to engage in fraudulent or opportunistic behavior if that is the only way to realistically achieve the performance metric.
Applying her three factor model looks like this: Does the company’s messaging tell employees that it doesn’t care about ethics? Is it rewarding other people to act in the same way? And is it signaling that there is nothing wrong with unethical behavior or that there are no victims? This theory fits in nicely with the Bucy corporate ethos paradigm described above.
Stout proposes modest, nonmaterial rewards such as greater job responsibilities, public recognition, and more reasonable cash awards based upon subjective, ex post evaluations on the employee’s performance, and cites studies indicating that most employees thrive and are more creative in environments that don’t focus on ex ante monetary incentives. She yearns for the pre 162(m) days when the tax code didn’t require corporations to tie executive pay over one million dollars to performance metrics.
Stout’s application of these behavioral science theories provide guidance that lawmakers and others may want to consider as they look at legislation to prevent or at least mitigate the next corporate scandal. She also provides food for thought for those in corporate America who want to change the dynamics and trust factors within their organizations, and by extension their employee base, shareholders and the general population.
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Adding to Peter's posts about law schools cultivating the emotional skills of law students, perhaps we should add humility to the list. Ross Douthat penned a compelling and unsettling column in the New York Times last week that used Jon Corzine as tragic figure to talk about the failings of our larger meritocratic enterprise. He writes:
In meritocracies, though, it’s the very intelligence of our leaders that creates the worst disasters. Convinced that their own skills are equal to any task or challenge, meritocrats take risks that lower-wattage elites would never even contemplate, embark on more hubristic projects, and become infatuated with statistical models that hold out the promise of a perfectly rational and frictionless world.
Hubris is in great supply at law schools, elite and otherwise, and on law faculties too. Can one be both ambitious and humble? Can law schools both inspire to dream large dreams -- personal and social -- while still warning about our own fallibility and the limitations of law?
I am grateful for Usha’s latest post about her ambivalence to law and emotions scholarship because it provides an opportunity to engage in extended public discussion about what are some of the legal payoffs to (business) law professors of learning and teaching about emotions in general and happiness in particular.
I concur with Usha that it’s a busy time of the academic year as the semester is coming to a close and many of us will soon be traveling for the holidays (and some of us have traveled to participate in conferences). Of course, most of us feel that we are if not always, then at least constantly busy. In their article titled Idleness Aversion and the Need for Justifiable Busyness, Christopher K. Hsee, Adelle X. Yang, and Liangyan Wang present experimental evdience that busier people self-report being happier. The following is a video short about how the days are long, but the years are short.
I am quite sympathetic to Usha’s opinion that while happiness research is “all fascinating and it shapes my daily choices and reaffirms (or causes me to question) my life choices. Happiness research goes to the core of myself as a person. Still I wonder: what does this have to do with law?” This is partly because her view is one that many people including myself from a couple of years ago share. As Usha pointed out, I’ve already written a number of law review articles and some peer-referred articles about law and emotions including but not limited to happiness. Rather than repeating any of those article’s themes (those interested can find all of them available here), I’ll share five concrete responses to the specific challenge that Usha issued about what are the legal implications of and payoff to emotions and happiness research.
First, much of law concerns and is about human behavior: how to discourage anti-social human behavior and encourage pro-social human behavior. In attempting to change human behavior, law is and must be predicated upon a theory of human behavior. The theory can be Oliver Wendell Holmes’ bad man or neoclassical economics’ much caricatured rational actor. Whatever that underlying theory of human behavior is that law is based upon, that theory must address human JDM (Judgment and Decision Making) because in order for the law to change human behavior the law must change the judgments and/or decisions that humans make. It just so happens there has been a recent flood of research about how emotions in general and happiness in particular influence human JDM. This research is diverse and scattered across many disciplines, including anthropology, economics, finance, neuroscience, marketing, philosophy, political science, psychology, and sociology. Of course, this plethora of non-legal interest and research does not have to mean there are legal implications of new understandings about how emotions and happiness shape human JDM. But at least some law professors can and should read this rapidly growing literature to digest it and see if any of it has legal implications or payoffs. Professor Emeritus and former Dean of Stanford Law School and current President of the William and Flora HEwlett Foundation, Paul Brest teaches a graduate course on JDM at Stanford University. He has co-authored with Professor of Law and Director of the Ulu Lehua Scholars Program at the William S. Richardson School of Law in Honolulu, Hawai'i and Senior Research Fellow at the Center for the Study of Law and Society at the University of California, Berkeley, Linda Hamilton Krieger a book titled Problem Solving, Decision Making, and Professional Judgment: A Guide for Lawyers amd Policymakers. Chapter 13 of their book analyzes complexities about decision-making including predicting future well-being and Chapter 16 is titled The Role ofAffect In Risky Decisions.
Second, much of business law is premised upon the neoclassical economics model of utility maximization or the behavioral economics challenge to that model. In either case, business law can benefit from recent work on happiness economics because happiness economics raises a more fundamental challenge to and radical critique of neoclassical economics than does behavioral economics. Some view happiness economics as being a proper subset of behavioral economics, while others view happiness economics as being an extension of behavioral economics. In any event, behavioral economics points out that people have bounded rationality, willpower, and self-interest. The theoretical core of behavioral economics is an article titled Prospect Theory: An Analysis of Decision under Risk by Daniel Kahneman and Amos Tversky. This is an article which is likely to have been cited more times than it has been read by law professors and certainly more times than it has been understood by law professors as evidenced by overly broad attempted legal applications.
Happiness economics points out how people often systematically make decisions that fail to maximize their experienced happiness ex post as opposed to their anticipated or predicted happiness ex ante. This robust empirical and experimental finding means that at least in principle there is room for some other party, public or private, to help improve (or take advantage of) people’s JDM. In a recent working paper that is a forthcoming article in the American Economic Review, titled What Do You Think Would Make You Happier? What Do You Think You Would Choose?, Daniel Benjamin, Ori Heffetz, Miles S. Kimball, and Alex Rees-Jones present survey evidence that although what people choose hypothetically and what they predict would maximize their SWB (Subjective Well-Being) typically coincide, there are systematic reversals. They identify such factors as autonomy, family happiness, predicted sense of purpose, and social status to help account for hypothetical choices while controlling for predicted SWB. Their methodology has a number of possible legal and policy applications, including the development of aggregate measures of happiness. Another example is the application of their approach to reconcile the tension between an empirical finding in the article The Paradox of Declining Female Happiness by economists Betsey Stevenson and Justin Wolfers of declining average SWB of American women since the 1970s, both in absolute terms and in relative terms compared to men, with a common intuition that expanded political and economic freedoms for American women have made American women better off. Survey respondents who were asked to rank living in a world with or without such increased political and economic freedoms for women. Significantly more respondents choose to live in a world having expanded political and economic freedoms for women despite believing that a world without such expanded political and economic freedoms would make them happier than the opposite. Their National Bureau of Economic Research working paper 16489 titled Do People Seek to Maximize Happiness? Evidence from New Surveys contains additional examples and more details.
Third, research into two specific emotions, namely fear and greed finds that participants in financial markets are sometimes emotional and sometimes unemotional because they engage in both emotional and unemotional types of mental processing in responding to ever-changing market circumstances. In a series of articles titled,
finance professor Andrew W. Lo posits that many tenets of rational expectations and the so-called efficient markets hypothesis fail to hold always, despite serving as useful benchmarks of what might eventually happen under certain idealized conditions. He speculates that an evolutionary theory of punctuated equilibria involving rare but big environmental shocks resulting in mass extinctions and eruption of new species could apply to financial markets. As Lo points out, law and policy that is based upon assuming rationality or more precisely lack of emotionality is going to be inapt during financial crises. Similarly, law and policy that is based upon assuming emotionality is going to be inapt during financially calm times. His Adaptive Markets Hypothesis implies that effective law and policy should adapt in light of changing financial markets and their participants. Examples of such adaptive business law and policy include:
(1) Countercyclical capital requirements.
(2) Collection, communication, dissemination, publication, and transparency of information about accurate systemic risk measures.
(3) Creation of a Capital Markets Safety Board (CMSB), analogous to the National Transportation Safety Board which conducts an independent investigation of all transportation accidents, in order to perform definitive forensic analysis of past financial crises. The CMSB would be made up of “teams of experienced professionals— forensic accountants, financial engineers from industry and academia, and securities and tax attorneys—that work together on a regular basis to investigate the collapse of every major financial institution.”
As Professor Lo cogently observes,
“The fact that the 2,319-page Dodd-Frank financial reform bill was signed into law on July 21, 2010—six months before the Financial Crisis Inquiry Commission submitted its January 27, 2011 report, and well before economists have developed any consensus on the crisis—underscores the relatively minor scientific role that economics has played in responding to the crisis. Imagine the FDA approving a drug before its clinical trials are concluded, or the FAA adopting new regulations in response to an airplane crash before the NTSB has completed its accident investigation.”
Fourth, central to effective JDM is the development and practice of skills related to emotions and emotional intelligence. A number of business trade books and business school courses focus on how managers can improve their emotional intelligence and in so doing become more effective organizational leaders. Law school clinical and negotiation casebooks and courses often discuss the importance of recognizing and responding appropriately to emotions in attorneys, clients, judges, juries, and other legal actors. For example, in their chapter, If I’d Wanted to Teach About Feelings, I Wouldn’t Have Become a Law Professor, Melissa L. Nelken, Andrea Kupfer Schneider, & Jamil Mahuad present concrete tools for teaching law students about the importance of emotions in negotiation. Yet much of current American legal non-clinical education teaches students explicitly and implicitly that lawyering is just about logical analysis and not about feelings. For example, in another article titled The Discourse Beneath: Emotional Epistemology in Legal Deliberation and Negotiation, Erin Ryan writes that "[b]y acknowledging the salience of wise emotionality in individual and collective deliberation, lawyers will not only improve their own personal repertoires, but propel the practice of law, negotiation, and policymaking toward new horizons of efficacy." Similarly, a recent book titled How Leading Lawyers Think: Expert Insights into Judgment and Advocacy by Randall Kiser discusses (at pages 75-85) how important emotional intelligence is to legal practice.
Fifth and finally, law professors can and should incorporate more information about emotions into law school. Many law professors and law students share a common discomfort with and disdain for emotions in part because of what many law students and faculty believe it means to think like a lawyer. For example, see page 422 of the article titled Negotiation and Psychoanalysis: If I’d Wanted to Learn about Feelings, I Wouldn’t Have Gone to Law School by Melissa L. Nelken. In her anthropological study of first–year contracts classes at eight law schools, law professor and senior fellow of the American Bar Foundation Elizabeth Mertz found that being taught to think like a lawyer caused students to lose their sense of self as they develop analytical and emotional detachment, resulting from the discounting of personal moral reasoning and values, as they learn to substitute purely analytical and strategic types of reasoning in place of personal feelings of compassion and empathy.
In fact, empathy is an important skill that lawyers can and should learn. In his article, Thinking Like Nonlawyers: Why Empathy Is a Core Lawyering Skill and Why Legal Education Should Change to Reflect Its Importance, Ian Gallacher analyzes pedagogical implications of lawyers communicating a lot with people who are not lawyers, such as clients, jurors, and witnesses.
In conclusion, a better and more nuanced understanding of what roles emotions generally and happiness particularly can play in human JDM, economic behavior, financial markets, legal practice, and legal education can and should inform how law professors conduct academic research and teach law students.
The semester is waning. I've been traveling. It's a busy time. Still, I've read Peter's posts with interest and, time and again, been tempted to put fingers to keyboard to write on the general topic that he's explored so fruitfully in law reviews and blog posts: happiness research.
I've had 2 children in the past 4.5 years, so take this with some salinity: I think happiness research has been the academic development that's had the most impact on me personally in the recent past. I mean, I love the corporate law and securities, don't get me wrong. But hedonics: what makes me happy as a person? A short commute over long commute makes people markedly more happy. People with children say that kids make them happy, but day-to-day kids make you unhappier than being without. Are single people happier than married people? Does the memory of vacation give you more pleasure than the vacation itself? I find it all fascinating and it shapes my daily choices and reaffirms (or causes me to question) my life choices. Happiness research goes to the core of myself as a person.
Still I wonder: what does this have to do with law? Which is the challenge Peter seems to issue, backhandedly, in his post. I don't know that I'm afraid of law and emotions: I just don't see the academic implications of an admittedly fascinating field of research. Cue Abrams and Keren, who say
[Mainstream legal academics ] have not predictably viewed it as a resource for addressing questions within their substantive fields; it is often treated as a novel academic pastime rather than an instrument for addressing practical problems. This reception contrasts sharply with that accorded to two fields that have also challenged dominant notions of (legal) rationality: behavioral law and economics, and the emerging field of law and neuroscience....
Notwithstanding the breadth of its epistemological challenges, law and emotions scholarship can contribute to the familiar normative work of the law—revising and strengthening existing doctrine, improving decisionmaking, and informing new legal policies. Moreover, it can facilitate the less familiar but nevertheless valuable task of using law to improve people’s affective lives.
I don't know. The studies Peter cites about emotion governing financial markets sounds fascinating and worth reading. What's the legal payoff, though? I get that, over time, $6000 spent on a trip to Europe will give me more pleasure than spending $6,000 on a more expensive car. That's useful information to me (although admittedly it just reinforces my prior inclinations). But legal implications?
Except for Arizona and Hawaii, the United States ended this calendar's observance of Daylight Saving Time at 2 a.m. local time today. In a fascinating book titled A Time for Every Purpose: Law and the Balance of Life, Harvard University Byrne Professor of Administrative Law Todd D. Rakoff argues that social regulation of time can and should create more room for people to balance time at work with time away from work.
In the article Losing Sleep at the Market: The Daylight-Savings Anomaly, three financial economists document that in international financial markets, the average Friday-to-Monday return on daylight-savings weekends is much lower than expected, with a magnitude 200 to 500 percent larger than the average negative return for other weekends of the year. This finding is consistent with psychological research about how changes in sleep patterns have impacts on accidents, anxiety, decision-making, judgment, reaction time, and problem solving. In this article Winter Blues: A SAD Stock Market Cycle, financial economists found that the lack of sunlight during winter months tends to depress stock prices across international markets. More recently, the article This is Your Portfolio on Winter: Seasonal Affective Disorder and Risk Aversion in Financial Decision Making reported that people with SAD (Seasonal Affect Disorder) exhibited financial risk aversion that varied across seasons because of their seasonally changing affect. SAD-sufferers had much stronger preferences for safe choices during winter than non-SAD-sufferers, and SAD-sufferers did not differ from non-SAD-sufferers during summer.
In two articles, The Psychophysiology of Real-Time Financial Risk Processing and Fear and Greed in Financial Markets: An Online Clinical Study, Andrew Lo and co-authors find traders who respond with too little or too much emotion tend to be less profitable than traders with middle of the range types of emotional responses. Another article Endogenous Steroids and Financial Risk Taking on a London Trading Floor documents that traders tend to make more money on days when their testosterone levels are higher than average.
All of the above differing strands of empirical research share in common the finding that emotions play important roles in how people arrive at financial judgments and financial decisions. Of course, even just a moment of introspection is enough for us to realize that we are like other people in making emotional judgments and emotional decisions. In the article Who's Afraid of Law and Emotions?, the Herma Hill Kay Distinguished Professor of Law at Boalt Hall Kathryn Abrams and Southestern law school professor Hila Keren analyze the ambivalent reactions by mainstream legal academics to law and emotions scholarship and conclude that part of the reason for such responses is the persistence of rationalist tendencies within the legal academy.
I have often heard after making a presentation about emotions in financial markets and regulation the view that emotions could matter in non-financial areas of life and law, but emotions in general and happiness in particular are not what business and business law are and should be about. Such a point of view strikes as being wrong and closed-minded. As economist Andrew J. Oswald cogently observes in the opening paragraphs of his article Happiness and Economic Performance:
"Economic performance is not intrinsically interesting. No-one is concerned in a genuine sense about the level of gross national product last year or about next year's exchange rate. People have no innate interest in the money supply, inflation, growth, inequality, unemployment, and the rest. The stolid greyness of the business pages of our newspapers seems to mirror the fact that economic numbers matter only indirectly.
The relevance of economic performance is that it may be a means to an end. That end is not the consumption of beefburgers, nor the accumulation of television sets, nor the vanquishing of some high level of interest rates, but rather the enrichment of mankind's feeling of well-being. Economic things matter only in so far as they make people happier."
I will expand in a later post on decisions to measure happiness by an increasing number of governments of countries, states, and cities as diverse as Bhutan, England, Guandong province in China, Maryland, and Somerville in Massachusetts. For now, check out:
Finally, Glom readers may find this five-day free virtual event of interest: The Enlightened Business Summit which takes place this week November 7-11 and is hosted by Chip Conley, the founder of Joie de Vivre, a two-time TED Speaker, and author of the book Peak: How Great Companies Get Their Mojo from Maslow and the forthcoming book Emotional Equations: Simple Truths for Creating Happiness + Success:
I am happy to recommend a new blog Brazen And Tenured - Law Politics Nature and Culture from two of my colleagues: Pierre Schlag, Byron White Professor of Constitutional Law, and Sarah Krakoff, Wolf-Nichol Fellow. Pierre's research interests include constitutional law, jurisprudence, legal philosophy, and tort law. Pierre wrote an essay, The Faculty Workshop, which examines how the institution of law school faculty workshops expresses, regulates, and reproduces legal academic behavior, governance, hierarchy, norms, and thought. Sarah's research interests include civil procedure; Indian law, and natural resources law. Sarah is working on a book about the different stages of humans' relationship to nature, which extends her book chapter, Parenting the Planet.
As Pierre described their blog, it's quite idiosyncratic as far as blogs are concerned. That having been said, Glom readers are likely to find their blog to be amusing, informative, and thought-provoking. Here are the two most recent examples.
Pierre's post entitled Tips for Legal Commentators: How to Talk to the Press is a delightful compendium of speaking points. It explains why the legal talking heads who come out of the woodwork to appear on television during any high-profile trial or other legal event always seem to say the same things with a high noise to signal ratio. My personal expeirence when speaking to print media financial journalists about securities fraud, materiality, derivatives, and Goldman Sachs is there is a very high probability (equal to one minus epsilon, where epsilon is a very small positive number) that I'll be misquoted to have said exactly the opposite of what I actually said! Pierre's advice for speaking to journalists has the virtue that it has the property of being subject matter and position invariant. In other words, no matter what legal topic and what viewpoint you have, Pierre's suggested sound bites will apply. Because they are universal and timeless, these quotes have the added virtue of making you sound profound and wise. Finally, these sample responses to media questions are brief, intuitive, memorable, and predictable. Once you deploy one, there is likely to be repeat demand for your expertise. On the other hand, if you do not enjoy being a talking head, then do the opposite of what Pierre recommends to ensure that reporters will not seek you out.
Sarah's post entitled The Economy versus the Environment? Not! (Or Why to Be Tigger Instead of Eeyore this Halloween) is a welcome reminder for both economists and environmentalists that being offered a choice between the economy and the environment is a false dichotomy that privileges a myopic time horizon and local opposed to global perspectives. Her post also nicely dovetails the small but growing literature applying empirical happiness research to support sustainable environmental policy. For example, Daniel A. Farber recently posted a working paper entitled Law, Sustainability, and the Pursuit of Happiness, which demonstrates that sustainability for society and the pursuit of individual happiness do not have to be at odds.
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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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