Conglomerate Blog: Business, Law, Economics & Society

December 14, 2011

Does a Corporation Have a Conscience and Can It Tempt Ethical People to Do Bad Things?

Posted by Marcia Narine

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.

November 13, 2011

Fostering humility

Posted by Erik Gerding

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?

November 08, 2011

Some Legal Payoffs to Better Understanding Emotions Generally and Happiness Particularly

Posted by Peter Huang

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,

(1) The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective

(2) Reconciling Efficient Markets with Behavioral Finance: The Adaptive Markets Hypothesis

(3) The Three P’s of Total Risk Management

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.

November 07, 2011

Ambivalence to law and emotions scholarship: the guilty speaks

Posted by Usha Rodrigues

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?

November 06, 2011

Daylight Saving Time, Finance, Emotions, and Law

Posted by Peter Huang

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:

November 05, 2011

A Shout Out To Brazen And Tenured

Posted by Peter Huang

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.

November 04, 2011

Corporate Greed, Behavioral Economics, and Financial Regulation in the Movies and on TV

Posted by Peter Huang

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.

October 31, 2011

Thinking About Thinking

Posted by Peter Huang

Many thanks to Eric and fellow Glom bloggers for this real option to contribute some guest posts. I’ll focus in these posts on how these three areas relate to business, law, economics, and society:

1) Recent empirical and experimental research by economists, psychologists, and others about happiness, also known as SWB (Subjective Well-Being).

2) Popular culture portrayals of the great recession, e.g. the movie Margin Call,

(Note: in the interests of full disclosure this film does not involve any margin calls).

3) Ethics and professionalism in business and law.

First, today’s post is an enthusiastic and whole-hearted endorsement of a new book from 2002 economics Nobel Laureate, Danny Kahneman: Thinking, Fast and Slow, just published last Tuesday.

Kahneman's book is a fascinating intellectual memoir by the co-creator (with his frequent co-author Amos Tversky) of prospect theory, pioneer of much of behavioral economics and behavioral finance, and most recently a leader in SWB research. His book provides a delicious buffet of food for thought about thinking from a Jedi master in how to think appropriately. As with all great books, this one is not only informative, but also transformative.

Kahneman is of course familiar or should be so to law professors because many scholars in behavioral law and economics have widely applied and cited Kahneman’s fundamental research on cognitive biases and heuristics in order to intellectually justify increased regulatory intervention. It is on the basis of this research that such well-known legal scholars as Chris Guthrie, Samuel Issacharoff, Christine Jolls, Jeff Rachlinksi, and Cass Sunstein among others advocate various types of paternalism (including asymmetric, libertarian, and weak).

The objective that Kahneman states and succeeds at in his book is to provide a more accurate, richer language (of diagnostic labels much like those from the scenes of differential diagnosis in the television series House)

to help all of us better identify, understand, and improve poor choice and judgment by others and ourselves. Recall the scene from the film, Indiana Jones and the Last Crusade, in which after a Nazi ages to death in mere seconds, the holy grail knight observes: “He chose … poorly.”

After a delightful personal history of science introduction, Kahneman divides his book into these five parts. Part 1 offers insights on two systems of thinking, processing information, judging, and choosing. System one type of reasoning is affective, associative, automatic, fast, habitual, heuristic-based, holistic, intuitive, and unconscious. System two kind of reasoning is analytical, cognitive, conscious, controlled, deliberative, effortful, logical, rule-based, and slow. Part 2 explains why people are able to think analogically, associatively, causally, and metaphorically, but have difficulties in thinking statistically. Part 3 analyzes overconfidence in understanding events and underestimation of chance’s role in explaining things. Part 4 is an engagement of and essential challenge to rationality assumptions classical economics a la the University of Chicago school privileges. Part 5 introduces a riddle of two selves with divergent goals: an experiencing self and a remembering self. There is a final chapter that investigates the consequences of the three dichotomies that the book detailed: system 1 versus system 2, behavioral versus classical economic views of agent rationality, and our experiences versus memories. Finally, two seminal articles by Kahneman and Tversky are reproduced in appendices.

Analyzing the many implications of this book for business and law could easily take several fun lifetimes. In a later post, I’ll focus on when law and policy should care more about our experiences than our memories of them.

September 26, 2011

Your Law Firm Craters; Then What?

Posted by David Zaring

Wharton just had Chris Rider in to talk about what happened to the lawyers from the six big law firms that dissolved during the financial crisis - you know, Thelen, Dreier, Heller Ehrman, &c. As always with these sorts of projects, some of the most interesting stuff to non-specialists is the descriptive stuff; 88% of the lawyers found jobs, most with one of the 250 largest law firms, and partners did better than associates. But what Rider was really interested in was how your network affected the quality of your next job, given that who you know probably really matters in that endeavor.

But how do researchers figure out who you know? Rider looked at law school alumni networks, and co-worker networks, and the upshot was that the better predictor of which firm would hire the Heller refugees were the firms that hired other Heller lawyers (and that Heller lawyers hired in groups were more likely to end up at better firms), but that people were more likely to end up in the office of a firm with many of their fellow law school graduates than chance would predict.

I don't really believe that the alma mater of a 15 years out partner makes a difference in where they lateral to, so I suspect that something unobserved is going on there. And I'm not surprised that firms were more likely to hire Thelen's entire ERISA litigation team instead of some random Thelen lawyer, and that if you were part of a marketable team, all the better for you. But it's still a pretty interesting project - amid all the angst about what is hapening to the legal profession, this paper has some answers. There's an early version of it here.

April 18, 2011

It's not what the judge had for breakfast, it is when she had lunch

Posted by Erik Gerding

Here is an amusing article from the Economist that reports on a study from Israeli scholars that shows delectable evidence that Israeali parole board judges are more likely to be lenient immediately after a meal. On the other hand, there is evidence that being slightly hungry sharpens the intellect.

I'm not sure whether to evaluate this evidence before or after dinner.

February 21, 2011

Book Club: Chinese Parenting, Western Intensive Parenting and Legal Enforcement of Over-Parenting

Posted by Gaia Bernstein

My immediate reaction to Amy Chua's fascinating and brave book and the media storm that followed it was surprise. My surprised reaction was not to Chua's story but to the distinction between Western parenting and Chinese parenting on which it was based and that was particularly highlighted by the media. Strict ambitious Chinese parenting described by Chua was consistently compared to permissive Western parenting. Having spent a lot of time in the last two years thinking and writing about the transformation of American parenting norms - I believe the differences are not as stark.

Chua describes Chinese parenting as extremely intense, demanding children to excel at all costs and investing family resources (time, money and energy) to ensure these goals are met. In our article titled Over-Parenting, Zvi Triger and I describe the ways in which parenting in the United States has changed over the last two decades and has become what we call "intensive parenting." Intensive Parenting is prevalent in middle and upper-middle class families. Intensive parenting is first of all cultivating. Parents spend time and resources identifying their children's strengths and scheduling their days to cultivate these strengths. Children's lives are chock-full with activities designed to make sure they develop to their full potential. Intensive parenting is also informed - parents spend significant amounts of time making sure that they are abreast of all the information necessary to excel at child-rearing. This may mean reading volumes of child development literature or spending hours researching the best after-school French class. Finally, intensive parents consistently monitor their children to assure these goals are met, whether through constant cell phone communication or regular involvement in schools. So really Western intensive parenting and Chinese parenting share a lot in common. Both have high expectations and ambitions for children and parents alike.

Since both parenting styles have high expectations from parents, they both exert an enormous toll on parents. Chua in her book describes in many words the cost of her parenting style to her relationship with her youngest daughter - the daughter who resisted. But neither Chua nor Western intensive parents discuss the toll of these parenting styles on themselves. Both Western intensive parenting and Chinese parenting are extremely intense for parents. They require a massive investment of time. whether it is to accompany your child to piano lessons and oversee hours of practice as Chua describes or whether it is to take children from one after-school activity to another and continually negotiate that each institution caters to your child's need as many Western intensive parents do. These parenting style have costs for adult careers, time spent with spouses and just general adult free time. Unlike our parents, parents today have far less free time that is real adult-time -- not catered to children activities. Yet, this is a topic rarely discussed by Chua or by Western parents.

Having said all of that, I should acknowledge that there are obviously differences between the two parenting styles. These differences become stark particularly when things go wrong. When things go wrong and the child fails, the Chinese parent, according to Chua, blames the child and demands more work to achieve the goal. The Western intensive parent instead blames the institution or the teacher, arguing that the child would have excelled, absent a problem with the institutional arrangement.

Finally, I have to say that I am very glad that Chua wrote her book. Glad not just because it was an honest book and a fascinating read. I am glad because I believe it underscores the message of our Over-Parenting article. In the article we show that the law in many ways is already endorsing Western intensive parenting norms and we caution against further incorporation of intensive parenting norms into the law. We argue that Western intensive parenting is class and culture dependent and not shared by all cultures and classes. In the article we highlight other cultures' parenting practices, which endorse less parental involvement and more free play. Chua's parenting style is a different variation, endorsing intense involvement but using methods that are foreign to Western intensive parenting. The storm that followed the publication of Chua's book showed how strongly people feel about their parenting styles and the danger of enforcing one parenting style through legal standards on all.

February 18, 2011

Should the Justice League of America Incorporate? Or become an LLC?

Posted by Erik Gerding

If there is one thing that can distract me from a crushing load of commitments, it is superheroes. One of my favorite colleagues, sent me a link to a post on "Superhero Organizations and Business Entities". The post deals with the question of "what kind of business entity would be best for superhero organizations like the Avengers or the Justice League."

When I get a free moment, I'll add my own nuanced analysis to this under-theorized field to examine the embedded tensions. For now, several big ticket items are missing from this opening volley of a post. The big issues with superhero organizations do not concern limited liability (which may be surprising given the tendency of superteams to regularly level Metropolis, Gotham, or NY). Instead, my empirical data suggest that the most common issues are control ("Will Captain America remain team leader?"), the admission of new members ("Should the Avengers roster be capped at seven?"), and the expulsion of members ("Green Arrow is a loose cannon!").

June 01, 2010

Peter Kraus and Law and Society

Posted by David Zaring

Peter Kraus, who managed to become the best paid investment banker in America last year, while failing his way to AllianceBernstein, is the subject of the latest "I hate bankers" profile in the New York Post, though the lesson might be more that those with law degrees should make like Lloyd Blankfein and trade them in for finance jobs whenever possible. Kraus spends his money on Park Avenue apartments, awesome clothes and watches, and modern art. It is a fun read. But his handlers were bonkers to permit it while Andrew Cuomo is investigating the guy.

Like Gordon, I think Law and Society has good options for the business oriented scholar - and one of the best panels I attended during the conference was an explicitly pre-tenure panel. If you want to know where scholarship is headed, you can do a lot worse than to hear the research agendas of those soon to be on the job market. It's something that AALS and ALSB do not provide - though, to their credit, I think you can find it at CELS, ALEA, and CLEA. It's part of the mix of a good conference.

May 29, 2010

Is Law & Society the default academic conference for law professors?

Posted by Gordon Smith

Many (most? all?) academic disciplines other than law have an annual conference, which is devoted to networking, workshops, paper sessions, lectures, etc. While the conferences, such as the Academy of Management Annual Meeting, have many dimensions, the academic content is the driving force behind the conference.

The Association of American Law Schools holds an annual meeting each January, and despite recent advances -- for example, many sections now base their programs on a call for papers -- the academic content of AALS remains rather sparse. Those interested in business associations, for example, can expect one paper session and a panel from the Section on Business Associations. Other sections may have programs of interest, but in a good year, I find three or four academic programs that attract my attention.

The conception of the Law & Society Annual Meeting as the default academic conference for law professors was suggested to me this week by a friend, and I think he may be right. The range of topics represented at this year's meeting is impressive, including a large number of sessions on business law. Unlike the American Law & Economics Association Annual Meeting -- which is a great conference, and I don't intend this comparison as a slight -- LSA is largely unbounded by methodological constraints. "Society" used to imply (to my mind, at least) an empirical orientation using sociological methods, which are anyway quite diverse. But LSA has embraced the "big tent" view of law and society, and it shows in the sessions. Many groups, including our small band of law and entrepreneurship scholars, use LSA as a platform for organizing a "conference within a conference," and this has resulted in a much richer conference than in years past. I hope that LSA continues to allow or even encourage this development because law professors benefit from having a discipline-wide academic conference, and AALS does not seem well positioned to providing it.

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April 27, 2010

Citizens United ...and now for something slightly different

Posted by Tamara Piety

Much of the outcry about Citizens United has focused on its anticipated impact on elections, see here and here, as well it might since the decision was, after all, one about the proper interpretation of the Bipartisan Campaign Reform Act, aka McCain-Feingold. However, for my money (no pun intended), its most pernicious impact is likely to be not on elections (there was already a lot of corporate money in elections), but rather its influence on the future interpretation of the commercial speech doctrine. The commercial speech doctrine permits the regulation of commercial speech for its truth.

What has this got to do with political speech you might say? Nothing, unless one considers why for-profit corporations get into campaign finance or lobbying in the first place. They do so for the same reasons they engage in commercial speech; to further the economic interests of the corporation (and/or the shareholders if you prefer). Even though the Supreme Court did not hold in Citizens United that a corporation enjoys the same First Amendment rights as a human being, the rhetoric in the opinion, what I call the "anti-discrimination rhetoric," is likely to be used as if the Court had said just that and in support of an argument that the Court should not "discriminate" against commercial speech and relegate it to the category of an intermediate scrutiny test but rather should apply to it a strict scrutiny test, a New York Times v. Sullivan test. Suffice it to say that this permits regulation in theory, but little in practice.

There is evidence that Citizens United will be used this way if you look at how at how Bellotti was used. Bellotti was another corporate election law case. It was decided in 1978, only two years after Virginia Pharmacy, the case in which the commercial speech doctrine was first announced. It has been repeatedly used to argue for expanded protection for commercial speech. Most recently in the Supreme court in 2003 in the Nike v. Kaksy case. See here, here and here.

Theoretically Bellotti was a case that had nothing to do with commercial speech. Nevertheless, it has regularly showed up, as it did in Nike, in arguments in favor of more protection for commercial speech, supposedly for the proposition that speech is not less valuable because a corporation utters it. May be. But consider this, if we (or the Court) gets this argument tangled up with some notion that First Amendment protection is offered on the basis of some anti-discrimination principle we may be in very deep waters indeed, because for a business corporation its political expression is surely tangential to its main organizing purpose. It's core expressive activity is commercial speech. If we are protecting the speaker then it would seem that its core expressive activity ought to be protected. However, going that way would seemingly wreak havoc on any sort of regulation of commerce. How can you regulate commerce if you can't regulate commercial speech? If the Court goes the way of offering strict scrutiny protection to a lot of commercial speech it may make debate about reform of the financial sector moot. Not to mention the idea that corporations need protection against discrimination is a fairly difficult one to swallow. (It makes for some good editorial cartoons though! This month's Vanity Fair has a great one which you can only see if you buy the magazine; but you can find in the table of contents here under the Vanities section. A similar cartoon showed up earlier in the Boston Phoenix and that one you can view here .)

This is not just a theoretical proposition. There is a case now pending before the Supreme Court which (arguably) involves commercial speech and at least one amicus brief suggests that this is the case in which the Court can resolve the status of commercial speech (in favor of more protection, natch) and answer the question raised but not answered in Nike v. Kasky. Guess which case is included in its list of authorities? Yep. Citizens United. I will save for another post which case this is and where else Citizens United is popping up. But this is one of those First Amendment cases that could have very widespread impacts on all sorts of regulation of business. That may be a happy thing if you think less is more in the regulatory arena for business. May be not so happy if you think the government should have more of a hand in the regulation of the safety of food, drugs or... financial services.

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