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Free bargaining makes people better off…
Provided that we assume that their choices satisfy the assumptions of rational choice
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Rational Choice: Six Assumptions
Full Information (later) No mistakes No misrepresentations No informational assymetries
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Rational Choice: Six Assumptions
Full Information Choices Are Freely Made (later)
No duress
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Rational Choice: Six Assumptions
Full Information Choices Are Freely Made Non-satiation
More is always better
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A
B
Good 1
More is always better
0
Good 2
Non-satiation: B > A
Non-SatiationIs this the same thing as saying “Greed is good”?
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Michael Douglas as Gordon Gekko in Wall Street
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Rational Choice: Six Assumptions
Full Information Choices Are Freely Made Non-satiation Completeness or comparability
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Time 1
0 Time 2
No black holes
Comparability: No incommensurabilities
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Sophie’s Choice
You are a member of a hospital’s ethics committee. You have to choose between allocating a kidney to an alcoholic former sports idol or a mother of two.
Can you think of other examples?
IncommensurabilityTragic Choices
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Rational Choice: Six Assumptions
Full Information Choices are Freely Made Non-satiation Completeness or comparability No third party effects (externalities)
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Mary
Bess
Ann
Representing Ann’s utility on a third dimension
Third party effects: Bargaining with a third person
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Paretian norms don’t work—if it’s an external cost
Externalities and Tort Law
Social Perfectionism
What happens if third parties can’t be joined?
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Do we then abandon the concept of efficiency?
A more relaxed standard: Kaldor-Hicks efficiency
A transformation is Kaldor-Hicks efficient when the winners could compensate the losers (“Potential Pareto-Efficiency”)
But nearly everything has third party effects…
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It is proposed to abandon steel tariffs that impose costs of $10B on the economy but provide steel manufacturers with a gain of $1B.
The bankruptcy of a failing business imposes a cost to shareholders of $1M, but provides a benefit of $5M to creditors.
Examples of Kaldor-Hicks Efficiency
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Mary
Bess
A
B
C
C is Kaldor-Hicks Efficient to A At C Bess is better off than she is at A; She could also give up CB roses to move to B and still be better off than she was at A, while Mary would be no worse off
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Rational Choice: Six Assumptions
Full Information Choices are Freely Made Non-satiation Completeness or comparability No third party effects (externalities) Now—Perfect rationality
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Relaxing the Rationality Assumption: Transitivity: A Technical Definition
If A is preferred to B and B is preferred to C, then A is preferred to C
A>B, B>C A>C
AB, BC AC
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Transitivity: A>B, B>C A>C
Time 1
0
Time 2
C
B
A
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Transitivity: Indifference curves can’t touch
Time 1
a b
c 0
Time 2
A violation of transitivity
If a ~ c and c~ b,then a ~ b.But b > a
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Relaxing the rationality assumption:Paternalism
Suppose we knew we would harm ourselves in our choices in certain cases
Might we not then wish to delegate to the paternalist to choose for us?
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Relaxing the rationality assumption:Byron, The Prisoner of Chillon
At last Men came to set me free –I asked not why, and recked not where--It was at length the same to me,Fettered or fetterless to be--I learned to love despair…
My very chains and I made friends,So much a long Communion tendsTo make us what we are, even I Regained my freedom with a sigh
Infants: Kiefer
Restatement § 14
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What if a fake ID is presented?
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Why an exception for necessities?
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Shields v. Gross
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Brooke Shields at age 10 inSugar and SpiceMagazine
Gee Thanks, Mom!
Brooke Shields two years later
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Federal Child Pornography Laws Mandatory Minimum of 15 years
(2) (A) “sexually explicit conduct” means actual or simulated— (v) lascivious exhibition of the genitals or pubic area of
any person; (8) “child pornography” means any visual depiction, including any
photograph, film, video, picture, or computer or computer-generated image or picture, whether made or produced by electronic, mechanical, or other means, of sexually explicit conduct, where—
(A) the production of such visual depiction involves the use of a minor engaging in sexually explicit conduct;
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There is justice, after all…
People ExclusiveBrooke Shields: Tabloid Checked My Mother Out of Nursing HomeFriday May 15, 2009 06:30 PM EDT
Brooke Shields's mother, who suffers from dementia, was checked out of a New Jersey nursing home Thursday by a journalist seeking a "tabloid story," the outraged actress tells PEOPLE.
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Mental Illness
Restatement §§ 12-13, 15-16 Faber Uribe
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Paternalism’s questionable historySo you want to help victims? How about…
Restrictions on women
Slavery
“The benevolent have a tendency to colonize, whether geographically or legally.” Arthur Leff
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The New Paternalism
Unlike the old Paternalism, the new Paternalism does not discriminate
It is also based on better science
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The New Paternalism:When might our desires misfire?
When might we agree to let the Paternalist second-guess our decisions?
Judgment Biases: Because we miscalculate what is good for us
Akrasia: Because we lack the strength of will to pursue what we know is good for us
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Cognitive Paternalism: Judgment Biases
Rationality as a scarce resource: the need to rely on heuristics and hunches
Even if these are satisfactory in average cases, they seem to mislead in anomalous cases.
The rise of cognitive paternalism
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We need our hunches to navigate through life…
Gerald Ford, trying to walk and chew gum
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Judgment Biases: Some readings
Vern Smith, Nobel Address 2002 Kahneman, Slovic and Tversky,
Judgment Under Uncertainty (1982) Gigerenzer, Adaptive Thinking (2000) Sunstein, Behavioral Law and
Economics (2000)
Judgment Biases
A bat and a ball together cost $1.10. The bat costs $1.00 more than the
ball How much does the ball cost?
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Paternalism:Some Judgment Biases
The Availability Bias Pauline Kael on the 1972 election How likely is a divorce?
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Some Judgment Biases
The Anchoring Bias I spin a roulette wheel and it comes up
25. Now I ask you how many African members there are in the UN
I spin and it comes up 65. I ask again.
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Some Judgment Biases
The Gambler’s Fallacy You are at a casino. At the roulette table,
the numbers are either red or black. Black has come up six times in a row. What is the probability that it will come up black on the next turn? (Assume a fair table.)
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Some Judgment Biases
The Gambler’s Fallacy You are at a casino. At the roulette table,
the numbers are either red or black. Black has come up six times in a row. What is the probability that it will come up black on the next turn? (Assume a fair table.) 50%. (You thought the table had a memory?)
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Some Judgment Biases
Regret You attend a boring lecture in law-and-
economics. On returning to your flat you discover that you missed a visit from a long-lost friend. You feel great regret even though, ex ante, attending the lecture seemed the best thing to do.
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Some Judgment Biases
The Hindsight Bias You watch a baseball game. The pitcher
(ERA of 2.11) has given up two walks in the eighth inning. The manager leaves him in. The next batter up hits a home run. “Idiot!,” you say. “I would have taken the pitcher out.”
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Do judgment biases justify Paternalism?
Do we underestimate small probability events? Mandatory seat belt laws Mandatory no-fault divorce Incentives to put savings into a pension
plan
Nudge: Sunstein and Thaler
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Do judgment biases justify Paternalism?
Are our hunches dumb? Gigerenzer’s fast and frugal heuristics
Ecological rationality: how well do our heuristics fit in the world we inhabit.
Is there an inner logic to availability, regret and other heuristics?
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Do judgment biases justify Paternalism?
Is there an inner logic to availability, regret and other heuristics? Anchoring and availability ordinarily are
efficient Regret pierces through egotism The Hindsight Bias underlines the lesson
we are taught.
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Do judgment biases justify Paternalism?
Are some biases corrected through learning? How to hit a curve ball.
Can market processes help? Would inefficient heuristics tend to get
excluded in markets?
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Judgment Biases: Emotional and Moral Heuristics
Our emotions are coded with knowledge Deep preferences as a solution to PD
games Of disgust and hatred…
Moral Heuristics Gigerenzer Romola
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Do judgment biases justify Paternalism?
What about the Paternalist’s judgment biases? Lord Denning and the hindsight bias. The business judgment rule. The availability bias and inefficient
pollution regulations.
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Paternalism: Akrasia
The akratic are “not-ruled”
Pictures of akrasia Dostoyevsky’s gambler The disciples in the garden: “The spirit is
willing but the flesh is weak.” St. Peter
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Varieties of Akrasia
Overwhelming passion: Phèdre
The Divided Self: To which self are we allied?
Reversal of preferences: Mary Beth Whitehead
Self-deception: Denial is not a river in Egypt…
Discounting the future: criminals
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Does Akrasia argue for paternalism?
The akratic might wish for laws that address their weakness of will.
Can you think of examples?
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The Counter-arguments
Is addiction per se bad? Might it ever make sense ex ante to become an addict?
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Gary Becker: Rational and irrational addiction
Utility
0 Time
Gary Becker, Accounting for Tastes (1996)
Preferences for commodities over time
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Gary Becker: Rational and irrational addiction
Utility
0 A
B
Time
Gary Becker, Accounting for Tastes (1996)
classical music
Over time the preferencefor classical music increases—but this is a benign addiction
Subject suffers from “withdrawal”if music taken away from him
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Gary Becker: Rational and irrational addiction
Utility
0 A
B
CTime
classical music
coffee
Unlike classical music, there comes a time when the subject would like to stop drinking coffee. Though he finds he cannot do so, his ex ante decision to start drinking coffee is still rational
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Gary Becker: Rational and irrational addiction
Utility
0A
D
B
CTime
classical music
coffee
hard drugs
Ex ante, the decision to start taking hard drugs is irrational
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The Counter-arguments
Can the state distinguish between rational and irrational addiction?
Just how would you categorize the taste for the following: Tobacco Ice cream Lotteries
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The Counter-arguments
If we might be weak-willed, can we address the problem without the help of legal barriers? Social sanctions Self-binding
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The Counter-arguments Self-binding as a response to akrasia
Jon Elster, Ulysses and the Sirens (1984)
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Examples of self-binding
Marriage
Home purchases
Leverage
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The Counter-arguments
Is there such a thing as excessive self-control? Prohibition The addict and the teetotaler
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Aristotle’s anaisthēsia
No booze for you, INSECT!
Carrie Nation
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Is there such a thing as excessive will-power?
Ainslie in Elster, Getting Hooked (1999)
Bergson: “Life demands not only that we live but that we live well.”
Chardin, The House of Cards ca. 1735
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Impugning Individual Choice: Paternalism and Perfectionism
Paternalism: Interfere with personal choices to make subject better off
Perfectionism: Interfere with personal choices to promote a moral goal
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PerfectionismPaternalism
Impugning Individual Choice
The two strategies overlap
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Impugning Individual ChoiceTwo kinds of paternalism
Soft Paternalism overrules personal choices in order to satisfy subject’s deepest preferences
Judgment biases and akrasia
Hard Paternalism overrules personal choices when the subject’s deepest preferences are immoral and “he doesn’t know what’s good for him”
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PerfectionismSoft Paternalism(good preferences)
Impugning Individual Choice:Varieties of Paternalism
Hard Paternalism(immoral preferences)
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SocialPerfectionism
Soft Paternalism
Varieties of Perfectionism
Private Perfectionism(Hard Paternalism)
