Farnsworth: The Legal Analyst

 1- Incentives

Law is to disincentivize future tragedy, not just to assign blame for past tragedy.

You can make an extremely compelling case by using the case to disincentivize future harm.

the lost life, the demolished car, the broken window, or whatever the harm might be. When any of those things happen, the world is made poorer-_irrevocably so. This is intuitive and obvious to the family of the person who was killed. They are painfully conscious that nothing the law says can bring him back. But it's also true, if less obvious, after an accident that merely wrecks a car. The car can be repaired, and whoever was to blame can be made to pay for it, and now the car's owner might feel that the law did bring back the car: a miracle! It's as if the accident never happened. But it isn't a miracle. It's a waste. No matter how satisfied the owner feels, the world would have been better off without the accident, because it ate up money that would have been better spent on something else--anything else. Just ask the person who ended up paying for it. The point is that the law doesn't fix bad things that have happened.

It can't: they've happened. All the law can do is redistribute the suffering a bit.

But the law's dream- anyone's dream--would be to turn the clock back and stop the bad thing from happening in the first place.

The court might make a rule that would cause horrible events like the bank robbery to be less likely from now on. This wouldn't undo the killing that already happened, but it could stop some killings in the future- and that's equally good, isn't it? Or better than equally good: for we would be stopping lots of bad things, not just undoing one of them.

Instead of looking back and deciding who should bear the suffering, it can look ahead and decide what ruling will make the suffering less likely to occur later.

What would this train of thought look like? In the case of the bank, it means asking what incentives people will have after the case is over. Here is an interesting possibility: if the court says that the plaintiff wins, then from now on banks will have an incentive to hand over the money when thieves take hostages (to avoid paying in court again next time). And that, in turn, means that thieves will have an incentive to take hostages.

True, thieves might not know the legal rule, but then they might not need to know it.

The bank has to win for the same basic reason that governments won't give in to hijackers of airplanes when they demand money or whatever else. It's tempting to make the payment and save the passengers' lives. You probably would make the payment if you knew it never was going to happen again. But that's the point: not just that it might happen again, but that if you make the payment it becomes more likely that it will happen again.

The simplest way to find the ex ante angle is to picture either side winning the case and then imagine how the parties will think a week later- -what either of them might do differently now that they know how the courts will respond.

Thus you can imagine the bank learning of the decision and changing its rules to make sure that its tellers hand over the money; and then you can ask how this would, in turn, change anyone else's incentives, starting with the thief.

When you hear that a lawyer is making a "policy" argument, that usually means it's an argument from the ex ante perspective- that is, a claim about the effects the decision might have on someone's incentives.

Deterrent incentive.

AA rule that looks brutal and wasteful when invoked might actually be working beautifully, if invisibly, by causing the occasions for its use to be rare.

Seizing the notes of the therapist is a trick that only works once. All therapy conversations will be modified by “I warn you this could be used in court” and by many people not going to therapy in the first place.

2- The idea of efficiency

If you notice a flaw in the instructions to a jury and speak up promptly, the problem can be corrected on the spot very easily. If you wait until later, whether deliberately or carelessly, then dealing with the problem becomes much more expensive. The court can't bring back the old jury; a new one has to be picked, and the case retried. It's costly for the parties and the public. Those costs are a waste, by which we mean they are needless, or inefficient. They can be avoided if people point out mistakes when they happen. This is why courts of appeal tend to be very hard on a complaint of any kind that wasn't raised in the trial court, whether it's about jury instructions, a bad closing argument, or a blunder in allowing a piece of evidence into the case.

The same claim could have been handled without the duplication of effort if it had been included in the first lawsuit; and though it's too late to do anything about that now, parties planning lawsuits like these in the future would save everyone money and trouble by bringing all their claims at once-claims for their medical expenses and for pain and suf-fering. Again these arguments will win. The neighbor's second case will be dismissed under the doctrine of res judicata ("the thing is decided"), which generally forbids one party to sue another twice over the same transaction. "Transaction" is a vague term, but most courts define the word to mean that it would have avoided waste in other words, that it would have been more efficient- to combine the second case with the first one.

how judges decide accident many cases: they ask whether the defendant failed to take any steps that were cost-justified-any steps, in other words, that would have saved money when compared with the costs of the accidents they could have been expected to prevent. If so, the defendant is liable, and otherwise not.

holding them liable for negligence—that is, only if it's shown that they weren't as careful as they should have been-or holding them strictly liable, which means that they pay no matter how careful they were.

“We want the cave to end up owned by whoever can make the most of it”

A car accident that neither side sees coming. If the drivers had known they would be at risk of colliding with each other in the afternoon, they would have made a contract in the morning in which they both agreed to drive at a reasonable speed in which case the party who drove too fast could be thought of as breaking the contract. This example sounds far-fetched, but it helps show the relationship between some of the topics we've been discussing. Nobody advocates for waste; when it does occur, you usually can view it as a departure from what the parties would have agreed on in advance if they could. A lot of legal rules thus make more sense when you imagine the people affected by them all discussing the issue before the arrival of whatever situation they are in.

Many times a rule, when seen from the “before” perspective, evidently functions to keep everyone's total costs down before they all know what roles they will end up playing.

3- Thinking at the margin

You might say the average person usually doesn’t know enough law for that, and typically they aren't even all that rational; most people are beset by lots of beliefs and preferences that amount to cognitive illusions, as we shall see in part 4 of this book. But again the comeback is the same. We are in search of marginal effects, not average ones. You can question even the marginal effects or their significance; just make sure that is what you are doing.

Arguments about what the average person typically does aren't an effective reply to those who are trying to make a dent at the margin.

Law tries to influence those at the margin, not those who were going to buy a car but those who would of there was no tax but if there was a tax ended up driving their car a few more years.

Margins applies to the people, like the car example, but also within each person. A smoker drinking more or less.

Wow. Eloquent

Imagine a controversy between an airport and neighbors who complain that it makes too much noise. Suppose the airport creates $10 million in benefits over some period of time, but the neighbors say it creates $15 million in costs (perhaps that is what you would have to pay all the neighbors to make them indifferent to the noise). It might seem natural to conclude that the airport should be shut down; it creates more harm than good. But now look at it from a marginal point of view. Maybe cutting back on 10 percent of its flights perhaps by stopping the ones at night would reduce the airport's benefits by $1 million but reduce the harm to the neighbors by $8 million. Then the balance would be different: $9 million in benefits as compared to $7 million in costs. The optimal solution here isn't to shut down the airport; it's to adjust the margins.

In a large population, whether criminals or anyone else, there are always some nearer the center and some nearer the edge, or margin, or decision. It’s this last group that one must worry about.

4- The Single Owner

Think single owner to internalize all costs. (Opposite of tragedy of the commons)

It "is for the public benefit that trains should run, but not unless they pay their expenses. If one of these expenses is the burning down of a wood of such value that the railway owners would not run the train and burn down the wood if it were their own, neither is it for the public benefit that they should if the wood is not their own. If, though the wood were their own, they still would find it compensated them to run trains at the cost of burning the wood, then they obviously ought to compensate the owner of such wood, not being themselves, if they burn it down in making their gains." It's not clear if Bramwell was making a claim about what would be fair for the railroad to do, or what would be efficient; an attractive feature of the single-owner hypothetical is that it often can be used to capture both concerns.

Interesting, did not know this

The ox is impressive in size and ferocity, and it becomes clear that you will have to choose between shooting it and letting the goat die so you shoot it. Do you owe your neighbor a new ox? Probably. It turns out to depend on how much the ox was worth and on how much the goat was worth. The neighbor will say that you should be held liable for the tort of conversion, which is the name of the action used to recover when property has been stolen or destroyed (in this case, perhaps, you converted his live ox to a dead one); you will defend by saying that your apparent act of conversion was covered by your privilege to defend your own property: the goat. But in most jurisdictions the question for the jury will boil down to the relative values of the two animals. You will have to pay your neighbor for the ox if it was worth significantly more than the goat; if the goat was worth more than the ox, you needn't pay anything.

Do you see why this amounts to a single-owner rule? The effect of it is to get you to think about the situation in roughly the way you would if you owned both animals, the goat and the ox. You would then be forced to choose which one would live, just as you were here.

Someone who owns a third of a corporation's shares is still likely to be better off if he can steal some money from it outright. He gets all of what he steals but suffers only a share (perhaps a one-third share) of the consequences. If he were a true single owner-one who owned the entire company himself- -then his argument would be strong: for then he would be accused of stealing from himself, which sounds ridiculous.

If It depends on who the owner would be. These are matters of taste that we prefer to leave to individuals to make for themselves.

5- The Least Cost Avoider

The expenses might arise from an accident, or a misunderstanding, or an agreement that fell through. All those events can be costly, and all might be handled the same way: figure out who was in the best position to prevent it--we will call this person the least (or cheapest) cost avoider"-and make him pay for the result. Sometimes we might hope he will act differently next time, but not necessarily; the point might be just to force him to compare the cost of paying the bills with the cost of taking more precautions, and do whichever is cheaper.

The beauty of this approach is that the law doesn't have to figure out how a single owner would have handled the problem. It tells the least cost avoider to figure it out.

But not always. Sometimes there are dual costs.

There are situations where both sides can and should take some precautions against trouble. The best way to stop cars from hitting pedestrians isn't just for drivers to be careful, or just for pedestrians to be careful. It is for both of them to be careful- -to exercise "joint care," as it sometimes is called.

But to send that message the law can't put all the responsibility onto whichever side could have avoided the accident more easily. In a sense there is no single cheapest cost-avoider; the cheapest thing is for both sides to use some care.

After an accident the law thus needs to examine the decisions made by both sides. That is what the law of torts does in a negligence case for example, in cases involving car accidents of almost every kind. The usual rule then is some form of comparative negligence: the jury asks whether each side was as careful as it should have been and splits responsibility accordingly.

6- Administrative Cost

in future cases the facts might not be as clear as they evidently are in this one. You will say that you were chasing the buffalo for five hours; I will say that it was more like five minutes. You will say that you had wounded it fatally, and that its death was only a matter of time; I will say that you barely grazed it and probably never would have finished it off. Sometimes my claims will be right, and sometimes yours will be- but how is a court to know which? It will be your word against mine, perhaps along with experts we hire to testify at a judicial hearing about the stamina of buffalo. These hearings will create two kinds of costs. The first is the simple outlay of time and resources involved in arguing about all this when we could have been hunting. The second is that sometimes the court will listen to all the evidence and then make the wrong decision. Every time this happens we might say that an "error cost" pops into existence.

If you kill my dog, you pay market value not personal value (much less than personal value). The answer again is administrative cost. If we try to figure out what the dog was worth to you -what its subjective value to you was we run into the same general problems we did with the buffalo hunt. First, the court is going to get it wrong a lot of the time. A judge or jury will have to listen to a long speech and then make some guess about what dollar value seems right. That judgment probably will be at least partly wrong every time, and wildly wrong some of the time.

Second, all this is going to take a while and cost us both. There may have to be a trial about it, perhaps where I cross-examine you distastefully over your feelings for your de-parted. This is expensive.

7- Rent

Suppose the wreck of a galleon is found on the ocean's floor. Four teams of salvors race to lay hands on a treasure chest the ship is known to have on board; it contains historical artifacts worth ten million dollars. Each team spends about three million dollars trying to get there first. Eventually one of them succeeds, and the others are out of luck. The result is perverse, is it not? A total of twelve million dollars was spent to recover something worth less than that. As a group, the salvors would have been wealthier if the treasure hadn't been found in the first place. The result still would have been unfortunate, if a little less perverse, if there had been only two teams instead of four, and six million dollars had been spent to raise twelve. That sounds like a better deal, but it's still a waste. Really, spending anything more than the bare cost of raising the treasure is a waste; all the other money just goes into efforts by the teams to beat each other out, and there is nothing to show for it once the treasure is raised. Needless to say, it's not how a single owner would have handled the situation.

This is a simple example of a problem known to economists as rent seeking.

The phrase may be unfortunate: "rent" brings to mind images of landlords, and the difficulty we mean to talk about here has only a remote connection to them.

Rent seeking means wasteful efforts to gain a prize; it might also be described as competition over the way some good thing ought to be distributed.

there are, in general, two kinds of ways to increase one's pile of wealth. You can do it by producing some good or service that other people find valuable. Or you can do it by fighting over a prize of some sort.

The difference between these methods- between, say, competing to run a better restaurant and competing to get to the treasure first is that the first one creates wealth, or better-offness, on the whole: the customers are made happy, and restaurants gradually improve. Fighting over who gets the treasure isn't like that. The treasure doesn't get any bigger as a result.

In a sense it gets smaller because so much of the wealth it represents is eaten up in the effort to lay hold of it.

Rent seeking - move wealth from one hand into another.

the more a society spends on rent seeking_ on quarrels over who gets what--the poorer it becomes.

If that's all that anyone did, everyone would starve in due course.

Rent seeking ex - monopolies.

1. Those high prices alone are a reason not to like monopolies, since they are a transfer of wealth from consumers to sellers (free markets work the opposite way: competition between suppliers turns their surplus into consumer surplus as they try to beat each other out to get business).

2. But another objection to a monopoly is that the promise of those high prices will make firms and their competitors willing to spend a lot to gain such a position, and these sums are no better spent than the monies laid out to get to the sunken treasure

8- The Coase Theorem

Some legal rules can be viewed as ways to correct that: they make people act the way they would if they cared equally about all the costs and benefits of what they did. Now let's consider another take on the problem, which is that there might not be a problem if the parties can easily make contracts with each other. If you're creating more costs to me than benefits for yourself, I can pay you to stop-and that will be the end of the waste even without help from the law.

Imagine that I agree to sell you a million widgets but we don't mention the price. The courts will fill in a price that seems "reasonable" at the time of delivery.* Now suppose the opposite: we do mention the price but we don't specify the number of widgets involved. This time the court's reply will be different. It won't try to speculate about what a reasonable number would have been; it won't enforce the contract at all. In effect the court fills in the blank with a zero. Obviously this isn't an effort to simulate what the parties would have wanted; zero isn't the quantity that either party to a contract has in mind. But whereas a court can figure out a reasonable price fairly easily (by just finding out what the market price was for widgets), it will be much more trouble to figure out what a reasonable number of widgets would have been.

9- Agency

You are a principal because you want them to work hard on your behalf.

You are an agent because they want you to be careful on their behalf.

The fun can then be extended by asking who are the agents and the principals when judges decide cases, or when government agencies issue rules, or when professors grade exams, and what it looks like when any of these parties shirk, and what might be done to reduce the risk of it.

10- Prisoner’s Dilemma

Interesting -

It appears that your restaurant is about to fail. You have five creditors- suppliers to whom you owe money for whatever reason.

Each is getting nervous and might sensibly decide to demand payment immediately or sue for it before you go broke. It would be better for everyone if all the creditors refrained from these tactics, since if they held back you might be able to keep your business afloat after all; when everyone insists on payment it ensures that you will go under and perhaps leave many creditors with nothing. But if some of the creditors are going to demand their money, the rest might as well do the same (it would be foolish to be last in line; and if the other creditors aren't going make such demands, each will see an irresistible chance to be on the safe side by being the one who grabs what is left while it definitely is still there. So it is in each creditor's individual interest to do what will make them worse off as a group.

The solution to this particular prisoner's dilemma is known as bankruptcy law. When someone goes bankrupt, any payments made to creditors in the ninety days beforehand- -the "preference period"- are void and have to be returned to the bankrupt's estate. In this case the creditors are the ones in the prisoner's dilemma.

12- Stag Hunt

Verrrry interesting: The two of us are hunters. We know that if we cooperate we can take down a stag and have it for dinner; if we work separately, we'll only be eating hare. It isn't quite a prisoner's dilemma, for in that game it's best for me if you cooperate while I don't (and your preference is the re-verse). Here my favorite result is that we both cooperate and eat stag. But I wouldn't want to hunt stag if you don't; that's my last choice. It won't work, and so will be a waste of time and leave me hungry. Of course you don't want to go after stag unless you're sure I will, too. Maybe we can agree to work jointly, but there is risk in it. Unless we have good reason to trust each other, the temptation will be great for either of us to give up on the stag and give chase to any hare that goes by. At least if I do get a hare I no longer have to worry that I'll end up with nothing if you decide to go after a hare because you think it's good insurance against the danger that I'll go after a hare because I'm worried that and so forth.

We owe this parable to Rousseau's Discourse on the Origin and Foundations of Inequality among Men, written in 1754: "If a deer was to be taken, every one saw that, in order to succeed, he must abide faithfully by his post: but if a hare happened to come within the reach of any one of them, it is not to be doubted that he pursued it without scruple, and, having seized his prey, cared very little, if by so doing he caused his companions to miss theirs."

There’s no sense hunting stag when everyone else is eating hare.

The best outcome in prisoner’s dilemma is they cooperate you defect. In stag hunt, it’s you both cooperate.

13- Chicken

Its name is chicken, In the most time-honored version, two teenagers drive straight toward each other at high speed, with various results then possible. One of them can swerve, neither of them can swerve, or both of them can swerve. If one swerves, he is deemed a chicken and is humiliated; the one who didn't swerve revels in his victory.

If neither of them swerves, they both may be killed in a head-on collision.

If they both swerve, then nobody dies or gets humiliated (at least compared to the other), but then nobody has the fun of winning, either.

One wants to understand how to do well at games of chicken when they can't be avoided; but one wants to know even more how to solve or avoid them altogether, since their destructive potential is large and obvious.

The triangular yield sign familiar from the side of the road is a simple example. Without it, every attempt by one car to merge into traffic has the potential to become a game of chicken. If you start driving heedlessly into the lane of traffic you want to join, maybe the person you are cutting off will stop for you. Or maybe he will keep going, It's hard to say until there's a yield sign, at which point the problem mostly goes away.

The worst outcome for you in a prisoner's dilemma arises when you keep quiet (cooperate) and your confederate talks (defects). Your worst outcome in chicken occurs when you both de-fect, since then you're liable to be killed. Here, it’s better if we both don’t do the same thing (1 yields 1 wins), whereas stag and prisoner’s wanted 2 cooperates)

Another name for this game, and one that might be more descriptive, is hawks and doves. One side is going to play the hawk (keep driving), and the other is going to be the dove (wait its turn). Q would rather play the hawk, but on the other hand it's important not to play the hawk if the other side does, too, since then we get a collision. Above all, you want to know what the other side is going to do so that you don't do the same.

This is the most important practical point to understand about how games of chicken, when they must be played, are won and lost: the winner generally will be the one who can commit himself to an aggressive strategy to playing the "hawk" most visibly and irrevocably. In the classic example offered by Thomas Schelling (whose discussion is great reading)," the best strategy for a driver playing chicken would be to somehow remove his steering wheel and throw it out the window. Once the second driver sees this done, he is forced to accept that there is nothing more the first driver can do; he is committed to go ing straight. The second driver inevitably will swerve away to avoid being killed.

Once you grasp this principle, you will see illustrations of it in all the little negotiations of everyday life: one side stakes out a position that reflects what he hopes to end up with, and tries to make it sound like he won't or can't bend and that massive destruction will result if the other side takes the same position. The other side then decides whether to go straight or swerve, a decision that will depend largely on how firm he thinks the first player's original position is; and so it goes.

Children are great at this. They figure it all out very early, and tend to be ruthless negotiators.

The greater troubles arise when there isn't a market into which the parties can escape from each other. That is what happens when two sides sit down to discuss the settlement of a lawsuit.

There is nobody else to bargain with. The technical term for this situation is a bilateral monopoly, because each side is a monopolist- -the only possible seller with respect to what the other side wants (e.g., getting rid of the lawsuit). If one side commits to a position strategically but has misjudged what the other will be willing to accept or for that matter if both sides try the strategy of utterly committing themselves to extreme positions the bargaining may collapse despite the existence of some price that would have left both of them better off: the boardroom equivalent of a game of chicken that ends with a collision.

This is one reason why professional mediators hired to resolve lawsuits like to put the parties in separate rooms and then take turns visiting them privately. Among other things it avoids the danger that either side (or both) will strategically commit to a position in front of the other that then becomes hard to back down from.

14- Cascades

You have job interviews with two employers and are turned down in both of them. At the next one you are asked if you have had any prior interviews. You recount your unhappy recent history, and the employer concludes that the two prior rejections probably meant something. This helps him decide to pass on you. The process continues and accelerates from there; the next interviewer finds you have three rejections and has even more cause for concern than the previous one. The process can work in reverse, too: a job candidate gets offers, and the offers create interest on the part of others.

Since someone usually benefits from a cascade, naturally we find that entrepreneurs sometimes try to start them deliberately. Thus the authors of the business book who bought 50,000 copies in an attempt to get it onto the bestseller lists where it then stayed. Or the producers who hire audience members to applaud at a performance or go heckle its competitors.

Your vulnerability to a cascade depends on how much knowledge of your own you have and how ready you are to assume that if others think something is true, it probably is. People vary on these points; some are weak resisters and others are strong. But the point of a cascade--the feature that makes it insidious is that it takes in the weaker and the stronger alike by enlisting them in order. A strong onlooker who isn't impressed by a consensus of two or three people comes back later to find a consensus of two or three hundred, and this time thinks there must be solid basis for it after all.

Ignorance and uncertainty are the foundatian of a cascade.

So to counter a smoking cascade the government puts out information that’s unequivocal

Cascade in voting. You want independent votes to reduce sway.

15- Voting Paradoxes

If you have people voting A to B to C, you can control the outcome by controlling the order of the options. A is the best and then B and C. Person 2 has A and B in the top 2, and C is out. Person 3 had person A and C in the top 2 so we should go with person A.

16- Suppressed Markets

Why is it so hard to get into a good university, but then also so hard to get thrown out? Why is the same true of countries?

We form communities in which we aren't so sure we want competition that the outside markets bring with them.

The same communities that want to treat everyone as equals may also want the good effects that competition can produce, and they may have to worry as well about competition from other places. The wish to balance these creates patterns that recur in communities the size of a nation or the size of a workplace.

The members put limits on the competition allowed within their walls because they want everyone inside to be on the same footing, but on inspection this ends up pushing the competition elsewhere-into less visible forms/hidden tournaments, with interesting side effects.

At the front gate there is screening based on the evidence of promise, however questionable, that a candidate has assembled through hard competition elsewhere; then within the gates competition is frowned upon and exclusion is almost out of the question.

For example:

Colleges allocate dorm rooms and seats in popular courses by lottery rather than auction. Students who major in physics or classics typically pay the same tuition as those who study history or sociology, even though the cost of educating the students is higher when their work requires laboratories or the classes are smaller.

But the cost is hidden -

when cutbacks come they may hit some departments more than others, at which point it might seem that ongoing user fees would have been kinder after all than a more egalitarian approach followed by amputation.

the workplace. Most firms compete fiercely with one another but want a sense of community within their own walls. This creates tension. They may want to avoid ruthless competition and exclusion among their own, but trying to suppress it isn't always in the clear interest of their employees or clients; so again we find suppressed markets,

17- Slippery Slopes

perhaps you favor assisted suicide, or a ban on hateful speech, and in either case your antagonist describes a "parade of horribles" that could follow-mercy killings, or a ban on other kinds of speech.

The decision at hand “decision one," is acceptable, but it might lead to a second decision later that sounds scarier: confiscating everyone's guns, making polygamy legal, and so forth.

When is there a real risk of a slippery slope?

1. When the first decision lowers the cost of the second? If everyone registers their handguns, confiscating them later will be easier (less thorough searching required to get all guns)

2. The first decision affects the attitudes brought to the second one.

3. “Equality” means the second decision must be made like the first one.

4. The first decision affects the power of those interested in the second one. If weed is legal, weed companies have more power and profit, and can advertise to achieve XYZ

18- Acoustic Separation Argument

You can make an acoustic separation argument if you couldn’t have known the law.

If you shoot a burglar as they break in, you aren’t held liable. You couldn’t have checked the law, you had to act.

If you set up a trap to kill anyone who walks through the door you will be held liable, because you could have checked the law (and the law wants to deter that behavior). But even if they wanted to deter you shooting a burglar, you wouldn’t have been able to check

19- Rights

A right is protected by a property rule if it can't be invaded without its owner's consent. A right is protected by a liability rule if someone can get away with destroying it so long as he pays the cost.

The rules don't apply to things; they apply to situations. Thus your car is protected against outright taking by a property rule: a miscreant who steals it will be arrested. The same car is protected against accidental damage by a liability rule: a careless driver who demolishes it will have to pay damages. In effect the careless driver can force a transaction on you that you might have declined. He damages your car and writes you a check- and the legal system is satisfied. But the system isn't satisfied if the thief gets caught and writes you a check. He goes to prison.

So property rules and liability rules differ in the extent to which they require permission from their owners before they are invaded.

This is why we put people in jail for petty thefts but not for causing terrible accidents

If for some reason I really want to smash the front of your car with a sledgehammer, I ought to ask first. If I don't ask and do it anyway, I go to jail. If I'm going to mistakenly demolish the front of your car by backing into it with mine, again it would be nice if I asked first, but this time it isn't realistic. We're talking about an accident; if I had the foresight to ask about it in advance, I would have had the foresight to avoid it altogether. This is the difference between jail and a fine.

20- Endowment

WTP is < WTA. We need more to accept because we like things we already own.

Interesting: There are studies suggesting that clean air provokes the sort of differences just discussed: people may not want to pay much for it out of pocket, but once they have it they are stingy about giving it up; their willingness-to-accept prices, in other words, are much higher than what they say they would be willing to pay.

21- Hindsight Bias

told their subjects about a nineteenth-century battle between the British and the Gurkhas of Nepal.? The circumstances of the battle were described, and the subjects then were asked to estimate the probabilities of various outcomes victory for the British, victory for the Gurk-has, or some sort of stalemate. Then other groups were given the same information, but they were also told which one of those outcomes did oc-cur. They again were asked to estimate the likelihood in advance of each possible result. The subjects who were told the result of the battle tended to rate the actual result as much more likely than those who weren't told anything about it; thus people who were told that the British won the battle tended to say that the British were likely to win all along. The probability that something would happen should be the same regardless of whether it happened in fact, but humans have trouble keeping the issues separate.

22- Framing effects

People make compromise decisions.

23- Base Rate

After much study, the police determine—never mind how-that for every 100 people who ride on an airplane, one of them, on average, is carrying drugs. They bring a police dog named Merlin to the airport to help find the culprits. Merlin sniffs every passenger who exits a plane, and he barks when he smells drugs. Merlin is highly skilled. He never misses drugs when they're present. He occasionally is prone to giving false alarms, but not often; if no drugs are present, he is go percent likely to keep quiet. Smithers steps off the plane, and Merlin barks at him.

How likely is it that Smithers is carrying drugs?

I pose this question because many people get it wrong; you should very much want to get it right, because it comes up in different ways all the time. It seems at first that Smithers probably has drugs. Merlin makes mistakes only 10 percent of the time; if he barks, Smithers is go percent likely to be carrying drugs, isn't he? No. The chance that Smithers has drugs is about 1 in 11 (or 9 percent, if you prefer). The trick is that you have to remember not just Merlin's chance of being right but also the background chance that Smithers has drugs in the first place, which is low.

Hey, wait: if he barks wrongly only 10 percent of the time, doesn't that mean you're go percent likely to be the right man? No, and now it's easy to see why: he has a 10 percent error rate in screening people, almost all of whom are innocent.

Smithers is required to take a test to see whether he has AIDS. The background chance that someone from his country has the disease is 1 in 250. The AIDS test he takes catches the disease in every person who has it. It also produces false positives 4 percent of the time. (Tests for AIDS nowadays are better than that, but bear with the example.) The test on Smithers comes up positive. What are the chances that he has AIDS? At first the chances look great: the test yields a false positive only 4 percent of the time, so that means he's 96 percent likely to have the disease, right? Wrong, of course, as you now understand. We have to account for the base rate-the background unlikelihood that he has the disease. And we know how to do this. We build a fraction. On top goes the number of times the dog will bark and be right, or, here, the number of times the test will be positive and will rightly find AIDS. Since 1 person in 250 has AIDS, and since the test catches all of them, that's 4 in 1,000 (we'll use thousands here so that we can work with whole numbers). So we can put a 4 on the top of the fraction. On the bottom goes the number of times the dog will bark, rightly or wrongly—or, here, the number of times the AIDS test will be positive, rightly or wrongly, in 1,000 tries. First there are the 4 accurate positives that we just mentioned.

Then there are the erroneous positives, which happen 4 percent of the time. That's 4 times in 100, or about 40 times in 1,000. ("About" is the right word because we should have removed the 4 of those 1,000 cases that do have AIDS. But we're close enough.) The number on the bottom of the fraction thus is 44: 4 correct positives and 40 bad ones in every 1,000 tests. Now we can see the odds that Smithers has AIDS when his test says so: 4/44, or 1/11, or about 9 percent-roughly the same figure as in our airport case, as it happens."

24- Intangible Valuation

Through insurance -

we have another way to think of the value she put on the film. If we consider the $10 a premium for a kind of insurance, we can reason backwards to the value that the owner of the film put on it for these purposes. You wouldn't spend $10 to insure against a 1/1,000 chance of a misfortune that would cost you only $10 or $100 at least not if you were being economically rational. It wouldn't be worth it. In the long run you would end up paying more in insurance premiums than you ever would collect when the dreaded event occurs. Imagine paying $ 10 a day for 1,000 days, then collecting $100 on the day when the bad thing happens: it would be a bad deal. But if the loss were worth $1 million to you, the $10 payment to avoid the 1/1,000 chance of it would be a bargain. So to return to our case, if we assume $10 is the most you would pay to accept the 1/1,000 risk of lost film, the implication is that you value the film at $10,000. We can use the amount the prosecutor spent on backups, cloud storage, etc. as proxies for insurance.

we also are putting a price on the misconduct of the camera store. The store will use this price when deciding how careful to be in the future, and how much to charge for its services—or whether to offer them at all. If the store has to pay a hundred thousand dollars when it loses a customer's movies because that is the amount the customer would have charged to sell them, the store will have to charge its customers a lot more in the first place to cover the cost of the occasional mishap. The question is whether everyone really wants to pay a lot more up front in order to have the right to collect a giant award of damages if the film is lost. Probably not, since if that's what many people wanted it would be in someone's interest to offer those terms to them.

The same logic can be applied to accidents. There are car accidents every day that cost people their lives. If the wrongdoer in such a case has to pay over the amount the victim would have charged to give up his life, the bill will be very large—not just for the victim, but for everyone else when they buy car insurance. We could all pay ten times as much for insurance and then give the victims of accidents ten times as much in compensation as we currently do. The result would be less driving, since owning a car would be far more expensive. The question is whether that is the world anyone wants. If it isn't, then giving mammoth awards of damages after an accident doesn't make sense.

If the benefits are too small, the costs of the activity won't be brought home to those who participate in it. But if the benefits are too large—larger than the plaintiff would have thought worthwhile to insure in advance-then the activity will be made more expensive than anyone really wants it to be.

the exciting idea is to make the homeowner file a public statement of the value of the house—and then to have a rule that anyone in town can buy the house at that price if they wish. The owner will want to declare a low price to keep his taxes down, but if it gets too low someone who likes his house, or maybe just someone who wants to make him leave the neighborhood, can swoop in and force him to sell. What fun!

There are thoroughbred horse races like this, too, called claiming races. Your horse races against other horses of similar value—in, say, the $20,000 bracket. You can try to sneak your horse into a cheaper bracket where it is more likely to win the races, but you probably won't, because there is a catch: anyone can buy your horse for the price that defines the bracket.)

Interesting af

Similar studies examine how much extra payment various types of workers demand to perform risky work. Assume window washers who work on top floors of tall buildings have a 1/10,000 greater chance of death than those who work near the ground; as a result, window washers are prepared to accept $300 less in wages to be assigned to low floors.

Again, this would suggest that they value their lives at $3 million. Notice that this is similar to asking what the customer at the camera store would have paid for a guarantee that her film wouldn't be lost. There have been many efforts to combine the results of all these studies into an average sense of how much people seem to value their lives." These inquiries are capable of generating widely disparate figures, but the averages they have generated lately are in the $7 million range." That figure can quickly change across times and places and can vary according to the wealth of whoever is being studied. In the late 1990s the usual figure offered in the United States was in the range of $2-3 million."