GAINS, LOSSES, AND JUDGES: FRAMING AND THE JUDICIARY.

Author:Rachlinski, Jeffrey J.
 
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INTRODUCTION 522 I. FRAMING, WITH APPLICATIONS TO LAW 528 A. Reference-Dependent Choices 529 B. The Status Quo Bias 533 C. The Endowment Effect 535 D. Risk-Seeking Choices Among Losses 538 E. Framing Effects in Judges 541 II. METHODOLOGY 545 III. EXPERIMENTS AND RESULTS 548 A. Study 1: Salary Dispute (Reference Dependence #1) 548 1. Methods and Materials 548 2. Results 549 3. Discussion 549 B. Study 2: Breach of Contract (Reference Dependence #2) 550 1. Methods and Materials 550 2. Results 551 3. Discussion 551 C. Study 3: Mutual Mistake (Status Quo Bias #1) 552 1. Methods and Materials 553 2. Results 554 3. Discussion 554 D. Study 4: Hiring and Firing Decisions (Status Quo Bias #2) 555 1. Methods and Materials 557 2. Results 558 3. Discussion 558 E. Study 5: Medical Malpractice (Endowment Effect #1) 558 1. Methods and Materials 559 2. Results 560 3. Discussion 561 F. Study 6: Water Right (Endowment Effect #2) 562 1. Methods and Materials 562 2. Results 564 3. Discussion 564 G. Study 7: Products Liability (Risk Seeking to Avoid Losses 565 #1) 1. Methods and Materials 565 2. Results 566 3. Discussion 566 H. Study 8: Framing and Bankruptcy Reorganization Risk Seeking to Avoid Losses #2) 567 1. Methods and Materials 567 2. Results 568 3. Discssusion 569 IV. DISCUSSION AND CONCLUSION 569 APPENDIX: STIMULUS MATERIALS 574 INTRODUCTION

Imagine that you bet a friend from Philadelphia $50 that the New England Patriots would win Super Bowl LII. Philadelphia won. How would you best express the financial implications of the game for you? Perhaps the most natural way is that you "lost $50." That is true enough, but is incomplete. You are really $100 worse off. You had to pay your friend $50, and you did not win the $50 that your friend would have paid you had New England won. The salient out-of-pocket loss overshadows the $50 that you did not win. (1) Losing is not identical to failing to win. (2) Losses hurt much more than equivalent gains feel good, and we thus focus our attention on losses. (3)

Aversion to losses is one of the most robust phenomena in the pantheon of decision theory and behavioral economics. (4) It even has a neurological basis. (5) Loss aversion clearly influences decisions about financial gambles but extends well beyond that. (6) Doctors favor riskier medical procedures described as involving the potential loss of life than described as potentially lifesaving; (7) or, as a popular television show put it: "She can actually make a side effect like 10% chance of liver failure sound like a 90% chance of liver success!" (8) Professional golfers take more chances to avoid a bogey than to obtain a par. (9) People report that food tastes better when described as 75% lean than as having a 25% fat content. (10) Successful political candidates--including then-candidate Donald Trump--take care to use the rhetoric of loss to instill a desire for change. (11) People have different physiological reactions to gains than to losses. (12) Nonhuman primate species such as chimpanzees (13) and capuchin monkeys share the same asymmetric response to gains and losses. (14)

Most choices can be described (or "framed") as involving either a loss or a gain. The malleability of choices then creates anomalies of judgment, including reference-dependent choices, the endowment effect, the status quo bias, and risk-seeking choices when confronting losses. (15) Loss aversion (or framing), as psychologists dubbed this phenomenon, (16) makes the frame of reference relevant to choice in that preferences seem to depend upon the position people currently occupy (reference-dependent choice). (17) It also leads to a preference for the status quo (status quo bias). (18) Loss aversion induces people to value commodities more once they own them (the endowment effect). (19) Finally, when all of the potential options involve losses, an aversion to sure losses leads to risk-seeking conduct; people choose options that hold out hope of losing as little as possible, even when those options are economically less attractive than options that involve sure options (risk-seeking choices when confronting losses). (20)

Not surprisingly, a phenomenon as robust as loss aversion influences the development of law. (21) The distinction between gains and losses appears to be deeply embedded in the grammar of how people think, including about law. (22) For example, tort law concerns itself with the "loss of a chance" rather than a "foregone opportunity." (23) The Constitution protects against "takings" but provides no discussion of "givings" or failures to give. (24) Professor Patrick Atiyah asserts the intuition clearly: "To deprive somebody of something which he merely expects to receive is a less serious wrong, deserving less protection, than to deprive somebody of the expectation of continuing to hold something which he already possesses." (25) The effect of loss aversion on law and public policy is thus apt to be powerful. Just consider the following examples of the role framing plays in a variety of legal contexts:

  1. Although the Supreme Court interprets constitutionally enshrined federalism as precluding the federal government from imposing penalties (losses) on states for failing to enact legislation, (26) federal statutes that withhold federal highway funds (foregone gains) for failing to enact legislation are constitutionally acceptable. (27)

  2. A New York statute, recently challenged on First Amendment grounds before the United States Supreme Court, Expressions Hair Design v. Schneiderman, forbids the use of surcharges (losses) on credit card transactions, but allows discounts for cash (gains). (28)

  3. The Clean Air Act (29) regulates new sources of air pollution (which can reduce potential profits or gains of future facilities) far more aggressively than existing sources (which would impose losses on existing facilities). (30)

  4. Defendants in lawsuits commonly reject economically favorable settlement offers (which would mean incurring a loss) in favor of litigating vigorously, while plaintiffs generally accept such settlement offers (which means accepting a smaller gain than an aggressive litigation strategy might bring). (31)

  5. Tort law compensates victims for all manner of out-of-pocket losses, but fails to provide compensation for foregone profits in most settings. (32) Similarly, "when an interaction results in both an injury to one side and benefit to the other, the remedial rights of the injured party are usually based on her losses, rather than on the other party's gains." (33)

  6. Taxpayers who have underpaid during the year and face paying more taxes when they file their return are much more likely to file fraudulent returns than those who have overpaid during the year and are already getting a rebate. (34)

  7. The Supreme Court interprets the Due Process Clause as requiring a hearing before a beneficiary of an entitlements program can be deprived of any benefits (a loss); fully qualified applicants for benefits (future gain) do not enjoy the same protection. (35)

  8. Employees rarely attempt to bargain for more employment protection than "at will" employment offers (a potential gain), but employees who have "for cause" protection strongly resist giving it up (a potential loss). (36)

    The list of legal issues in which foregone gains and losses are treated differently goes on at length. (37) Over a decade ago, two articles reviewing the literature on the implications of framing for the legal system identified hundreds of law review articles on the subject. (38) A recent book expands even further on this list. (39)

    The influence of loss aversion on legislative and regulatory processes appears to be well established, (40) but judges obviously play a critical role in the development of law. As outside referees, however, judges might not fall prey to the cognitive illusions that influence lay citizens and litigants. The many articles assessing the role of framing in legal analysis still lack a systematic demonstration that framing influences judicial decisions. The research presented in this Article fills that gap.

    In this Article, we present eight studies in which over one thousand judges evaluated hypothetical cases from the perspective of either gains or losses. In all eight studies, we used fact patterns presenting decisions that are factually and economically identical except for their frame as a gain or loss, illustrating the four phenomena described above (reference-dependent choice, status quo bias, endowment effect, and risk-seeking choices in the face of losses). (41) Across eight different areas of law, judges reacted differently to gains than to losses. In short, the results confirmed one of the basic insights of behavioral economics by demonstrating that gains and losses affect how judges decide cases.

    This Article proceeds as follows. In Part I, we briefly review the literature on framing effects, with special attention to applications in legal contexts. In Part, II we describe our research methods. In Part III, we describe the eight studies of framing we have conducted on judges and report our results. Part IV offers a discussion and conclusions.

    1. FRAMING, WITH APPLICATIONS TO LAW

    As journalist Michael Lewis documented in his recent book, The Undoing Project, psychologists Amos Tversky and Daniel Kahneman first documented the disparity between people's reactions to gains and losses while studying economic paradoxes concerning how people make choices involving risk. (42) All of the decisions Tversky and Kahneman initially studied involved potential gains. For example, they asked their research subjects questions like: "Would you rather have $500 for sure or a 50-50 shot at $1,000?" (43) Tversky began to wonder what would happen if they began putting negative signs in front of the numbers. (44) For example: "Which... do you prefer... [a] lottery ticket that offers a 50 percent chance of losing $1,000 [or a] certain loss of...

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