Property's morale.

• Author: Davidson, Nestor M.

A foundational argument long invoked to justify stable property rights is that property law must protect settled expectations. Respect for expectations unites otherwise disparate strands of property theory focused on ex ante incentives, individual identity, and community. It also privileges resistance to legal transitions that transgress reliance interests. When changes in law unsettle expectations, such changes are thought to generate disincentives that Frank Michelman famously labeled "demoralization costs."

Although rarely approached in these terms, arguments for legal certainty reflect underlying psychological assumptions about how people contemplate property rights when choosing whether and how to work, invest, create, bolster identity, join a community, and make other decisions at property's core. More precisely, demoralization is predicated on a kind of paralysis flowing from anxieties about instability, unfair singling out, and majoritarian expropriation that can be sparked in legal transitions.

This prevailing psychological portrait of expectations has considerable intuitive appeal and is widely influential. It is, however, distinctly incomplete. This Article offers an alternative picture of the expectations with which people approach property and the corresponding anxieties that might cause people to hesitate. From this perspective, stability is less important than assurances that the legal system will respond when external forces threaten to overwhelm the value owners create, that it will provide a fair process of adjustment over time, and that it will ensure inclusion.

In short, property law can offer morale benefits that are every bit as critical as demoralization costs. Property theory and doctrine often juxtapose ex ante certainty against ex post flexibility; however, a morale lens underscores that legal transitions can signal responsiveness as easily as instability. Doctrinally, this understanding recalibrates property law's approach to expectation. Normatively, property's largely ignored, but absolutely vital, morale function provides a framework for understanding how the legal system can buoy confidence in greater balance. fostering all of the work with which property is so rightly associated.

TABLE OF CONTENTS INTRODUCTION I. THE PSYCHOLOGY OF EXPECTATIONS IN PROPERTY THEORY. A. Stability Justifications in Property (and Their Discontents) 1. The Ex Ante Value of Legal Certainty 2. The Costs of Stability and the Critique of Expectationalism B. Doctrinal Protection for Stable Expectation C. Michelman's Formula on the Couch: Analyzing Demoralization II. ALTERNATIVE ANXIETIES: NONRESPONSIVENESS, UNFAIRNESS, AND EXCLUSION A. Regret Avoidance, Volatility, and Systemic Risk B. Fairness, Flexibility, and Engagement C. Perceptions of Exclusion and Barriers to Commitment D. An Alternative Portrait for Ex Ante Confidence III. RECALIBRATING EXPECTATION AND SECURITY IN PROPERTY A. From Demoralization Costs to Morale Benefits 1. A New Variable in the Expectational Calculus 2. The Reciprocity of Expectations 3. Moral Intuitions Revisited B. Correcting for Expectation Asymmetry in Property Doctrine 1. Sensitivity to Expectational Tradeoffs in Property Conflicts 2. Takings, Due Process, and "Common, Shared Understandings". C. Regulating for Morale Boosting in Property 1. Security, Flexibility, and Signals of Systemic Risk Regulation 2. From Neutrality to Antidiscrimination to Inclusion 3. A Word on the Market for Morale D. Opacity and the Risk of "Morale Hazard". 1. The Opacity of Alternative Expectations 2. Overincentive Problems and the Limits of Expectation CONCLUSION "Property is nothing but a basis of expectation...."

--Jeremy Bentham (1)

INTRODUCTION

Property law's approach to the life of the mind is unbalanced. One of the most enduring arguments deployed in favor of strong property rights is the imperative to protect the "settled expectations" of property holders. (2) This reflects the prevailing, often visceral, idea that the values inherent in our system of property--rewarding investment, promoting exchange, bolstering individual identity, and fostering community--are best served by long-term stability in a legal regime on which people can rely. (3) Concern with protecting expectation has taken root both in constitutional property law as well as in a variety of traditional doctrinal areas of property. (4)

Lurking beneath arguments for property's valorization of expectation lays a set of psychological assumptions about the anxieties that are sparked by legal transitions. (5) Changes in the law, for example, may raise fears of general instability--if the law changes now, the law may similarly and in unforeseen ways change again. Moreover, there is something palpably troubling about the unfairness of a process under which the state intentionally picks winners and losers. Finally, when the majority harms the property of a minority in a way that does not even out over time, such majoritarian abuse tells other owners that they, too, might be singled out. Frank Michelman famously labeled the disincentives flowing from legal transitions that unsettle expectations "demoralization costs." (6)

This compelling portrait of the psychology of expectations has been widely influential in legal theory and doctrine, (7) and has considerable merit. (8) It is, however, distinctly incomplete. As the aftermath of the recent economic crisis has painfully evinced--in which ordinary investors retreated from committing capital (9) and housing markets locked up in part because potential buyers were concerned about further market shocks (10)--other long-term concerns are vitally important when people decide whether and how to approach property. These concerns reflect anxieties that mirror what demoralization assumes. Thus, some people fear that when uncertainty arises, the legal system will not be responsive. Likewise, some people need to know that when circumstances change, there will be a fair process of adjustment. And those facing private exclusion at the hands of a majority may be concerned with whether there will be an adequate remedy. These animating anxieties essentially focus on whether law will respond or stand idly by when events beyond the control of owners threaten the value of their property. (11) For some people, then, it is the very risk that a legal transition might not be forthcoming that will cause them to be cautious.

This landscape of concerns finds support in behavioral and psychological literature on decisionmaking and risk. Experimental and observational work, for example, has documented that people tend to respond to certain negative events by overcompensating toward risk aversion. (12) Psychological research on procedural justice has further underscored that perceptions of fairness and systemic legitimacy are important determinants when people contemplate engaging in an activity. (13) And there is empirical support for the proposition that signals of exclusion, explicit and implicit, can disincentivize and marginalize those receiving such signals, again making them hesitate before committing. (14)

This alternative psychological portrait suggests--and it is the work of this Article to delineate--a very different kind of expectation for the institutions of property to respect. As much as people worry about instability, unfair singling out, and majoritarian exploitation, people are also concerned about responsiveness, fair adjustment, and inclusion. In other words, some people are motivated to engage with property not because they take comfort that the law will not change but rather because they know at the outset that the system will be flexible. As a result, legal transitions can communicate to those people that the boundaries of risk inherent in property have reasonable limits; that society will, however imperfectly, provide processes to mediate competing property interests; and that the system of property will protect those perceived to be outsiders. In short, for some people, demoralization costs have an underappreciated obverse in what this Article calls "morale benefits." (15)

Descriptively, sending signals that resonate for expectations of flexibility is an important part of what the legal system is doing unintentionally much of the time when it muddies supposedly crystalline rules. (16) In any number of areas, legal institutions are confronted with changed circumstances arising from new understandings of harm or new opportunities, and the law shifts to accommodate these changes, even at the cost of unsettling previous reliance. This dynamism in property is often understood to reside in the realm of ex post adjustment and reinterpretation of rights. But these shifts can also be understood as sending an ex ante signal to those who value flexibility--an important psychological consideration to bolster confidence. (17)

Understanding morale's role leads to a broader palette of interests for courts to consider when approaching questions of expectation. (18) The prevailing focus on one type of expectation and the demoralization that follows its transgression presents a fundamentally inaccurate picture of the "ingrained habits of mind" (19) that inform the choices people make in approaching property. A more balanced perspective would not render reliance on legal rules less salient but would mean that courts evaluating the costs and benefits of legal transitions would recognize the inherent tradeoffs in choosing traditional expectations of certainty over expectations of flexibility. Similarly, a morale lens can illuminate otherwise puzzling aspects of regulation that are as much about signaling responsiveness and systemic strength as they are about correcting specific market failures. (20)

Normatively, recognizing that morale benefits counterbalance demoralization costs gives a conceptual vocabulary for reshaping our understanding of expectations. Any owner can potentially be not only the...