Conflict of Interest and Decision Making

This chapter looks at conflicts of interest (COI). It first considers tools of analytic philosophy to highlight the notion of COI, and in particular, the connection between COIs, choice and judgment, emphasising why decision making is a central element in the characterisation of COIs. Drawing on these elements, it is clear that any question of regulation and institutional design requires a sophisticated understanding of the capacity of individuals to recognise and resist bias in themselves and others when making judgments and decisions. The chapter then studies two specific mechanisms—bounded rationality and cognitive biases—that affect the behaviour of people in COI situations. It starts by analysing how rationalisation can reframe questionable behaviour as appearing acceptable, and how a sense of invulnerability encourages people to downplay the impact of COIs. The chapter then looks at techniques (policies, procedures, incentives, etc.) used to address COI situations in the light of insights from psychological studies. It concludes that both fiduciary duties and procedural requirements reflect an erroneous understanding of psychology and have led institutions and policies to deal ineffectively—if not indeed counterproductively—with the problems caused by COIs. Finally, the chapter assesses how alternative mechanisms may overcome the highlighted deficiencies. It specifically focuses on the key role that professional norms can play in dealing with unavoidable COIs while preserving trust between the affected parties, and the potential for self-regulation to provide worthwhile tools in combatting the harmful effects of COIs.

The Power of Sequence

Researchers have documented numerous cognitive biases that are difficult to reconcile with rational choice theory. But is there a more general set of decision-making rules that might account for these cognitive biases and ‘rational’ decisions alike? Psychologists in search of such rules have developed a theory of quantum decision making. This chapter introduces quantum decision making to a legal audience, explains its intellectual origins, and identifies some contexts in which it provides useful tools for legal theorists. Using the example of a juror evaluating a criminal case, the chapter illustrates how quantum decision making explains and predicts phenomena that are difficult to reconcile with other theories of choice. More generally, quantum decision making highlights the importance of sequence in shaping judgments and decisions—and thus, its importance in law’s choice architecture.

Game Theory and the Law

Classical game theory analyses strategic interactions under extreme idealisations. It assumes cognitively unconstrained players with common knowledge concerning game forms, preferences, and rationality. Such ideal theory is highly relevant for human self-understanding as a rational being or what Selten called ‘rationology’. Yet, ideal theory is highly irrelevant for real actors who are in Selten’s sense boundedly rational. Starting from essential features of real bargaining problems, elements of Selten’s ‘micro-psychological’ and Raiffa’s ‘telescopic’ behavioural bargaining theory are introduced. From this, an outline of a workable rationality approach to bargaining emerges. It suggests relying on telescopic elements from Raiffa’s model to provide general outcome orientation and on insights from Selten’s aspiration adaptation model of individual decision making to develop process-sensitive action advice. A bird’s eye view of a prominent recent case of ‘bargaining in the shadow of the courts’ shows a surprisingly good fit of outcomes with the implications of Raiffa’s telescopic approach while remaining compatible with a Seltenian process. Though due to a lack of specific information because the micro-foundations for the telescopic theory cannot be provided, it is at least clear how further case studies and experiments might be put to work here.

Decision Making in Chains and Networks of Contracts

Networks of contracts serve mainly as a long-term form of organisation, both features being typically combined. This combination—the so-called organisational contract—is seen as a hybrid between market and firm. There are different explanations for its existence and two are particularly prominent. Williamson sees them as a governance device to cope with the problem of uncertainty of future events, namely in situations where one party has invested in a particular relationship more than the other and therefore is ‘more dependent’ on its continuance. Conversely, Powell sees them as a scenario where neither command nor anonymous exchange dominate, but mutual (often personalised) trust and reciprocity based on strong mutual knowledge of the partners are marked. These two explanations imply how fascinating the organisational contract may be for decision theory and the law. This chapter addresses the phenotype of (long-term) networks of contacts and sees a large variety of them ranging from rather standardised to highly tailor-made arrangements, which implies a heterogeneous basis for decision-making theories and their application. With respect to decision-making theories that are considered in the second section, the chapter takes a broad perspective. While it may be attractive to apply mainly one decision theory to the phenomenon, the chapter asks which decision theories might have particular explanatory value. Thus, a broader survey on a multifaceted compound of theories might be particularly suitable for the heterogeneous aspects of the phenomenon. The chapter also addresses the question of which repercussions the discussed decision theories might have in law.

Itinera Europea

Based on strategic interaction analysis, the chapter assesses the plausibility of the future paths of development of the European Union: a federal state, a differentiated and flexible union, covert integration, or disintegration. Systematically varying either the preferences of the main actors or the macro decision-making rules and external shocks/crises, the analysis comes to the conclusion that a differentiated and flexible union and covert integration are the most likely paths of development. The chapter discusses implications of specific scenarios, such as a possible popular backlash against ‘covert integration’ and elaborates on the desirability of practical proposals of a change in the European institutional architecture.

The Social Welfare Function

The social welfare function (‘SWF’) framework is a methodology for assessing governmental policies that originates in theoretical welfare economics and is now widely used in various economic literatures. The framework translates the possible outcomes of policy choice into patterns of well-being among the population of interest, represented by interpersonally comparable well-being numbers. Policies are then ranked in light of some rule for ordering these well-being patterns (such as a utilitarian or prioritarian rule), taking account of the probability that a given policy will lead to a given outcome. This chapter presents the SWF framework, illustrates how it can be used for regulatory policy analysis, and compares the methodology to cost-benefit analysis (‘CBA’), currently the dominant policy-analytic tool in governmental practice. CBA eschews interpersonal comparisons and, instead, translates policy impacts on each person into a monetary equivalent relative to the status quo; these monetary equivalents are then added up. While CBA and the SWF framework are broadly similar in being consequentialist and welfarist, and in adopting a preference view of well-being, they employ distinct analytic structures for integrating information about preferences and possible outcomes to arrive at an assessment of the various policies that government might adopt. As the chapter demonstrates, the structural differences between the SWF framework and CBA can yield significant divergence at the level of policy recommendation.

Most People Like Nudges—and Why that Matters

This chapter reports the results of nationally representative surveys in fourteen countries, investigating the attitudes of people towards nudges and nudging, with a particular focus on environmental and health nudges. The countries covered are Australia, Brazil, Canada, China, Denmark, France, Germany, Hungary, Italy, Japan, Russia, South Africa, South Korea, and the United Kingdom. There is strong majority support for both health and environmental nudges in all countries, with the exception of Japan, Denmark, and Hungary. China and South Korea stand out with particularly high acceptance rates. Beyond reporting the results of the combined dataset for the first time, the chapter provides an explanation first, of why policy makers might be interested in public approval or disapproval of nudges, and second, how information of public acceptance can inform both uses of and constraints on nudging.

Did You Say ‘Theories of Choice’?

This chapter takes up two difficult questions: ‘does the law contain one or more theories of choice?’ and, if it does, ‘is there a meta-theory to tell us which theory of choice to use in which cases?’ Even if one retains a loose definition of what counts as a ‘theory of choice’, there are reasons to be sceptical about the enterprise of mapping out theories of choice underpinning the law. This is because the supply of such theories is both abundant and incomplete while the demand is generally weak. Consumer protection, which purports to protect ‘consumer choice’, would seem to be a designated area of law to look for theories of (consumer) choice. However, an enquiry into legislative work on consumer protection reveals paradoxical efforts to confirm the theory that consumers do well with information rather than investigate alternative theories. It also appears that consumer law embeds several different conflicting theories of consumer choice without any sign of a meta-theory indicating which theory applies to which cases. In addition, where there is a theory of consumer harm justifying legislative intervention, it seems to matter little that we do not have a theory for how consumer choice is distorted. In short, the legislative appetite for theories of choice seems limited. Legal scholarship offers a different picture. A space has emerged in which to discuss theories of choice within legal analysis, which is still in the process of being shaped. Tentatively, it is suggested that the legal literature offers a contrast between deep and narrow discussions of theories of choice, and wide and shallow ones.

Institutional Investor Voting Behaviour

This chapter shows how network theory can improve our understanding of institutional investors’ voting behaviour and, more generally, their role in corporate governance. The standard idea is that institutional investors compete against each other on relative performance and hence might not cast informed votes, due to rational apathy and rational reticence. In other words, institutional investors have incentives to free-ride instead of ‘cooperating’ and casting informed votes. We show that connections of various kinds among institutional investors, whether from formal networks, geographical proximity, or common ownership, and among institutional investors and other agents, such as proxy advisors, contribute to shaping institutional investors’ incentives to vote ‘actively’. They also create intricate competition dynamics: competition takes place not only among institutional investors (and their asset managers) but also at the level of their employees and among ‘cliques’ of institutional investors. Employees, who strive for better jobs, are motivated to obtain more information on portfolio companies than may be strictly justified from their employer institution’s perspective, and to circulate it within their network. Cliques of institutional investors compete against each other. Because there are good reasons to believe that cliques of cooperators outperform cliques of non-cooperators, the network-level competition might increase the incentives of institutional investors to collect information. These dynamics can enhance institutional investors’ engagement in portfolio companies and also shed light on some current policy issues such as the antitrust effects of common ownership and mandatory disclosures of institutional investors’ voting.

Decision Theory and Allocating Decision Making in the Firm

Sometimes it is possible to deal productively with the subject matter of choosing and making decisions without actually settling upon any particular theory of choice. This is the case in the law of business organisations, which does not settle upon a theory of choice because it does not consider itself the ultimate decision maker. Rather, the law develops rules to allocate decision-making authority among the various parties. Utilising only a few basic principles of decision theory, the law of business organisation creates a structure for allocating decision-making responsibility on many different levels. However, it leaves the ultimate decision makers free not only to make substantive decisions for themselves but also to select from among the various theories of choice for doing so.