EXPERIMENTAL LAW AND ECONOMICS*
COLIN CAMERER
ERIC TALLEY
Rea A. & Lela G. Axline Professor of
Business Economics,
California Institute of Technology
Professor of Law, USC Law School;
Senior Economist, RAND Corporation
Institute for Civil Justice
PRELIMINARY DRAFT
(Do not quote, cite or circulate without permission)
December 28 2004
First Version: February 2004
*
Forthcoming, Handbook of Law and Economics (A.M. Polinsky & Steve Shavell, eds. 2004). Many
thanks to participants at a conference at Harvard Law School for helpful comments and discussions. All
errors are ours
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I. INTRODUCTION
Few methodological approaches to the study of law that have received more recent
attention than experimental methods. While virtually absent from the pages of law
reviews and law and economics journals just a decade ago, experimental studies (or
articles purporting to be inspired by the results of such studies) have become a veritable
staple consumption good for today’s legal scholars.
In many respects, the emergence of experimental methods to analyze law should not
be terribly surprising, particularly within law and economics (and affiliated fields).
Indeed, over an even longer period of time, experimental methods have become relatively
well established in both economics and political science proper – disciplines that served
as central foci in generating insights that inform the law and economics literature. In
addition, the emerging field of “behavioral economics” has begun to synthesize findings
from economics, political science and psychology into a more unified theory of
individual and multi-person decision theory. (See, e.g., Camerer et al. 2004). Because
psychologists have long depended primarily on experimental methods, these
interdisciplinary approaches were a natural fit for such methodological emphases.
Indeed, during the last five years, a sub-discipline of “behavioral law and economics” (or
BLE1) has emerged that largely echoes the approach in behavioral economics. This very
sub-field has similarly enjoyed significant popularity in legal scholarship of late.2
Experimental methods are but one methodological approach within the field of law
and economics, and by far the most recent to take root. Most of the initial insights within
1
See, e.g., Jolls, Sunstein & Thaler (1998) for a review.
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the law and economics during the 1960s and 1970s came from applications of core
insights from microeconomic theory. Game theorists similarly claimed a piece of the
action during the 1980s and 1990s, incorporating insights from repeat play, asymmetric
information, and evolutionary selection models into the analysis of law. During this
period, empirical methods also began to emerge, particularly as methods for collecting
and analyzing data from the court system became more reliable and feasible. In many
ways, empirical methods have proven a helpful means for testing the numerous
predictions made within theoretical law and economics.
Nevertheless, as we elaborate below, empirical approaches suffer from the fact that it
is often difficult to stage (much less to observe by happenstance) a truly natural
experiment in the real world that implies clear causal conclusions. Because laboratory
approaches excel in just this respect, at the very least good experimental designs are
likely to provide a complementary and confirmatory check on empirical methods. Our
joint enterprises in this essay are (a) to articulate more specifically how and where
experimental methods fit into the larger tapestry of legal studies from a social science
perspective; (b) to describe contributions that have already been made in the field; and (c)
to suggest future courses of inquiry that may well prove fruitful.
Before proceeding, a few caveats about our inquiry deserve specific mention.
Although the foci of our inquiry may prove helpful to a number of different audiences,
we intend our contribution to resonate most centrally with two groups in particular. First,
for legal scholars who are not experimentalists by training but who are interested in
exploring experimental methods, our review may serve as a valuable reference for
A recent Westlaw search, for example, turned up a total of 341 law review articles discussing “behavioral
law and economics” during the last 6 years.
2
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generating research questions and guiding experimental design.3 Second, for academics
of all stripes who wish to evaluate a piece of experimental law and economics (e.g.,
referees, reviewers, and so forth), our essay may help provide a framework for evaluating
new scholarship for its creativity, novelty, and relative contribution. We would be, of
course, pleased if this paper were read by an even broader audience, but such gratification
would be strictly fortuitous.
A second caveat to our analysis concerns how we make distinctions on subject matter
and scope. Because experimental law and economics has a relatively short pedigree
(only 20 years or so by even the most generous genealogical counts), it has necessarily
drawn from and built upon a vast body of research that used experimental approaches to
law, but did not centrally concern economic inquiries per se. Fields such as law and
psychology, criminology, and legal sociology have, at intermittent times, employed
experimental methods to gain purchase on causal claims about human legal behavior.
These literatures, in contrast, have relatively long pedigrees, and we cannot possibly do
justice to all of them within the confines of the current essay. We have chosen, therefore,
to do justice to none of them, except insofar as they have informed the general approach
applied by researchers in experimental law and economics. It is important for us to
emphasize that our omission should not be seen to reflect any assessment about the
contributions these fields have made to experimental studies, but instead is an artifact of
more pedestrian scrivenerial logistics.4
3
Our contribution should not be relied on exclusively, however. Indeed, those new to experimental
methods might well benefit from the insights of an experienced co-author, and from other overviews of the
experimental approach (such as Croson 2002).
4
Those readers looking for a more general treatment would do well to consult the Volume 4 of the
University of Illinois Law Review (2002), which is dedicated entirely to experimental methods in law writ
large.
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Our analysis proceeds as follows. Section II discusses general methodological issues
surrounding experimental methods in law, including the purpose of experiments, the
ingredients of a good experiment, and the central role that experimental evidence is
increasingly playing in testing the underlying foundational precepts of economic behavior
as it applies to law. Section III then considers a number of specific legal settings in
which experimental approaches have proven particularly valuable, such as the study of
bargaining in the shadow of the law, the analysis of suit and settlement, and the
investigation of jury and judge behavior.
In each of these contextual applications,
experimentalists have informed the state of academic inquiry substantially, and in many
cases experimental approaches have played a central role in spawning affiliated
theoretical or empirical literatures. Finally, section IV concludes by offering a series of
observations about where experimental approaches might still fruitfully expanded or
applied in novel ways to the study of law.
II. METHODOLOGY & MOTIVATION FOR EXPERIMENTAL LAW AND ECONOMICS
An experiment is the creation of a situation controlled by the experimenter (to
some degree), for the purpose of testing a general theory or establishing causality (see
Croson, 2002, for a “how to” manual aimed at lawyers).5 As noted above,
experimentation, field observation, and theory are ideally complements of one another:
done well, each enhances the marginal productivity of the other enterprise. Moreover,
5
Smith (1982) is a seminal discussion of principles of economic experimentation. A useful recipe book is
Friedman and Sunder (1993). Bergstrom and Miller (1999) show how to teach an economic principles
course using simple experiments. Cumulated regularities are summarized in Davis and Holt (1993) and
Kagel and Roth (1995).
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the conditions of the experiment match the assumptions o`f a theory being tested.
(Psychologists often refer to this match as “internal validity”).
A central feature of any sound experimental design is control. The crucial features
of control are (a) the ability to assign subjects randomly to treatments, (b) the ability to
operationalize features of theory which are often difficult to observe or control
econometrically in field data (and also to create situations of theoretical interest which do
not occur naturally or reliability), and (c) the ability to replicate results (which disciplines
experimenters, permits accumulation of regularity, and facilitates tests of robustness to
design changes).
Random assignment is perhaps the most foundational element of a valuable
experiment. Explicitly, it is important to be sure that subjects are truly assigned in a
random fashion. For example, suppose that subjects are told to sit wherever they like as
they arrive, and those in the front row of a lab will act as buyers and those in the back
row as sellers. Even though assignment is nominally random, if the early-arriving
subjects sit in the front row then buyers will be those who are more punctual and
latecomers will self-assign themselves as sellers. If, as seems plausible, early arrivers are
likely to have different proclivities than late arrivers, the assignment protocol would not
be truly random. It would be easy to draw the wrong conclusion about the effects of
buyer versus seller behavior, when the effect is really due to early arrival (an
experimental “confound”— a multicollinearity that is easily avoided by random
assignment).
From the perspective of replicability, experimental economists are frequently
preoccupied with following a written script and recording any ad lib instructions that are
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given (often in an experimental log) to permit exact replicability. Such procedures are
perhaps a prudent way to address a related problem that has not been explored
thoroughly: the underlying “blindness” of an experiment to the hypotheses being tested
(which is why being able to replicate the experimental instruction exactly is important).
There are subtle ways in which an experimenter’s bias toward or against a theory being
tested could influence the results, as well as other subject-experimenter interactions (e.g.,
male subjects may behave differently in the presence of a female experimenter).
Careful analysis of experimental data follows most of the rules of good statistical
control of any type of data: Have large samples, make replications as independent as
possible, and conduct multiple parametric and nonparametric tests. A complication with
many economics experiments is that responses are not independent because subjects
interact. If subjects are bargaining in pairs, for example, then data can be analyzed both at
the individual level and the pair-wise (dyadic) level. Usually experimental economists are
careful about making conservative assumptions about independence. For example, in
some cases each experimental session is treated as a separate data point, and tests are
conducted with each session-wide summary statistic as a single datum. An early tradition,
which is unfortunately waning, is to invite subjects back for a second repetition of the
same experiment to see whether experienced subjects behave differently than experienced
ones. When equilibria are complicated, we often find that experienced subjects will be
much closer to equilibrium predictions6 than experienced ones. This does not imply, of
course, that the data from inexperienced subjects are uninteresting. Indeed, the ability to
Note that “equilibrium predictions” need not coincide with equilibria emanating solely from rational
choice models. Indeed, as we elaborate below, many elements of behavioral economics are themselves
amenable to equilibrium concepts.
6
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compare the two groups just helps establish the boundaries of where the equilibrium
prediction might work poorly and well.
A. Purpose of experiments
Experiments are useful for different purposes. In experimental economics,
experiments often permit sharp testing of theory when predictions depend delicately on
assumptions that cannot be clearly measured from field observation.
For example,
experiments testing game theory have proved especially useful because predictions often
depend delicately on what players know about moves of others and how they value
consequences (e.g., Camerer, 2003). Hundreds of experiments have shown where
equilibrium concepts predict well and predict badly. These data have also provided lots of
raw material to motivate new theorizing about how learning, natural limits on strategic
thinking, and social preference like reciprocity explain strategic behavior.
Sometimes experiments simply document regularity “pre-theoretically’, as an
inspiration for theorizing. For example, early experiments established that even small
groups of traders (e.g., as few as three buyers and three sellers) rapidly converge to
Pareto-optimal competitive allocations in decentralized trading. This result is surprising
because formal models of competitive markets had previously assumed infinitely many
“price takers,” so that game-theoretic strategizing is disabled. The experimental regularity
shows that surprisingly competitive results can be created by very small numbers of
traders when exchange is centralized. This regularity then provoked theories of how
strategic interaction would work in small-numbers settings (Wilson, 1985; Cason and
Friedman, 1993), and how simple adaptive rules could lead to convergence (Easley and
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Ledyard, 1993; Gode and Sunder, 1997), although this is still largely an unsolved
problem.
Experiments have also proved useful in giving advice to policymakers about how
well targeted policy interventions are likely to work (Plott 1987; Roth, 2002). The
inspiration here is very much akin to experimentation in the physical sciences, such as
testing of airplane wing designs in wind tunnels, or testing ship designs in “tow tanks”
with simulated oceanic waves. While these experiments do not guarantee that a wing or
ship which perform well in a wind tunnel or tow tank will be the best design in the air or
at sea, they can weed out bad designs at a low cost. A famous recent example is
experimental input to the design of telecommunication spectrum auctions, which
significantly influenced the actual designs (as did auction theory) in the PCS auctions of
the late 1990’s, first in the US then later in many other countries.
B. Generalizability
Of course, it is important to establish a clear basis for generalizing from the
results of an experiment to a specific domain of interest. As Posner (1998) notes:
The problem of extrapolating to normal human behavior from behavior in unusual
experimental settings . . . is obvious. . . One would like to know the theoretical or empirical
basis for supposing that the experimental environment is relatively similar to the real world.
That would be the first question an experimental scientist would address.
Psychologists use the term “external validity” to describe the extent to which the
experimental conditions match those of the setting the results are meant to
generalize to. We prefer the term “generalizability” as a reminder that the external,
naturally occurring world is complex; there is often not a single “external world”
that is different than the artificial experimental world. Furthermore, since
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experimental facts are mean to be part of a three-way dialogue with field
researchers and theorists, the crucial component of generalizability is whether a
theory carefully distinguishes between behavior of students playing for modest
stakes, for instance, and high-priced lawyers in a courtroom. If a theory purports to
be general, and its assumptions are carefully created in an experimental design
(that’s “internal validity”) then the criticism that the experiment was not meant to
apply to students, for example, is really an admission that the theory’s domain of
application was not completely specified. A corollary implication of this view is
that criticism of an experiment’s generalizability is most productive if it is phrased
as an hypothesis about how behavior would differ if the design were changed—i.e.,
the criticism should be in the form of an alternative design and a prediction about
how (and why) the design change would matter.
In generalizing from experiments in legal settings, the two most common
concerns are the subject pool and the stakes (discussed below). Several studies have
shown that experienced professionals typically behave in abstract experiments
much like college students do (e.g., Ball and Cech, 1996); so the a priori guess
from these studies is that students and experienced lawyers would behave similarly
in experiments based on pretrial settlement. Of course, more studies comparing the
two groups in legal experiments would be useful.
C. Psychology and economics experimental conventions
It is important to note that experimental conventions in psychology and
economics have historically been quite different (see Camerer, 1996; Loewenstein, 1999;
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Hertwig and Ortmann, 2001), though conventions are being mixed in a fusion as
experimenters cross traditional boundaries. Experimental economists tend to insist that
subjects’ earnings depend on their choices. Most comparisons between no performance
incentives, and low and high incentives, show that paying some performance-based
incentive does not usually alter summary statistics like mean responses, but sometimes
reduces variance in responses, boredom, and “presentation effects” (e.g., subjects are less
altruistic and risk-preferring when playing for real money; see Camerer and Hogarth,
1999; Hertwig and Ortmann, 2001). Paying very large sums typically does not alter
behavior much, but a growing body of evidence from paying modest sums, by the
standards of developed countries, in foreign countries where incomes are lower will
provide more data on whether paying very high stakes makes a difference.
Experimental economists also regard deception, which is particularly common in
social psychology, as a last resort. The taboo against deception is enforced because of a
fear that repeated deception undermines experimental credibility, and may also be
transparent to savvy subjects.
Experimental economists also prefer abstract descriptions of the experimental
setting (to avoid non-pecuniary motives which may be activated by calling an action
“defect”, say, rather than “choose row B”). Experimental economists are also more
fastidious about reporting all their data in a raw form (to permit skeptical readers to draw
their own conclusions), and typically make their instructions and data available—
typically on a website, nowadays—to permit low-cost replicability (which also signals
the experimenter’s faith in the replicability of their results). Psychologists are more
inclined to gather a wide range of cognitive measures, like response times, demographic
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data about subjects, psychometric tests, subjects’ self-reports about motives for their
behavior, and brain imaging (e.g., Camerer et al., 2005, and the November 2004 issue of
the Royal Transactions of the Philosophical Society B, on “law and the brain”).
These distinctions between the two approaches have blurred recently, particularly
as experimental economists become more interested in the influence of the description of
the experimental setting on behavior. Our view is that good experimentation combines
the best of both approaches—extreme care in enabling exact replication, paying some
incentive for performance (American subjects are typically paid about triple the
minimum wage), full disclosure of all the data with website archiving, and measuring
demographic and cognitive variables, and self-reported “debriefings” after the
experiment, when those data are easy to gather and potentially informative even when
they are not the main focus of study.
III.
APPLICATIONS
We now turn to considering specific applications of experimental approaches
within salient legal settings. While time and space considerations prevent us from
sampling the entire field, we highlight below those applications that (in our estimation)
have proven to be particularly valuable for the study of law and economics. Our first set
of applications considers the experimental analysis of bargaining and the Coase theorem,
and how economic incentives, information, and entitlement structure affect the ability
and proclivity for individual actors to reallocate their rights optimally. The second set of
applications concerns experimental studies of the litigation and settlement process – an
area that has shed considerable light on our understanding of the processes that select
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cases for litigation.
Finally, we consider experimental analyses of jury and judge
behavior. In each of these contextual applications, experimentalists have unambiguously
informed the state of academic inquiry, and in many cases experimental approaches have
played a central role in spawning affiliated theoretical or empirical literatures.
A. Contracting, Legal Entitlements, and the Coase Theorem
It is difficult to imagine a precept of law and economics that is more central than
the much-heralded Coase theorem (Coase 1960). The theorem (in at least one version of
its various forms) posits that in the absence of significant transaction costs, the
underlying manner in which legal rights are allocated is unimportant for efficiency
purposes, since self-interested parties will tend to reallocate rights efficiently through
bargaining. Coasean logic is, in fact, foundational to all contracting, and it is therefore
not surprising that experimental approaches in law and economics have been particularly
focused on contracting behavior.
Perhaps contributing to the interest in experimental tests of the Coase theorem is
the concept’s own fluidity. As a conceptual premise, the Coase theorem is as easy to
understand as it is difficult to apply. Indeed, as Coase himself recognized, the most
interesting cases are those in which transaction costs are significant, and bargaining in the
shadow of the law need not be efficient. Experimental law and economics scholars have
devoted considerable attention to numerous manifestations of the Coase theorem, in part
to identify what those cases are. Although their contributions are too numerous to
catalog here, we can at least provide a sampling.
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Simple Bargaining Environments with Perfect Information:
Perhaps the most natural experimental environment in which to test the
predictions of the Coase theorem is in a simple two-party bargaining framework. Early
pioneering work in the field (e.g., Hoffman & Spitzer 1982; 1985) largely confirms the
zero-transaction costs predictions of the Coase theorem in simple experimental settings.
The Hoffman/Spitzer experimental design involved a designated “controller” who could
unilaterally choose among various social allocations of money, which differed both in
their aggregate level of compensation and in their distribution. The experimenters varied
the determinants of how one was designated a controller, ranging from simple random
designation to an “earned” right through a series of backwards induction games. Finally,
the parties were allowed to contract for side-payments prior to the controller’s choice of
social allocation. The authors found that while the method for determining the controller
significantly affected distributions between the parties, nearly all the dyads were able to
contract into the socially optimal outcome. This work (and various follow-on efforts)
gives reason to be sanguine about the ability of parties to overcome endowment effects.
Private Information
One factor that early Coase theorem experiments described above did not attempt
to control for was the information structure of the bargaining environment.
This
omission is potentially significant, since it is well known from the bargaining literature
(e.g., Myerson & Satterthwaite 1983) that private information leads to generic
inefficiencies.
More recent experimental work (e.g., McKelvey & Page 2000) has
confronted this challenge more directly, testing the Coase theorem in contexts where
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asymmetric information pervades the bargaining environment. McKelvey & Page, for
example, find that property rights can be “sticky” under asymmetric information, in that
efficiency-enhancing transfers from low valuers to high valuers frequently fail to be
consummated unless the mutual gain is significantly greater than zero. This finding is
largely consistent with the predictions of asymmetric information game theory.
In a related twist on this approach, Croson & Johnston (2000), studied Coasean
bargaining experiments involving asymmetrically informed parties, but the experimenters
varied the way that the underlying legal entitlement was protected. For some subjects, a
legal entitlement was protected by a property rule (which gives its owner the right to
enjoin conflicting use by others). For other subjects, the right was protected a less certain
rule (such as a probabilistic entitlement or a liability rule that allows the non-owner to
appropriate the right non-consensually in exchange for paying damages). Johnston &
Croson find that partial entitlements of this type (particular uncertain ones) to lead to
more efficient bargaining outcomes than strong property rights, a prediction that is
consistent with rational choice theory predictions with asymmetric information (Ayres &
Talley 1995; Johnston 1995).
Endowment Effects
During the period in which the Coase theorem experiments were ongoing,
research motivated through law and psychology was exploring a related phenomenon that
has come to be known as the “endowment effect,” a term that embodies experimental
findings about how ex ante possession appears to affect valuation decisions. Explicitly,
the endowment effect reflects experimental (and empirical) evidence that the maximum
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amount a person would be willing to pay to procure a good is often significantly less than
the minimum amount she would be willing to accept to part with the same good, in
contrast with most assumptions of the rational actor model that possession does not affect
value. It is a phenomenon that has been detected in numerous experimental settings (for
a recent meta-analysis, see Horowitz & McConnell 2002).
While the endowment effect was originally the province of prospect theorists in
economics and psychology (e.g., Kahneman, Knetsch & Thaler 1990), experimental legal
scholars soon recognized (and exploited) its relevance as well. Indeed, the existence of
significant endowment effects may have important implications for both our positive
understanding of legal rules and how such rules should be designed optimally. Most
generally, because the endowment effect retards efficient trade, it is more incumbent on
legal orderings to calibrate allocations efficiently from the outset. As such, considerably
more thought would have to go into determining how to set default rules in contracting
(Korobkin 2002), whether to protect entitlements with strong or weak protections
(Rachlinsky & Jourden 1998), and in whom to vest entitlements to begin with.
The set of challenges introduced by the endowment effect is made more intriguing
by the fact that it appears to be a fairly context-dependent phenomenon. In particular, the
effect appears most pronounced in situations where the entitlement at question has few
market substitutes (Shogren et al. 1994), when it has significant use as well as exchange
value (Kahneman, Knetsch and Thaler, 1990);7 when subjects believe their entitlement
was the result of merit rather than luck (Loewenstein & Isaccharoff 1994); and when
subjects have had little practice or other familiarization with the experimental design
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(Plott & Zeiler 2004). These contextual caveats are important for legal policy makers,
since exporting lessons from the laboratory to the outside world is often a hazardous
business.
Nevertheless, there appear to be many legal environments where the
endowment effect is a plausible and important phenomenon.
One area of research that has yet to be significantly developed is the intersection
between theories of asymmetric information and endowment effects in legal bargaining
contexts. Many of the existing contributions in one field or the other can be justifiably
criticized for concentrating too myopically on one account or the other, without
attempting to discern between them. This is particularly problematic, since many of the
situations in which the endowment effect is most pronounced correspond precisely to
where private information is likely to be a factor.8
B. Litigation and settlement
Another robust area for experimental research in law and economics has been on
the litigation process itself. The process of trials is the unique foundational feature of the
law as an institution, and it should therefore not be surprising that it has garnered
attention from not only legal scholars but also from other social scientists interested in
strategic interaction. As we discuss below, one particular area of study in particular –
that of the “self-serving bias,” is intimately related to the law and economics of suit and
settlement.
7
Most experimental evidence suggests that the endowment effect is not present when the underlying right
is solely or principally a store of value. A few experiments, however, have detected an effect when the
underlying value is itself uncertain (e.g., van Dijk & van Knippenberg 1996).
8
For example, as Shogren et al. 1994 demonstrate, the endowment effect is strongest in situations where
there are few if any ready market substitutes for a good. Similarly, the strategic importance of private
valuation is substantially reduced (and often eliminated) when there are numerous market substitutes for a
good in question.
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Perhaps the most long-standing line of research in the trial process was begun by
psychologists interested in the effects of optimism and “self-serving bias” in affecting
decisions within risky environments. Building on pioneering work in psychology (e.g.,
Roth & Murnighan 1982), a number of legal, economics, and psychology scholars have
explored the degree to which individual litigants appear to skew their expectations about
trial in a manner that favors their own case.
In perhaps the most familiar set of
experiments (Babcock et al, 1995; Babcock, Loewenstein & Issacharoff, 1997; Babcock
& Loewenstein 1997), subjects were instructed to act as attorneys, and read a narrative
involving a personal injury dispute between two potential litigants, in which damages
were known to be $100,000 but liability was in doubt. While a group of control subjects
read these materials without knowing whether they would ultimately be asked to defend
the plaintiff or defendant, the treatment group was told in advance which side they would
ultimately represent. Information was then elicited from both subject sets about (a) what
amount of money was likely to be the most “fair” to remunerate the plaintiff; and (b)
what amount of money they predicted would be awarded by a real judge (who had read
the facts previously and who had issued an independent judgment9). Finally, the parties
were afforded an opportunity to settle their case during a bargaining period that preceded
the non-consensual imposition of an outcome.
In virtually all permutations of this experimental setting, subjects who were informed
of their role beforehand exhibited economically and statistically significant differences
from the control group.
For example, treatment subjects differed from control
counterparts both in their assessment of the fair outcome and of the judge’s ultimate
9
Typically, subjects in these studies were awarded monetary prizes for the accuracy of their predictions
about judge behavior.
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decision by approximately $18,000, while control subjects actually exhibited no
difference (or even a negative difference).
More to the point, treatment subjects
exhibited a significantly lower settlement rate, and a significantly longer period to settle
when they could reach an agreement.
More recent experimental efforts to test the robustness of this finding have provided
evidence that self-serving biases are also present when the extent of damages (rather than
liability) serves as a source of potential disagreement. Babcock & Loewenstein (1997),
for example, find that the same qualitative variety of self-serving bias also can be found
in attorneys and experienced negotiators (albeit sometimes in a smaller magnitude). In
other recent studies, Babcock & Pogarsky (1999; 2002) find that it is possible to
manipulate the “gap” between plaintiffs’ and defendants’ assessments of a case by
imposing a damages cap that constrains the range of feasible settlements. Additionally,
the authors find, quite interestingly, that the imposition of an exceedingly generous cap
on damages had the reverse effect, increasing disagreement and discouraging bargaining.
This finding suggests a possible interaction between litigant “optimism” on the one hand,
and anchoring effects on the other (a cognitive behavior discussed more fully below).10
Finally, at least some preliminary work has been done exploring processes by which
procedures may de-bias litigant optimism. For instance, Babcock, Loewenstein &
Issacharoff (1997) find that a simple but effective de-biasing instruction is to urge
litigants to consider the relatives strengths of the opponent’s case or the real possibility
that the judge may rule for the other side. Debiasing (and reduction in costly delay) also
occurs when subjects are assigned to their bargaining role after reading the case
materials, which implies that the self-serving bias is created by encoding of the case facts
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as they are being digested, rather than by the role assignment per se. Still few
experimental results exist, however, mapping out the robustness of de-biasing
mechanisms.
The literature on self-serving biases in litigation plays a particularly interesting role in
providing experimental support for a key theoretical account within law and economics
about how cases proceed to litigation. The famous Priest-Klein (1984) hypothesis about
litigation posited a theoretical model in which relatively “optimistic” litigants fail to settle
their cases, but pessimistic ones litigate. The self-serving bias literature presents credible
evidence for a version of the Priest-Klein hypothesis in which all litigants exhibit some
optimism, although some exhibit more than others. Interestingly, many of the same
predictions from their theoretical mode (such as the well known 50% plaintiff victory
prediction at trial) emerge from models of self-serving biases. Interestingly, this may be
an area where theoretical work by law and economics scholars helped to motivate later
research by non-legal scholars about litigation behavior.
A an approach complementary to that reflected in the self-serving bias literature
for analyzing suit and settlement comes from the theoretical literature positing that
information asymmetries retard settlement (e.g., Reinganum & Wilde 1986; Spier
1994).11 Under this approach, some parties act as tough bargainers not because they are
overly optimistic, but rather because they possess proprietary information about the
strength of their case. Similar to the endowment effect literature, the experimental results
10
See subsection 3, infra.
While information asymmetries are undoubtedly important, note that the debiasing effect of assigning
bargaining roles after reading case facts in Babcock et al. (1997) shows clearly that the creation of selfserving bias while encoding information is important too. That is, two parties reading the same case facts
with different roles in mind can create a perception asymmetry (like fans on opposite teams watching a
sports event both thinking the refereeing is biased against them) which will have similar implications to a
true information asymmetry.
11
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in self-serving bias literature may, in part, embody some aspects of private information.
For example, subjects pre-informed of their hypothetical roles may selectively search for
facts that support their client’s case, glossing over those that are either neutral or support
the other side’s case. Entering negotiation, then, each side may have some informational
advantages over the other. To date, there appear to be few experimental designs that are
capable of disaggregating informational from cognitive impediments to settlement.12
As noted earlier, one important use of experiments is to help design or evaluate
how well legal institutions work, in settings where we can control for endogeneous
adoption and evaluate efficiency directly. Babcock and Landeo (2004) did bargaining
experiments to examine the effects of pre-settlement escrows (as studied by Gertner and
Miller, 1995). In their experiments a plaintiff learns of a damage amount drawn from a
commonly-known distribution; in the interesting case the defendant knows only the
distribution. Both plaintiff and defendant make secret settlement offers. If the offers
overlap they settle immediately; otherwise two rounds of bargaining proceed, incurring
fixed costs. If no settlement is reached they “go to trial” and the plaintiff is awarded the
actual damage. They found that the escrow mechanism increases settlement from 49% to
69% and lowers pre-trial legal costs by about half. Furthermore, the results are roughly
consistent with many numerical predictions of the Gertner-Miller model.
C. Adjudication, Jury Behavior and Judge Behavior
Another fertile area of research for experimental law and economics scholars has
been in the behavior of juries and judges. We consider them each, one at a time. Unlike
12
A few experimental studies find results consistent with the informational account of settlement failure in
analyzing the English versus American rules on fee shifting. See Coughlan and Plott (1997).
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each of the foregoing areas, however, the study of judges and juries has a significantly
more disorderly nature to it. While there are a number of interesting individual findings
in this area, they are more difficult to weave into a larger, unified descriptive tapestry.
We therefore content ourselves merely with describing the various contributions that
exist here.
Jury Behavior, Voting, and Social Pressure
Game theorists have long been interested in jury decision-making, and in many
instances theoretical contributions in the field have inspired subsequent efforts by
experimentalists to test the theory in the laboratory. In one notable example of this trend,
a relatively recent literature (emanating largely from economists and political scientists)
has called into question the relative wisdom of unanimous vote requirements the jury
setting. In a well-known article, Fedderson & Pesendorfer argue that strategic voting by
juries may lead to more convictions under a unanimity rule than under a majority rule,
since individual jurors under a unanimity rule may feel particularly hesitant to be the
pivotal hold-out in a vote (Fedderson & Pesendorfer 1998). Others (such as Coughlan
2000) have challenged this assertion, noting that most juries engage in deliberation, and
through such pre-vote deliberation juries are significantly more likely to transmit
important information to others, thereby decreasing the chances of such perverse
predictions. A recent experimental study by Guarnaschelli, McKelvey & Palfrey (2000)
attempts to test that claim in an experimental setting of hypothetical jurors. They find,
consistent with the Fedderson & Pesendorfer thesis, that juries are more likely to vote
strategically under a unanimity rule; however, the aggregate effect of this strategic
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behavior does not appear consistent with the Nash prediction of higher conviction rates
under a unanimity rule.
The tendency of juries to vote strategically has interesting parallels to the early
pioneering work in psychology on social pressures to conform. Solomon Asch’s wellknown experiment in which confederates are successfully able to tip majority opinion,
while not directly about law, has been cited by many as an example of the non-Bayesian
biases that juries often face (see Asch 1956; Kuran & Sunstein 1999). To date, however,
there have been few efforts by experimentalists in law and economics to incorporate this
phenomenon into a broader analysis of strategic voting.
Hindsight Biases
Another important cognitive heuristic that has been shown to be important in legal
settings is hindsight bias: the tendency for individual decision-makers to be overconfident about the ex ante predictability of a particular event, knowing that such an
event did in fact come to pass. In more pedestrian parlance, the hindsight bias is roughly
akin to the practice of “Monday morning quarterbacking” – proclaiming foreknowledge
of a solution to a difficult problem that has since become obvious in hindsight. Motivated
by early experimental results in psychology (e.g., Fischhoff 1975), a number of legally
oriented scholars developed experimental settings to determine whether jurors are also
subject to hindsight biases (e.g., LaBine & Labine 1996; Kamin & Rachlinsky 1995).
These experiments (which sometimes involved financial incentives) asked jurors to
assess whether a particular act of nonfeasance constituted negligence. Those in the
control condition were given information about the relative costs and benefits of action,
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while those in the treatment condition were given the identical set of facts ex post, along
with information that harm had actually occurred subsequent to the defendant’s
nonfeasance. In each study, subjects in the treatment group were consistently much more
willing to find the existence of negligence than those in the control group.
Prescriptively, the finding of a significant hindsight bias among jurors may
provide some basis for a number of concrete institutional responses, such as altering the
legal nature of negligence, obviousness or any number of legal standards that turn on
retrospective assessment of ex ante likelihood. But moreover, the finding begs the
question of whether there might be ways to minimize or eliminate the bias with
procedural changes in court. In this respect, some experimental findings (e.g., Viscusi
1999, 2001) indicate that judges are substantially less susceptible to hindsight biases than
are jurors, suggesting that encouraging bench trials may be an opportune way to reduce
the hindsight bias from legal proceedings. This conclusion, however, is not free from
debate, and other studies (e.g. Guthrie, Rachlinski, Wistrich 2001 ) find that judges are
also susceptible to hindsight biases (albeit perhaps in a lesser degree than jurors).
Additionally, there may be simple forms of jury instructions that have the effect of
diffusing (or at least dampening) the bias. For example, one study finds that a warning to
jurors avoid second guessing the defendant’s actions or being “Monday-morning
quarterbacks” substantially reduced the prevalence and degree of hindsight bias in subject
jurors (Stallard & Worthington 1998).
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Anchoring
Finally, as noted above, at least some of the experimental literature on attorneys
has touched on a phenomenon known as the “Anchoring Effect,” a behavioral regularity
that is more routinely highlighted in jury experiments. Anchoring refers to the process by
which an individual decision maker gravitates to a reference point that she subsequently
uses as an initial condition for arriving at a final decision. The effects of anchoring
appear to be especially strong in the context of damage awards given by juries. These
decisions are typically made complex by the lack of familiarity that juries have with the
range of damages that are appropriate within a given class of cases. The lack of an
“upper support” on the set of damages can invite manipulations by interested parties to
distort jury decision-making. For example, it is now well documented in a number of
experimental studies that both statutory damage caps as well as specific monetary
requests made by plaintiff attorneys can provide an anchor from which jurors may work,
in awarding both compensatory damages and (in particular) punitive damages. (Hastie,
Schkade & Payne, 1999; Robbennolt & Studebaker 1999). And, while anchoring appears
to be predominantly a danger for juries and courts, litigants themselves may also be
susceptible to the effect (Babcock & Pogarsky 1999).
As with the hindsight bias,
anchoring effects appear to be more pronounced with lay juries than with professional
judges.
IV.
LOOKING AHEAD
Although the universe of experimental studies of law is now becoming sizeable
and is still growing, there remains a considerable stock of “low hanging fruit” for legally
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oriented experimentalists to harvest. Although we have neither the time nor space in this
essay to offer an exhaustive inventory,13 future research possibilities include both
methodological and substantive dimensions, which we briefly explore below.
Methodologically, as noted above, very few experimental studies of law have
attempted to discern how subjects behave when repeating experiments. Not only would
such information convey significant information about how learning and experience
affect performance, but it would also contribute to the power of experimental findings, by
allowing researchers to infer “within subject” treatment effects and subject-based fixed
effects that are not easily observable with strict cross-sectional analysis.
Another
promising methodological approach is to use internet-based experimental instruments to
measure individual responses to experimental protocols.
While this form of data
collection has obvious drawbacks (such as a reduction in control and perhaps more
selection bias in responders), it allows experimenters to access a much broader crosssection of subjects than is frequently available in university settings. (See, e.g.,
McCaffrey & Baron 2004).
In a similar vein, a rapidly emerging development in experimental economics is
the use of field experimentation, in which some elements of control are imposed on a
naturally occurring situation. In one study of this sort, Camerer (1998) placed large
($500-1000) bets at a horse racing track (and cancelled them at the last minute) to
determine whether such activity would cause cascade effects in other bettors (e.g.,
Bikhchandani et al. 1992). Control came from the fact that which of two matched-pair
13
Nor, to be brutally honest, do we have the inclination to give away our own best research ideas for the
dubious sake of spicing up a concluding section whose text (and footnotes) no one -- except for possibly
the editors of this book -- is otherwise really going to read anyway.
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horses were bet on was randomized by a coin flip.14 Another cross-cultural study did
experiments on simple bargaining games in 15 small-scale societies to investigate the link
between cultural practices and fairness norms (Henrich et al., 2004).
Field experimentation is not completely foreign to legal scholarship. For example
Ayres (1991) explored the prevalence of racial profiling in new car markets by sending a
racially diverse set of confederates into automobile dealerships to bargain for new cars
using identical bargaining strategies. Using visits to identical dealerships to establish
control, he finds that racial minorities tended to pay both higher first offers and higher
final prices than white males. Bertrand and Mullainathan (2004) did a similar “audit”
study, sending resumes to employers which were identical except for different black and
white applicant names, to investigate discrimination in hiring.
The principal attractions of field experiments are that they extend the reach of the
experimental method to the subject pools we are often most interested in. However, field
experiments are often criticized for failing to procure adequate informed consent from the
target populations.15
Substantively, legal scholars are in a particularly opportune position to make
contributions about how law should respond to behavioral patterns that are frequently
observed in experimental settings. Indeed, if nothing else, the legal milieu is one of the
most elaborate and pervasive of contexts in which many (or even most) people interact.
As noted above, we are still far from determining the contextual boundaries of a number
of experimental findings (such as the endowment effect), and underlying questions about
Similarly, Lucking-Reilly (1999) created internet auctions for “Magic” playing cards with different
auction structures to test predictions about the influence of reserve prices and other variables on bids.
Control came from the fact that subjects who entered the different auctions presumably did not self-select
which one to enter.
14
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the generalizability of experimental findings still substantially hinders informed legal
reform. More work by legal scholars can help to investigate the precise legal contexts
such effects are largest, how they interact with the substantive underpinnings of legal
rules and standards, and how legal rules may be best designed to avoid situations where
individual decision making is likely to be untrustworthy.
Another area in which legal scholars are in a prime position to contribute to
experimental law and economics is in the enterprise of discerning how (and whether)
legal structure itself can help not to avoid triggering cognitive inconsistencies, but rather
can help to de-bias individual decision-making (Jolls & Sunstein 2004). As noted above,
for example, some studies have found that relatively simple manipulations can dampen –
and in some instances eliminate – cognitive biases, such as jury instructions (e.g., Simon
et al., 2001)16 or the introduction of a fiduciary-like agency relationship (e.g., Arlen et al.
2002). Despite these isolated findings, there is surprising little experimental work to date
exploring on how legal institutions might play a role in accomplishing this task.
Finally, a topic that has enjoyed relatively robust attention among legal scholars
in recent years – that of extra-legal “norms” of behavior – has proven to be ripe stalking
grounds for experimentalists as well. A number of recent studies by economists (Fehr,
Fischbacher & Gächter, 2002; Bohnet, Frey and Hück, 2001) have suggested that norms
of cooperative behavior and legal / contractual sanctions may have interesting interaction
effects.
The interplay between behavioral norms and law’s dual expressive and
sanctioning qualities has been taken up by legal academics as well of late in experimental
15
Harrison and List (2004) and Bertrand and Mullainathan (2004) provide more examples and a taxonomy
of features of field experiments.
16
Simon et all, 2001 find that simple “consider the other side” jury instructions can help to mitigate the
effects and incidence of constraint-satisfaction reasoning (somewhat akin to cognitive dissonance).
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settings (Bohnet & Cooter 2004, McAdams & Nadler 2004). Nevertheless, there is still
remarkably little known about the extent to which legal regulations and extra-legal norms
complement one another, substitute for one another, or neither.
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