Open Doors, Trap Doors and the Law
Shmuel I. Becher & Tal Z. Zarsky
INTRODUCTION
Common wisdom teaches us to strive to leave options open, and to
the greatest extent possible. We are advised by mentors and peers to reexamine constantly decisions and offers, seek out new ones, while not
losing sight and control of the old. "Keep all doors open, for as long as
possible" – is a piece of advice many of us have both received and
dispensed. The general preference to keep all doors open is ubiquitous,
exercised in various walks of life – and especially in that of consumption.
Indeed, keeping doors open in this context is a cultural phenomenon,
which has become part of the unique American experience. 1
Leaving doors open is not merely a business or social dynamic. As
we detail throughout this article, it is also both reflected and rooted in the
law in various ways. For instance, the general preference to leave doors
open can be articulated in legalistic terminology. In this article we
explore this legal context, while using the term "Open Doors" (hereinafter
also: "OD") in a specific "legalistic" way; it will here refer to situations in
which an individual can exercise, ex post, a right to rescind or withdraw
from (and thus reverse) an ex ante commitment or decision (be it
contractual or pre-contractual).2 Even when applying this somewhat
narrow definition, we acknowledge that the phenomenon of Open Doors
is relevant to a variety of legal facets. We here choose to focus on OD in
the context of consumer contract law. More specifically and within the
realm of contract theory, we focus on implications to contract formation
the design of contractual default rules, as well as contract interpretation.
A key example of demonstrating the abstract notion of Open Doors in
actual business practices is that of return policies. In general, liberal
return policies are typical in many consumer markets. In other words, a
consumer is granted with the right to return a product to the seller and
receive his money back "no questions asked" (or in more legalistic terms
– rescind the transaction); he is thus granted an "open door" at the time of

Senior Lecturer, Colman Law School.
Senior Lecturer, Haifa Law School.
Many thanks to….
1
For instance, and as Joseph Turow points out, lenient return policies and other similar
practices have come to define the change in US commerce, from the small local shops
(that at times discriminated among consumers) to the large, equal and open department
stores. See JOSEPH TUROW, NICHE ENVY (2006). We set aside this important insight,
and move to address the analytical attributes of these dynamics, that no doubt led to its
cultural salience.
2
In recent years there has been a growing interest in the way people make decisions, and
choose among available options, and its influence on our wellbeing and happiness. For a
few poplar books see DANIEL GILBERT, STUMBLING ON HAPPINESS (2006); BARRY
SCHWARTZ, THE PARADOX OF CHOICE: WHY LESS IS MORE (2004); CASS R. SUNSTEIN &
RICHARD THALER, NUDGE (2008). None of these writings, however, addressed in detail,
let alone from a legal perspective, the issues raised in this Article.

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the initial transaction.3 The original decision to enter a transaction and
purchase an item can be reversed after the fact. We will return to this
example, with greater detail, throughout this paper.
Intuitively, leaving doors open makes perfect sense.4 Accordingly,
firms offering such opportunities should be encouraged and commended –
end of story - thus rendering the legal analysis of quite short and simple.
Why shouldn't we put off decision making to the greatest extent possible
while leaving all options open? After all, it does not only match the
human general tendency to procrastinate (at least some decisions and
actions),5 but it seems to have an inherent value as well. In the time that
might pass, another, better option could materialize or come to our
attention, as well as new information may surface. Given the variety of
options, the complexity of markets and the sophisticated tastes of
individuals, any additional time to contemplate a decision or transaction
at stake surely seems to be a blessing.
Contrary to this line of reasoning, we will show that this intuition is in
many cases wrong – and open doors are not a blessing, but a curse in
disguise. Moreover, OD are at times part of a carefully tailored strategy
to manipulate individuals. Thus, OD might lead people to enter
transactions they should have avoided. In many cases keeping doors open
might not be the optimal strategy to assure wealth maximization and
human happiness. The Article addresses this counterintuitive insight.
Thereafter, it begins to examine how contract and consumer law should
respond to OD, while leaving much of these important steps for future
analyses.
The Article proceeds as follows. Part I will detail the various benefits
associated with OD, pointing to the conventional wisdom that promotes
the notion of leaving doors open, which is supported by most recent
economic analyses. In Part II, we will address the ways the law can react
to (or endorse) this phenomenon in three basic ways. First, it can impose
OD. For example, the law can provide mandatory cool off periods, in
which a party to a transaction may withdrawn from it. Second, it can
3
Similarly, a borrower's ability to refinance, pay or substantially change the terms of a
financial loan (such as home equity loans) after the loan was taken without being subject
to a penalty can also be dubbed an "Open Door." Such rights are popular in the US loan
markets, and are even mandated in several states. See Peter J. Wallison, Cause and
Effect: Government Policies and the Financial Crisis, AEI Policy Paper, Nov. 2008.
Cite. Developing this example is beyond the reach of this article. In addition, examining
this example calls for first establishing whether this dynamic resembles that of "return
policies" and thus "open doors", or whether the act of refinancing cannot be considered
as rescinding a transaction, but amending it and formulating a novel one.
4
More than intuition is in play as well. In a recent working paper, Ben Shahar & Posner
explain that in many instances, recognizing such rights lead to efficient outcomes. See
Omri Ben Shahar & Eric Posner, The Right to Withdraw in Contract Law, cite
(Hereinafter:
"Ben-Shahar
&
Posner"),
available
at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1569753.
5
See, e.g., Jeff Sovern, Towards a New Model of Consumer Protection: The Problem of
Inflated Transaction Costs, 47 WILL, & MARY L. REV. 1635 (2006), n. 141 [referring to
Ted O'Donoghue & Mathew Rabin, Doing It Now or Later, 89 AM. ECON. REV. 103, 103
(1999) (noting that people have present-biased preferences); Brian Bergman, Guilt- Free
Goofing Off, Maclean's, July 28, 2003, at 38 (reporting that sixty percent of respondents
describe themselves as modest procrastinators and ninety-five percent say they
procrastinate at least occasionally, and quoting Professor Piers Steel as saying that
"[p]rocrastination is our normal state of being"); Barbara Yost, Don't Delay To Read
Why We Procrastinate, Seattle Times, May 2, 2004, at M2 (citing psychologist William
Knaus who estimates that "20% of the population are inveterate procrastinators")].
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encourage OD. This can be done, for instance, by formulating default
rules that allow or call for OD. Of course, under this second option
parties can contract around those default rules. Third, the law can allow –
in the sense of not bar - Open Doors. In such a case, the law will simply
respect the parties' decision to opt for OD and uphold their preference.
In part III we will focus on the fact that contrary to the conventional
wisdom, keeping doors open comes with its own pitfalls. We further note
that unfortunately, policy makers–not unlike the general population–tend
to neglect the negative aspects associated with leaving doors open. To
explain why, we will address the complex and rather counterintuitive
consequences of the law's tendency to allow, uphold or encourage Open
Doors. The paper's main contribution is, therefore, illuminating these
unfavorable sides of the "Open Doors" option.
Employing an interdisciplinary approach, we demonstrate that the
desire to leave doors open has wide, various and at time contradicting
psychological, economic, and legal implications. In many cases, people
merely assume that doors remain open and could be walked through at a
later time, whereas that in fact is not the case.6 Therefore, people's
reliance on such Open Doors may lead to inefficient outcomes. It leads
us to insist on receiving the right to Open Doors (and compensating the
opposing party for such a right) although it is seldom exercised.
Moreover, it leads people to engage in transactions they should rationally
avoid, or purchase products they need not buy. Resolving these problems
is far from simple. Interestingly, groundbreaking neuroscience studies
demonstrate that educating consumers (or trusting their self learning
ability) as to the contours of leaving doors open is not a panacea.
The problems here addressed call for a broad array of responses. In
part IV, we draw out the initial steps towards such responses, while
mapping out the future regulatory work we must commence so that such
steps could be grounded in sufficient research. We also explain how such
responses might counter some of the current prevailing notions of
contract and consumer law. These steps obviously address the tension
between the commercial and intuitive tendency to leave doors open on
one hand, and the problematic outcomes that may arise from this practice
on the other.
I. THE INTUITIVE AND ANALYTICAL ATTRACTIVENESS OF OPEN DOORS
In this part we address the various benefits commonly associated with
the notion of leaving doors open. In doing so, we draw out four basic
arguments. The first pertains to information gathering; the second to
managing (or limiting) risk; the third to psychological well being, and the
fourth to positive externalities. On the face of it, our analysis draws out
clear distinctions among the different aspects. Yet, we do so for
methodological reasons and clarity purposes, well aware that these
benefits at time overlap and interact with each other.
A. Open Doors & Information Gathering
One of the most basic (and frequently mocked) assumptions of
efficient markets is the existence of sufficient information for all parties
involved in the market's transactions. In theory, rational market
participants have a full understanding of the relevant attributes of the
6
As we explain in detail below, this is due to the high costs of exercising such rights.
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transaction they engage in.7 They are well versed in all these elements as
far as they pertain to competing products or services. They also posses an
almost infinite attention span to decide among them. This infinite set of
knowledge allows them efficiently to select a proper transaction and price
it properly. In doing so, they might employ a "weighted adding strategy,"
which requires a thorough analysis of the options at stake, including all
their pertinent attributes.8
Clearly, such a setting virtually never occurs. Typically, parties are in
a dire need either for information, or for time and attention span to gather,
analyze and digest it. This, on its own, is not an unsolvable problem. In
theory, parties might be applying various heuristics to work through the
unimaginable datasets they encounter,9 while using the time and attention
they can spare to "satisfice".10 Moreover, parties might constantly
blunder, but the mistakes will cancel one another and thus the overall
outcome might nevertheless be efficient and fair.
However, this is not frequently the case. In many transactions,
individuals (as one shot players) rather than the opposing firms,
systematically lack sufficient information and resources. At the same
time, repeat players (such as retail sellers) and other sophisticated market
participants usually benefit from superior information, especially in
instances where they dictate its terms. Thus, the errors here discussed tend
to be of the same kind and towards the same direction, and thus do not
cancel out one another.
Considering this set of events, an OD provides consumers–as the
weaker party–with more time for reflecting on the pros and cons of a
given transaction.11 This extra time allows examination of additional,
competing options. Furthermore, as time passes, new options that were
not originally contemplated may emerge or be discovered. Clearly, this
provides greater benefits for consumers that are not familiar with the
options that markets offer or might offer in the near future. In addition,
during this time, further information (negative or positive) might be made
available by third parties.
Moreover, OD provides parties with additional opportunities to close
informational gaps about the product they actually purchased. This is so,
since OD allow consumers to experience the product.12 The classical
7
Or as Gary Becker puts it, human participants are expected to behave in a way that "(1)
maximize their utility or ends (2) from a stable set of preferences and (3) accumulate an
optimal amount of information and other inputs in a variety of markets." See GARY S.
BECKER, THE ECONOMIC APPROACH TO HUMAN BEHAVIOR 14 (1976)
8
This strategy is discussed in many different decision making contexts. See, e.g., James
R. Bettman, Mary Frances Luce & John W. Payne, Constructive Consumer Choice
Processes, 25 J. CONSUMER RES. 187 (1998) (applying this strategy in the context of
consumers). Under this strategy, a decision-maker is supposed to assign a weight to
every potential attribute she wishes to compare. Important features receive relatively
high weight while less significant attributes are given less weight. In the next stage, the
consumer presumably scores each product characteristic. Finally, the decision-maker
multiplies the weight and the given score, then adds all factors for one total score. This
score will represent the product’s over-all quality from consumer’s viewpoint.
Therefore, a consumer who seeks to maximize utility chooses the product that received
the highest total score.
9
Gerd Gigerenzer, Cite.
10
Herbert Simon; Cite. See Also Grether, Schwartz & Wilde, Cite.
11
Ben Shahar & Posner explain how the OD can assist in learning how the product fits
in the home, or with other products available in the home (p. 20).
12
Here comes into play the fact that the contract has already been initiated, and thus (in
many cases) the purchaser has the actual possession. See also Ben Shahar & Posner, p.
21 (referring, for example, to musical equipment).
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example would include transactions involving tangibles products
accompanied with lenient return policies. By using the product, the
consumer can learn about the product's attributes, and whether it truly fits
her preferences and needs. This would be especially helpful in distance
selling (through the internet or the phone), where consumers have not had
a chance to interact directly with the product prior to purchasing it. By
experiencing the good, consumers can overcome the lacking of tactile
experiences that might lead to buying products that they will later learn
do not meet their preferences.13 To a somewhat lesser extent, similar logic
can be applied to all sales of tangibles. While consumers can definitely
learn prior to the transaction of the product's properties and attributes by
reading about it and examining it at the store, the tactile experience of
using the product at the comfort of their home (where the pressures of the
sellers' representatives are absent) allows them to learn a great deal about
the product in a short time and with limited effort.
The dynamic of learning through experiencing is not limited to
tangibles. A similar dynamic might transpire with intangible assets as
well. In this respect, consider a newspaper subscription, a cell phone
service – or any other service which comes at a set price. Ex ante,
borrowers typically believe they will be able to handle the payment for
the service, without experiencing traumatic financial hardship. However,
after some time of facing the underlying contractual obligations,
borrowers might learn that they committed themselves to a demanding
payment schedule that is beyond their monetary abilities. If the
purchasers have an Open Door, they can rescind their contract and enter a
new one which accommodates their economic state.14 In other words,
experiencing and living through the contractual terms assist individuals in
understanding the "true" meaning, implications and complications of the
transaction at stake.
Finally, rather than looking outward, the additional time allows the
relevant party to look inward and generate a better understanding of what
his or her preferences are. This can be done given the additional time, as
well as by experiencing the product or service directly (as opposed to
imaginatively). Experiencing the product or service can prove
constructive here as well.
B. Open Doors & the Assumption of Risk
Imperfect information and information gathering is merely one
relevant aspect of OD. Additionally, it is interesting to examine how OD
interact with the premise that contractual terms allocate risks among
parties. If one wishes to maximize her utility through open market
transactions, one must assess accurately the risks involved. In consumer
markets, there are various forms of risk in play. For instance, there is the
risk that the product's value will fall, or that the purchasers' preferences or
13
We assume that the relevant contractual framework does not stipulate that
experiencing the good would nullify the return option. Interestingly, some legislatures
outside the United States provide consumers with mandatory rights to cancel a longdistance selling transaction. See, e.g., Parliament and Council Directive 2002/65,
Distance Marketing of Consumer Financial Services, 2002 O.J. (L 271) 16 (EU);
Parliament and Council Directive 97/7, On the Protection of Consumers in Respect of
Distance Contracts, art. 6, 1997 O.J. (L 144) 19, 22-23 (EU). See also Georg Borges &
Bernd Irlenbusch, Fairness Crowded out by Law: An Experimental Study on Withdrawal
Rights, 163 J. INST. & THEORETICAL ECON. 84, 89 (2007).
14
A similar argument can be made with regard to loans, mortgages and other financial
arrangements – an issue we (as mentioned above) will not develop in this paper.
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circumstances will change in a way that will influence his or her
subjective value of the product. In theory, the contractual bargain made
among the parties constitutes an efficient risk allocation.
That contract terms should represent all relevant risks is easier said
than done. Markets commonly lead to inefficient outcomes as some
participants, typically one shot unsophisticated ones, have a greater
tendency to miscalculate the underlying risks.15 Repeat and sophisticated
players have both the opportunity and the resources and profit incentive to
hedge, minimize, properly evaluate and avoid risks. Thus again, the result
is of systematic market failure.
Once again, OD can prove helpful to weaker parties in minimizing
some risks and better evaluating others.16 Most relevant are the risks
pertaining to the preferences of the relevant individual, even in view of
changes in circumstances. In addition, OD can minimize the risk that the
relevant preferences will change in the near future. As a very simple
example, assume a consumer purchases an item and shortly thereafter
receives a similar item as a gift. Here, her need for the purchased item
naturally diminishes (and often in a very conspicuous way). A similar
dynamic will occur after purchasing a specially worm coat, and learning
that the upcoming winter is forecasted to be rather mild. Once again, the
longer the period the Open Door provides, the more likely it is to help
individuals who face changing circumstances.
Moreover, OD mechanisms prove helpful in minimizing an additional
risk the less-informed/one-shot player faces: that the opposing party will
breach the agreement and not fulfill its short-term obligations. Slightly
restated, an OD reassures the consumer that the product or service
purchased is not defective and that it meets the specifications and
descriptions provided ex ante. With an OD mechanism in place, potential
plaintiffs can automatically receive the remedy they would seek (from the
seller or in court) in the case they believe the product or service was
defective yet without the need of lifting any burden of proof – they can
rescind the transaction at a minimal costs.17 Thus, the risk of breach
without a simple cure is substantially limited.18
C. Open Doors, Positive Emotions & Psychological Effects
The reasons noted thus far support OD from what can be viewed as
an economic perspective. Up until now, we dealt with the preferences of
individuals, assuming they seek to maximize their utility by making the
most efficient and rational decision when choosing among the options
they face. In this section, however, we move to a psychological
dimension that comes with an OD.
15
On the consumers' ability to learn from experience and minimize risk, see Epstein,
Minn. L. Rev. Cite. But see Bargill, Minn. L. Rev. cite.
16
For a recent discussion as to how OD can minimize uncertainty in these transactions,
see Ben Shahar and Posner, p. 7-8 (the authors, however, do not clearly distinguish
between the function of closing knowledge and risk disparities among the contracting
parties).
17
While this risk might seem minimal in view of the clear course of legal action the
harmed parties may take, things are far from being so simple. For these one-shot
players, access to the legal system is costly and in many cases (especially given the
limited benefits of such claims) will bar them from bringing legal action.
18
Note that we mention this dynamic as an outcome of OD mechanisms, rather than a
proper justification per se. The specific benefits mentioned here can be also achieved
+through other legal means, such as consumer protection laws, class actions, etc. See
Becher and Zarsky, Hebrew, Cite.
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By and large, even when individuals do not anticipate immediate
changes in their preferences and the existing circumstances, they feel
much more confident once they know their decision can be easily
reversed, without costs. This is to say, that the mere possibility to cancel
decisions or postpone its finiteness is psychologically reassuring. If we
must choose between making a final decision and making one that can be
revoked, we will most likely opt for the latter – and choosing the latter
will give us comfort. The basic line of though generating this process is
"since no one knows what the future will bring, why shouldn’t we be
cautious and hence prefer a decision that grants us with an option to
regret"?19 Thus, OD strategies and provisions are not only efficient, they
promote consumer welfare on the most basic level – by enhancing
satisfaction and good feelings.
D. Open Doors, Competition & Positive Externalities
Lastly, the phenomenon of OD can lead to positive externalities by
proving beneficial to competitors. When contracts are "final" and there is
no OD available, individuals are basically "locked" into their initial
decision. Once a binding contract exists, it would be rather expensive or
difficult for them to opt to contract with a competitor. Usually, those
"lock-in" effects are enforced by harsh penalties if contracts are breached
midway.
Given the high switching costs consumers might encounter, potential
competitors have a very limited ability to compete and offer better or
different options. OD provisions provide consumers with an easy exit
option. Hence, such provisions enable competitors to pursue potential
consumers even when they are in a contractual relationship with another
firm. Arguably, these dynamics lower entry costs to markets and
facilitate competition. As a result, OD encourage and promote better
variety and quality.20 Clearly these elements are of greater relevance in
the context of long term contracts, especially for services. These issues
call for an extensive economic analysis, which is also related to antitrust
law. We are unable to address these issues within the confines of this
paper.
II. THE COMMON WISDOM OF OPEN DOORS & THE LAW
The notions of Open Doors are embedded in the existing legal
framework. In the most drastic and obvious form, they are rendered
mandatory. We review those instances in the first section. In others, the
law approves OD policies either by setting them as defaults ("gentle
nudges"),21 or in more subtle ways explained below. We examine this in
the second section. Finally, the law can merely uphold OD provisions in
a contractual framework or refrain from forbidding their existence or
intervening in their inner mechanisms. This is discussed in the third
section.22
19
These basic intuitions have been examined and challenged in several psychological
experiments. For one example see, e.g., Gilbert supra note 5.
20
As we explain below, a broad variety of laws facilitate an easy exit from a contractual
relation. In many cases, they allow a contracting party to switch for an extensive period
(rather than a short period after the transaction was formulated).
21
See Sunstein & Thaler, supra note 5.
22
This point might sound as a trivial one: why should the law intervene in these
instances – especially when these provisions appear to be set in place to minimize
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A. Mandatory Open Doors
Scanning through the law books, one would encounter a variety of
instances in which contractual OD mechanism is mandated.23 Perhaps the
most famous example would be mandatory "cooling off" periods24 set by
federal25 and state regulators26 for door-to-door sales and some timesharing sales. These are commonly justified as mechanisms that protect
consumers from falling prey to aggressive sales tactics and undue
pressure.27 For that reason, they are somewhat removed from the core of
our discussion.
Mandatory OD, however, go beyond these two specific instances.28
Regulators have set them in place for somewhat risky transactions (and
therefore as an appropriate measure to reassess risk) such as second hand
car sales (lemons laws).29 In addition, they have been set in place for
information asymmetries and assist weaker parties to better assess their risks? We will
return to this point below.
23
There are relatively few reviews for these issues. For some see Sovern, supra note 5;
Ben Shahar & Posner; Sunstein, Issacarof. Cite. In the United Kingdom, see Ramsey. In
Israel, see Becher & Zarsky. Cite.
24
For a general background and discussion, see JOHN A. SPANOGLE ET. AL CONSUMER
LAW 251-59.
25
See the Federal Truth in Lending Act, 15 U.S.C. § 1635. See also 16 C.F.R. § 429.0 et
seq. (1972) (FTC regulation requiring a cooling off period in all door-to-door sale).
26
According to one research, every state but New-Mexico has enacted a cooling-off
statute. See DEE PRIDGEN & RICHARD M. ALDERMAN CONSUMER CREDIT AND THE LAW
App. 15A (2007).
27
See Arizona v. Direct Sallers Ass'n, 108 Ariz. 165, 494 P, 2d 361 (1972) (noting that a
disproportionate number of door-to-door sales involve hideous selling tactics that often
leave innocent consumers rather vulnerable).
28
A deeper look into the regulatory framework of loans and financing reveals an
additional layer of OD – one that allows borrowers in a variety of setting to refinance or
terminate their loan with no penalties and with minimum costs, at any time. These, for
instance, are set in place by some state regulators, at non-trivial costs. Currently, there is
a long and heated debate as to how these policies impacted the recent economic crises
[Wallison, supra, cite]. A mandatory right to refinance a loan at any time permits the
borrower to exercise an OD option, by opting to change the initial terms of the loan even
after those were set. Furthermore, in many legal settings the law steps in to assure that
firms provide consumers with portability – that is, the ability to switch easily to a
different provider. Thus, the Health Insurance Portability and Accountability Act
("HIPAA") assures that medical insurance providers allow for the switching of jobs and
thus medical plans, by requiring they insure against preexisting conditions. Likewise,
additional regulations are enacted world-wide to assure phone number portability. In the
United States, the FCC set in place local number portability regulations, which promote
competition in the telecommunications markets and limit the incumbents' ability to lock
away their existing customer base. [XX Examine relevance to land and phone lines
XX]. Although these two (as well as others) examples might seemingly relate to the
issue at hand, we do not address these regulatory frameworks. This is so, since these
frameworks usually do not pertain to the consumer's ability to rescind or withdraw from
the initial contract with the relevant provider. Given the fact that we use a narrow
definition of the OD concept in this analysis (as mentioned above), these dynamics are
somewhat outside the scope of this paper. For similar reasons, we will not address the
broader notion of laws providing for mandatory (or at time, default) "exits" from long
term legal relationships – especially in the context of property law. See Dagan & Heller
(in the context of property law); Dagan & XX (Columbia L. Rev.) (in the context of
family law).
29
New York Used Car Lemon Law Statutes, General Business Law, § 198-b.
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important and substantial transactions (such as home equity loans),30
where both the reassessment of risk and the additional gathering of
information by the weaker party is essential.31 In the EU32 and other
countries33 extensive regulatory frameworks provide a "right to rescind"
distance sales. These laws pertained to catalogs and phone orders, but
have been broadened to e-commerce transactions.34 Several commentators
have called for the introduction of such regulation in the US as well – so
far with no success.35
B. Legal Frameworks that Promote Open Doors Policies
While imposing a mandatory OD regime might seem a harsh
intervention in the relation among the contracting parties, setting default
rules is considered a milder measure.36 Defaults are usually set to meet
the common preferences of the transacting parties,37 thus limiting overall
transaction costs. Yet in some instances defaults take on a different role –
one which strives to affect the transacting parties' behavior and conduct in
a manner the state deems fit.38 In several instances OD are set as defaults
(no doubt in accordance with the latter rationale) in various contractual
frameworks. In the realm of retail,39 for instance, several states have set
as defaults lenient return policies that retailers have to follow, unless they
choose to explicitly override them.40
At some points, the law provides a milder and more subtle nod. This
for instance occurred in the context of online software contracts. Here,
30
See the Home Equity Loan Consumer Protection Act of 1988 (check), that added new
provisions to TILA.
31
Accordingly to Sovern, this regulation might also stem from the fact that these
transactions were generated in many cases through a "doorstep" agreement [cite].
32
See Pamaria Rekaiti & Roger Can den Bergh, Cooling-off Periods in the Consumer
Laws of the EC Member States: A Comperative Law and Economics Approach, 23 J.
Cons. Policy 371 (2000); Georg Borges & Bernd Irlenbusch, Fairness Crowded out by
Law: An Experimental Study on Withdrawal Rights, 163 J. INST. & THEORETICAL ECON.
84, 89 (2007).
33
[Cite NZ report].
34
See, e.g., Rekaiti & Van den Bergh, supra note 32. As Ben Shahar & Posner correctly
point out, one of the rationales for extending such protection to the Internet in the EU
was to promote e-commerce. They further point out that applying this rationale to the US
legal and business setting on its own seems unfitting. For a challenge to the basic
premise of this rationale, see Becher & Zarsky, Hebrew. Cite.
35
[Cite Hillman/Principles].
36
See, e.g., Cass R. Sunstein & Richard H. Thaler, Libertarian Paternalism is not an
Oxymoron, 70 U. CHI. L. REV. 1159 (2003). For a recent call to extend the current legal
setting and add additional default "Open Door" rules, see Ben-Shahar and Posner.
37
For a detailed and illuminating discussion see Ian Ayres & Robert Gertner, Filling
Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87
(1989); Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal
Choice of Legal Rules, 101 YALE L. J. 729 (1992).
38
Ayres & Gretner, id.; Sunstein & Thaler, supra note 36.
39
In the financial context, the law provides the OD framework a more subtle affirming
nod. For instance, the federal government has put in place an elaborate system that
enables banks to offer fixed rate/long term loans which allow refinancing at any time. In
other words, those loans allow the borrower to exit one loan and opt for another. The
government does so at considerable expense and risk. The rise and fall of Fannie Mae
and Freddie Mack are closely related to these issues [Cite/Walison, supra; LA Times
article].
40
N.Y. Gen. Bus. L. §218 (1977).
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courts and commentators have been wrestling with the question as to
whether the terms included in the software package constitute a binding
contract. A major impediment is the lack of actual consent to the terms
by the purchasing party prior to the entering and "accepting" the
transaction. Yet, in a famous court decision41 still considered by many as
good law,42 Judge Easterbrook of the seventh circuit found that a binding
contract was indeed formulated, even though the contractual terms could
not be viewed prior to formation. The court found that this serious flaw
could be cured by the purchasers' ability to view the terms after the fact
and the right to return the product thereafter.43
A somewhat refined but generally similar notion was accepted most
recently in the Principles of Software Contracts.44 Interestingly, in this
context the existence of OD serve to a certain degree as a substitute to ex
ante assent to the contract terms. Slightly restated, OD can substitute, in a
way, for the most fundamental elements of contract formation – initial
consent.45
C. Upholding & Reinforcing Open Doors
In many realms of business–retail, wholesale and banking will be our
cornerstone examples–open doors are set in place voluntarily by market
participants.46 Recent studies indicate the vast popularities of such
practices, which in some instances are extremely lenient.47 As we detail
below, firms offer these mechanisms for a variety of reasons, from
meeting consumer preferences, to signaling quality, promoting goodwill
or as a sophisticated marketing (not to say – manipulative) technique.
Although these instances seem to be located outside the realm of
regulation and legal intervention, that is clearly not the case. The
contractual framework generating these rights is upheld by courts; both
with regard to the existence of the right, as well as its limits.48 In addition,
regulators sometimes choose to intervene in these relations (or refrain
from doing so) with regard to the way the existence of OD is
communicated - by mandating additional disclosures or changing the
rights and obligations of the contracting parties.
41
ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir., 1996). For a recent analysis
revisiting this case, see Randy Picker, Easterbrook on Copyright, 77(4) Chi. L. Rev.
(2010) (forthcoming), cite.
42
Mark Lemley, Terms of Use, 91 MINN. L. REV. 459 (2006).
43
For a recent analysis also connecting return policies and the ProCD decision, see Ben
Shahar & Posner.
44
[Cite Principles]. See Tulane L. Rev. Symposium, 2010 (especially H. Travis article).
Cite.
45
There are even subtler affirming nods to OD by the law which we do not address here.
For instance, at times firms publish the low number of items returns and contracts
rescinded as an indication of their products' or services' quality. In some cases, such
information is submitted to courts in suits against the relevant firms, as indications of the
satisfaction of other customers (Sovern). When the OD are merely an illusion, relying on
such information as either promotion materials or pertaining to courts cases is clearly
wrong.
46
Survey as to the extent of the dynamic. See Ben Shahar & Posner, p. 6-7 for a sample
of these lenient policies.
47
Examples include, inter alia, Costco, Macy's, Walmart.
48
Of course, in typical situations the existence of the right relates to consumers' claims,
while its limits are important to the producers and firms. Where the state chooses not to
interfere it actually endorses, at least to some degree, the theoretical background
mentioned above concerning OD.
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On the face of it, this perspective seems trivial and its analysis futile.
Why not uphold contractual obligations which seem to benefit weaker
parties in closing information gaps and assessing risks, as well as have
positive externality effects?49 Yet, as we will explain below, in some
instances OD lead to outcomes which are adverse to the one-shot
contracting party, and occur without its understanding and knowledge.
In this context, we believe regulators are doing too little. Firms
commonly inflate (at times subtly) the "transaction costs" involved in
rescinding the original contract in various ways.50 For instance, they
assure that getting a hold of the representative in charge of canceling the
service is nearly impossible. In other instances they set strict demands for
physically returning the product. As Sovern explains, these problems are
quite common, yet will not be corrected by competition or consumer
complaints given several persistent market failures.51
We find Sovern's analysis convincing, yet choose to go beyond these
problems and explore further difficulties in the OD process, which are not
discussed in the current literature. We point to difficulties that arise, even
when assuming that the OD mechanisms are presented in full at the time
of the initial transaction (including a specific reference to all the
intricacies that involve terminating the transaction). In addition, we
assume that the abovementioned mechanisms are reasonable. That is,
that they do not include undue ex post burdens on consumers when
exercising their right to rescind the transaction.52 In the rest of our
analysis we seek to establish that even if these two requirements are met,
voluntary OD mechanisms present serious and thorny challenges that
mandate an additional layer of regulatory intervention. Currently, such a
layer is absent. OD mechanisms are upheld, and the parties that offer and
receive them are left to their own devices.
At this point an important caveat should be made. Thus far, we
assumed that the OD mechanism drawn out in the underlying contract and
the OD put to practice are the same. Yet, this is clearly not always the
case. In many instances, the policies drawn out in the contractual
framework are far harsher than those applied in practice. 53 For various
good reasons, firms have little to lose and much to gain from revealing a
49
In several instances regulators indeed intervened in these voluntary relationships. This
occurred when transactions which include OD are feared to be explicitly misleading or
fraudulent. In some cases, signs indicating "free trial period!" and "money back –
GUARANTEED!" were indeed too good to be true. Some involved "bait in switch"
schemes, where the product provided was not the one advertised. Others misled
consumers as to the extent of effort rescinding the initial transaction actually entails. For
instance, the Federal Trade Commission has taken steps to regulate "Negative option
plans" and "free trial offers" which involved "book clubs" and other such settings. Cite
FTC, CFR; Sovern. Here regulators moved to assure proper disclosure prior to the
transaction regarding the nature of the OD option, as well as the steps required to rescind
it. Below we will explain which of these examples require closer legal scrutiny.
50
[Cite Sovern, William & Mary]. On the other hand, see Ben Shahar & Posner, p. 23,
indicating that firms at time "exploit natural barriers" as a measure to limit the
consumers' ability to rescind contracts for strategic reasons. We find the use of such
implicit use of such barriers, even for achieving this fair outcome, troubling.
51
[Cite Sovern].
52
We are aware that defining "reasonable" at this juncture is a thorny task, but assume it
could be done and enforced
53
Jason Scott Johnston, The Return of the Bargain: An Economic Theory of how
Standard Form Contracts Enable Cooperative Negotiation between Businesses and
Consumers, 104 MICH. L. REV. 857 (2006).
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much more lenient approach than the one articulated in the contract.54
However, for clarity purposes and since these are unstable and
unpredictable outcomes, we will assume that firms indeed exercise their
formal policy as stipulated in the contract.55
As we sum up this part, we note two forms of OD policies
manifesting in the commercial realm. The first involves those that are
mandated, or at least set as a default by the regulator. The second deals
with those that are voluntarily adopted by the contracting parties (at times
going beyond the default set by law – if such exists). The outcome of
these two forms might seem to be the same to the transacting party.
Nonetheless, the source and authority behind these obligations (if
understood and recognized by the public) can make a difference. This is
so, since the source sends signals as to the significance and meaning of
the OD option. We address these signals–which at times might be
contradicting– in the sections below.
III. THE PROBLEMS OF OPEN DOORS
In Part I we delineated the positive attributes associated with OD. In
Part II we noted the ways the law adopts, encourages, or upholds OD. In
this part we move forward to show that the basic notions drawn out in
part I are in many instance false, and that OD lead to a very different
outcome than commonly assumed. Developing this understanding would
allow regulators and policy makers to formulate the way the legal
approach to OD ought to be crafted. Our argument, that the intuitions
which support OD are in many instances wrong,56 is premised upon the
assertion that open doors are in fact (and even initially) very much closed.
This misunderstanding leads to a flurry of problems, which at times
override the apparent benefits that this dynamic presents.
54
See Shmuel I. Becher & Tal Z. Zarsky, E-Contract Doctrine 2.0: Standard Form
Contracting in the Age of Online User Participation, 14 MICH. TELECOMM. & TECH. L.
REV. 303 (2008) (Hereinafter: "Becher & Zarsky"). Some commentators argue that such
strategies are even efficient and preferable to the entire market. See Lucian A. Bebchuk
& Richard A. Posner, One-Sided Contracts in Competitive Consumer Market, 104 MICH.
L. REV. 827 (2006).
55
A similar, yet mirroring problem is possible as well; firms might contractually provide
ODs that go beyond those that the local sales representative is aware of – or conveys to
the consumers. We refrain from developing this point for the reasons set in the text. In
addition, we believe that novel ways for distributing consumer information will prove
helpful in closing this information gap (for more on this dynamic, see Becher & Zarsky).
We thank Eyal Zamir for this point. For a discussion of instances when this form of
conduct is purposeful and strategic (as a measure to generate price discrimination among
consumers) see Porat & Gilo, cite (also discussed below in FN XX).
56
The notion that, at times, having additional (or "more") legal rights as opposed to less
is at time detrimental to society at large has been recently explored by Lewinsohn-Zamir,
More is not Always Better than Less – An Exploration in Property Law, 91 Minn. L.
Rev. cite. There, the author shows how many existing property-related norms, strangely
limit the autonomy and rights of various players – an outcome that supposedly would
impede upon efficiency and fairness. However, her analysis shows that these rules are in
many cases optimal, in view of various reasons (while focusing on behavioral insights
and cognitive failings). Our analysis makes a similar point in the consumer contract
context, while partially relying on behavioral and cognitive insights as well. Yet our
central premise differs from that of Lewinsohn-Zamir at one central point; rather than
explaining the rationale behind existing law, we point to a major oversight of both
scholars and policymakers when addressing OD options,.
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A. Are Open Doors Indeed Open?
The ability to rescind the agreement and exercise an OD is not as easy
and simple as it seemed at the time of formation. To verify this claim, we
will examine below the marketing, business and psychological dynamics
involved in the OD mechanisms. Yet before doing so, we should address
an implicit assumption underlying the analysis - that parties presented
with an OD ex ante account for its existence, and factor it into their
decision as to whether to transact. Furthermore, they implicitly "price" the
OD option, and willingly pay for this additional element. To this end, we
must introduce an additional layer of complexity to the analysis, while
distinguishing between salient and non-salient OD mechanisms.
As many contractual frameworks include dozens of pages and
hundreds of various elements, it is highly unlikely that the consenting
party is able to allocate sufficient attention to them all (furthermore – a
leading reason for the mere existence of the OD is to assist in overcoming
this almost impossible task). It is well known, for example, that
consumers tend not to read form contracts most of the time, and for
various good reasons. In light of this reality, contract law scholars have
begun distinguishing between "salient" and "non salient" terms and
provisions.57 The salient ones are those which the parties read (or learn of
their existence in another way58) and consider. At the same time, nonsalient provisions are given less weight or simply ignored altogether.59
This distinction is of great significance. According to this line of
reasoning, salient provisions (the most accepted example are "price"
terms) could generally be enforced by courts while requiring merely
limited judicial scrutiny. Here, competitive markets the parties are
effectively signaling to each other their preferences and consent insofar
that salient attributes are at stake. This meshes well with the overall
notion of freedom to contract and the autonomy of the contracting parties.
Non-salient elements should be treated differently. If individuals do
not pay attention to some provisions or contractual aspects, no consent
emerges and no signaling occurs. Thus, the preferences of market
participants cannot be incorporated and reflected in the contractual terms.
Rather, in such a case, the contract at stake is a result of the will of one
(drafting party) and the ignorance of the other. For that reason,
commentators have noted that courts (ex post) and regulators (ex ante)
could and should intervene at this juncture and protect the ignorant oneshot players from hideous non-salient provisions.60 For instance, provide
consumers with Open Doors which they only later will understand that
they need.
The fundamental question in this respect is whether OD mechanisms
are salient. On one hand, OD resembles many other elements that are
considered non-salient. OD provisions pertain to an uncertain and
57
For more on this see Russell Korobkin, Bounded Rationality, Standard Form
Contracts, and Unconscionability, 70 U. CHI. L. REV. 1203, 1220 (2003); Shmuel I.
Becher, Behavioral Science and Consumer Standard Form Contracts, 68 LA. L. REV.
118 (2007).
58
This flow of information is generated by (usually experienced) consumers in various
ways. For a detailed analysis see Becher & Zarsky, supra note 54.
59
The distinction between these categories is clearly not clear cut, and a term that is nonsalient at the time of the transaction might become salient at a later time for various
reasons (some of which would be addressed below).
60
See, e.g., Korobkin, supra note 57; Shmuel I. Becher, A “Fair Contracts” Approval
Mechanism: Reconciling Consumer Contracts and Conventional Contract Law, 42 U.
MICH. J. L. REFORM 747 (2009) (sources cited n. 2-4).
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unpleasant event which will take place in the future (the dissatisfaction
with the product or service purchased), which the chances of its occurring
are rather slim.61 On its face, this places OD provisions among typically
neglected elements such as remedies, forum selection clauses and
arbitration terms.62 Non salience is indeed a strong argument for setting
open doors as defaults or mandatory rules.
On the other hand, this matter is more complex. OD clauses seem to
enjoy some degree of public attention. For instance, recent surveys
indicate that consumers place considerable importance in return
policies.63 This might be explained given the cultural significance of this
element in US retail.64 Further empirical testing is required in order to
determine whether OD mechanisms are salient (an issue we will return to
below), or to differentiate among the different trends of consumer
behavior regarding this matter. The rest of the analysis will assume some
form of salience of OD in the eyes of most consumers.
Yet work through this problem, and until robust empirical data will be
gathered, we offer several distinctions. First, OD themselves have salient
and non salient elements. People arguably often notice their mere
existence or absence in general, and maybe even the extent of the period
they are open for. However, the specific terms that accompany OD (e.g.,
requirements such as keeping the receipt or original packaging – with lead
to the "transaction costs" addressed by Jeff Sovern) might be beyond the
attention span of the average consumer at the time of contract formation.
We will rely on this distinction below.
Second, firms offering OD mechanisms sometimes take steps to
render them salient or non-salient. In some cases firms promote the
salience of the OD provisions by advertising; by explicitly indicating
specific transactions as "free trial periods," or emphasizing the "money
back guarantee" or "cancel anytime" elements.65 In other cases, firms
strive to render these elements non-salient by "burying" references to the
actual OD mechanism in their contracts, to achieve various objectives.66
Hence, different instances require different analysis.
Third, even if consumers account for the existence of the OD and its
"price", we must inquire whether they calculate its value correctly. When
addressing options and their pricing in general, the option holder takes
into account the chance that the relevant event will materialize.67 Here,
individuals at the time of an initial consumer-related transaction must take
61
For empirical data regarding the rarity of actual returns, see Sovern. Cite. For
somewhat different findings in the electronics and computer realm, see Cite.
For a different opinion as to the perception of consumers at this juncture, see Ben-Shahar
& Posner, p. 30: "Buyers seek information about the sellers' return policies, because
most buyers anticipate returns as a non-trivial contingency."
62
Id.
63
See, e.g., Erika Morphy, Survey: Customers Want Flexible Return Policies, available
at
www.ecommercetimes.com/story/Ceng6yZTM0am6N/Survey-Customers-Want-FlexibleReturn-Policies.xhtml (75% find a clear and simple return policy to be a highly important
attribute). For a similar view, see Ben Shahar & Posner, p. 30, noting "Return policy is
not the type of fine print term that goes under the radar, hidden from consumers' plain
sigh.".
64
Turow, supra note 1.
65
[cite AOL example, Sovern.]
66
In a recent paper, Porat & Gilo address this dynamic. They examine whether it might
lead to efficient outcomes, as they allow firms to discriminate between diligent and non
diligent consumers. [Cite Porat & Gilo.] While we find their analysis important and
insightful, we choose to refrain from examining these instances further, as we find them
relatively esoteric and rare.
67
[Cite: Finance textbook on option pricing.]
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into account the factors we addressed in Part I: the chance that at a later
time, additional information, external and internal risks, or changes in
one's preferences will render the transaction at stake undesired. In
addition, the option holder should take into account the chance that her
analysis is wrong; a risk that in many markets is quite predictable (and
thus subsequently hedged).68 These elements make the proper assessment
of this option, quite difficult.
Moreover, unlike "general" options, we argue that one-shot players
may (or at least certainly should) must consider two additional important
factors. The first is whether the direct or indirect (or hidden) costs and
required resources involved in exercising the option will render such
actions unfeasible. This is especially important in ordinary consumer
markets, which involve relatively cheap and simple goods. The second
factor is whether having an OD option generates happiness and wellbeing. As we demonstrate below, OD might end up causing anxiety and
unrest, rather than satisfaction or contentment.
As we explain next, consumers faced with the OD will strive to
establish its significance and value by assessing these factors. However,
it is now well-established that people face serious difficulties assessing
outcomes of specific events which resemble the general traits of OD
dynamics. When the error is systematic and constantly pointed in specific
direction, this may lead to market failures and inefficiencies. When the
error is predictable and could be induced by the interested party using
various crafty measures, the problem exacerbates.
1. OD & the Endowment Effect
The endowment effect is one of the key contributors to the
misperception of OD. The endowment effect refers to the additional
disproportional value individuals attach to assets they possess or own. .
For instance, in one famous study students were randomly assigned mugs.
Those that possessed the mugs demanded far more money as sellers than
those that were not assigned with the mugs were willing to pay as
buyers.69 This effect was replicated in a variety of settings, cultures and
participants.70 Additional studies indicate that such change in value is
significant, attaches instantaneously, and grows with time.71 Recent
research shows that this effect is launched as early as the point in which
the goods have been purchased remotely (online or through a catalog),72
or even earlier (such as when the bidder in an online auction has remained
68
This would be the Standard Deviation element. We note that relying on the generic
term "preferences" at this juncture might prove to be problematic. As we will see,
preferences might be a malleable concept, which could even be affected by external
pressures. To address this problem, scholars have distinguished between first-order and
second-order preferences or short term and long term ones. Yet, we need not delve into
such an analysis at this point. Rather, when addressing preferences, we choose to rely
upon a somewhat objective notion of second-order preferences, which are stable, and
reflect the long term plans of the individual, which strives to protect his happiness,
success and well-being. We will return to the importance of this distinction shortly. Add
cite [Lewinsohn-Zamir].
69
The phenomenon was first documented by Richard Thaler some 30 years ago. See
Richard Thaler, Toward a Positive Theory of Consumer Choice, 1 J. ECON. BEHAV. &
ORGAN. 39 (1980). Note, however, that this insights pertains to consumer goods. It
does not seem to apply to transactions which involve loans and debt.
70
Cite. But see, Plott & Zeiler for a recent challenge to the power of this dynamic. Cite.
71
See, e.g., Ziv Carmon & Dan Ariely, Focusing on the Forgone: Why Value can
Appear so Different to Buyers and Sellers, 27 J. CON. RESEARCH 360 (2000); [cite].
72
[Cite Wood.]
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the highest bidder for an extended period of time).73 Clearly, this can lead
to overestimations of one's right or good, and thus to (somewhat
predictable) mistakes.74
The endowment effect generates a force which should not be
underestimated by those subjected to it. Yet it commonly is. In our
context, this leads to a problem: since individuals do not correctly predict
the extent of the endowment effect, they are unable to take it into account
accurately.75 As Ariely puts it:
If we are not sure whether or not we should get a
new sofa, the guarantee of being able to change
our mind later may push us over the hump so that
we end up getting it. We fail to appreciate how
our perspective will shift once we have it at
home, and how we will start viewing the sofa-as
ours-and consequently start viewing returning it
as a loss. We might think we are taking it home
only to try it out for a few days, but in fact we are
becoming owners of it and are unaware of the
emotions the sofa can ignite in us.76
While the strength and breadth of the endowment effect is not always
fully understood by consumers, it is surely appreciated in the world of
business and marketing. Vendors, service providers and their consultants
fully recognize that "moving" merchandise into the hands of consumers
can make all the difference, and is the way to get the deal done.77 To do
so, they employ various strategies - one of which is providing consumers
with OD.78
Thus, the endowment effect plays a crucial–yet at times
underestimated–role in the OD dynamic. Individuals who are provided
with an OD, misperceive the impact the endowment effect will have on
their decision making process as to whether they would exercise the
option.79 As stated above, ex ante, they assume they will exercise the OD
option, should the product (or service purchase) not meet their
preferences as they see them at that time, given new information about the
product, or other changes in market forces or their specific needs.
However, they misperceive the fact that their chances of exercising the
option are substantially lower. The endowment effect strengthens the
consumer's connection to the possessed product and increases its value in
her eyes. Slightly restated, the consumer assumes his preferences will
73
DAN ARIELI, PREDICTABLY IRRATIONAL (2008) 135-6 (based on Ariely, [cite]). Ariely
states that in these instances the endowment effect is launched by "virtual ownership").
74
For example, the endowment effect can distort litigant's willingness to settle a case.
See [cite].
75
Whether consumers can learn over time about these effects and correct their decisionmaking process is a thorny question. As we explain below, we are skeptical whether this
is indeed possible in our context.
76
Ariely, supra note 73, at [cite]. Or in the words of Hanson & Kyser: "Significantly it
has been demonstrated that people are unable to predict the operation of the endowment
effect…Consumers will fail to perceive the risks of taking a product home – they will, in
effect, really perceive it as a 'no risk' offer."
77
[Cite] marketing magazine. Thaler.
78
[Cite - marketing paper addressing this].
79
Still, articulating its exact influence in our context is somewhat of a challenge due to
lack in further empirical data. See Woods [cite].
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remain stable, or might be affected by third parties. But he is unaware of
the change of preferences brought about by the transaction itself.
The argument is challenging, because it requires a more flexible and
layered use of the concept of "consumer preferences". Note that
according to our last assertion, consumers are not coerced into refraining
from exercising the OD option, nor misled as to its terms. Furthermore,
consumers' decision to refrain from rescinding the contact is based on a
genuine value they attach to their possession or right. That is, their
preferences regarding the relevant product might have changed in light of
their ownership, but their decision (not to rescind the contract) reflects
their actual current preferences.
To explain why this seemingly legitimate exercise of preference
merits legal attention (and perhaps even intervention), we use the notion
of intertemporal decisions and conflicted time preferences.80 Using this
jargon highlights the difference between one's short term or current
preference (or present self) and one's long term preferences (or long-run
self). This is to say, that the value one is assigning a relevant product (for
instance: a new luxurious car, expensive watch or piece of jewelry) is not
always aligned with his long term life goals (e.g., education, saving, or
health care) or second-order preferences.81 Therefore, individuals
misperceive the change in their short term (or first order) preferences,
which may not match their long term (or second-order) ones – a change
which will undermine their will to exercise the open doors option.82
2.
Inertia & the Costs of Exercising OD
We now turn to a second set of factors which lead to systematic and
predictable misperception of OD. These pertain to the weaker party's
tendency to overestimate the chance of exercising OD option, and their
ability to do so. At the time of contract formation, individuals are not
likely to understand the full implications of rescinding the contract at a
later time. This misunderstanding occurs even when the entire process of
applying the OD option is laid out to consumers.83 In other words,
individuals will not fully comprehend the costs–in terms of time,
attention, anxiety and actual out of pocket expenses–involved in
exercising OD.84 At the same time, repeat players and sophisticated
parties understand quite well the true obstacles the other party would meet
once he decides to use the OD option.
Why do people tend to overestimate the ability to exercise OD
options? We believe that the answer comes from several cognitive
shortcomings.
Generally, individuals face difficulties in properly
80
For employing these terms in a different context see Lee Anne Fennell, Willpower and
Legal Policy, 5 ANN. REV. L.& SOC. SCIE. (forthcoming 2009).
81
Recent neuroscience studies suggest that this might be, at least in part, due to the fact
that different brain parts are activated by chances of immediate gratification versus
longer-range considerations. See id.
82
Alternatively, we can bypass these thorny autonomy issues by presenting the argument
differently. To do so, we can assert that the endowment effect generates a hidden cost
on exercising the OD option. Though this is a feasible perspective, it seems to ignore the
more difficult aspects of this dynamic.
83
As opposed to instances in which such misunderstanding results from the firm's
withholding of relevant information regarding this issue at the time of the transaction,
providing misleading data, or providing full data in an incomprehensible manner (which
obviously generate consumer misperception and clearly require direct regulatory
intervention). See Sovern, supra note 5.
84
[Cite examples].
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assessing risks and actions which transpire in the distant and uncertain
future. Moreover, individuals tend to be over-optimistic with regard to
future outcomes.85 In this respect, people tend to employ optimistic
narratives with respect to future deeds and plans. Thus, individuals
assume that standing in line to return a product will only take a limited
amount of time; the phone representative will respond to their request
relatively promptly; and all this will take place at a point of time during
which the relevant individual has ample free time to deal with these
matters.86
Even if individuals properly understand the meaning of exercising the
OD option ex ante, they are likely to err and overestimate the ability and
willingness to indeed exercise the option. In most cases, rescinding the
contract calls for actions. However, we frequently tend to maintain the
status quo and remain passive even if by doing so we fail to maximize our
utility.87 Even if we choose to act, we often tend to procrastinate and
postpone obligations.
Procrastination in our context acts as a double threat. First, it might
lead to accidentally missing the timeframe during which the transaction
could be rescinded. Second, procrastination would lead individuals to
push the decision they have to make regarding the use of the OD for as
late as possible. At this point in time, the endowment effect would play a
rather substantial role. Thus, procrastination leads to a higher chance of
inaction or ignoring the open door option.88 By and large, these elements
are mostly unapparent to the individual and thus cannot be incorporated
into one's calculation and decision – thus it is unlikely that consumers
will, on their own, adopt a "correction mechanism" as a result of their
experience with these transactions.89
At this point one clarification is due, since the distinction drawn here
is somewhat artificial. Assume that the consumer does not exercise the
OD option due to such difficulties and related high costs. Yet, she might
believe that she actually preferred to refrain from rescinding the relevant
contract because she "wanted" to retain it.90 This reflects the cognitive
85
For a general discussion see Lynn A. Baker & Robert E. Emery, When Every
Relationship Is Above Average: Perceptions and Expectations of Divorce at the Time of
Marriage, 17 LAW & HUM. BEHAV. 439 (1993). At this point, one might ask why the
firms' (and their executives) are not also overoptimistic in formulating these return
policies. The classic response would be that the firms can easily de-bias such a tendency
while relying upon extensive experience, empirical data and expert advice.
86
As we will explain below, this argument might prove a "double-edged sword", as the
individuals overall over-optimism might also lead them to underestimate the chance that
the OD option would be required from the first place. We will return to this point below.
87
Current research provides mechanisms that may overcome this tendency. See, e.g.,
Shlomo Benartzi & Richard H. Thaler, Save More Tomorrow: Using Behavioral
Economics in Increase Employee Savings, 112 J. POLITICAL ECON. S164 (2004).
88
As Sovern argues, the tendencies to procrastinate are only destined to intensify, as life
becomes busier, and many additional new and ongoing tasks tax our time for attention
(leaving only very limited time to deal with using open doors). See Sovern, supra note 5.
89
For a difference opinion regarding the ability of consumers to learn from experience,
see Epstein, cite. Note that one could also argue that consumers will learn from
experience in the context of the previous discussion – regarding the hidden costs of
rescinding contracts. Clearly such issues require additional inquiries, yet can be set aside
by arguing that this segment pertains to non-returning consumers with regard to a
specific transaction, which still prove to be a vast segment of the market.
90
These issues are a part of a new form of information disparity pertaining to what the
parties know about the one shot players – with the latter being in the surprising inferior
position of knowing less about their own subsequent actions. See, e.g., BARRY
NALEBUFF & IAN AYRES, WHY NOT? HOW TO USE EVERYDAY INGENUITY TO SOLVE
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dissonance phenomenon.91 However, for the sake of simplicity we will
distinguish between preferences and the difficulties to exercise the OD
option, especially since every one of these elements calls for a different
form of policy approach.
3. OD & the (Mis)perception of Happiness92
OD serves a basic psychological function. It allows one party to
delay, albeit for a limited period of time, a sometimes painful human
activity – decision making. Studies indicate that some sorts of decision
making is an experience many individuals do not like. OD, on its face,
provide individuals with a soothing experience of additional time to make
the relevant decisions.
Interestingly, psychological studies show that the OD proves to be
something very different. OD provisions generate anxiety and distress as
the lapse of the OD option approaches. For instance, in one study
participants were happy to select an option that allowed them to opt out of
a specific decision. Yet, they later came to regret this choice, and
exhibited a significant greater amount of stress. This was not the case
with respect to participants who were not provided with the OD
initially.93 Therefore, consumers tend to overestimate the well being and
psychological benefits associated with OD. It is unclear whether a
learning process can alleviate this problem.
B. The Consequences of Misperception
Up to this point, we argued that individuals will systematically
misperceive at the ex ante stage the chance they would make actual usage
of an Open Doors option. We explained they would most probably
assume that the chances they will exercise this option (if indeed needed)
are higher than they actually are, especially in view of well-established
cognitive biases and shortcomings. We now explain why such systematic
and predictable miscalculations are problematic. We show that such
misperception may lead to several outcomes, which are at times
detrimental to the weaker contracting party as well as to society in large.
PROBLEMS BIG AND SMALL (2003); Oren Bar-Gill, Informing Consumers about
Themselves (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1056381).
It seems that this new form of information disparity results from several developments,
including ongoing relationships between firms and consumers; the ability to record, track
and statistically analyze data pertaining to such activity which much greater
sophistication; advances in the field of social psychology and marketing, and the
enhanced ability to provide consumers with a broader array of options and alternatives.
Almost all of these play out in the context of open doors, which proves to be an excellent
example for this novel concern.
91
See ELLIOT ARONSON, THE SOCIAL ANIMAL 178–79 (7th ed. 1995) (defining cognitive
dissonance as “a state of tension that occurs whenever an individual simultaneously
holds two cognitions (ideas, attitudes, beliefs, opinions) that are psychologically
inconsistent,” where the tension can be reduced “by changing one or both cognitions in
such a way as to render them more compatible (more consonant) with each other”).
92
One might wonder whether it is the role of regulators to advance the well being of
market participants. On its face, there is no reason to limit our analysis to utility in its
narrow facet of monetary gain. Moreover, as the economic-based analysis of OD is
closely aligned to the psychological ones, we present the latter as mere corroborating
evidence to our central point concerning the hidden problems of OD options.
93
[cite] + Explain the miscalculation and misperception.
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In this section we delineate three such outcomes. The first is that
misperception of the OD option would lead to overpaying, which is both
unfair and inefficient. The second is that the misperception of the OD
may lead to flaws in the weaker party's perception of other, broader
attributes of the product or service–again, leading to unfair and inefficient
outcome. The third is that the misperception generates flaws in the
market's ability to regard an OD option as an accurate signaling
mechanism – an outcome which systematically disfavors the weaker
parties. In addition, we will explain why, in most cases, only the latter
two generate warranted concern.
Throughout this analysis, we return to several distinctions drawn out
above. First, we distinguish among the three forms of OD manifestations
in law presented above – mandatory, default (or promoted in other ways)
and voluntary. In addition, we distinguish among OD that are of various
forms and levels of salience. Finally, we also distinguish between
misperceptions which transpire, perhaps even innocently, in the market,
and those that are intentionally induced or exacerbated by the repeatsophisticated players.
i. Misperception and Option Pricing
The first outcome of the misperception is the miscalculation of the
value of OD. Consumers believe that this option is of greater value than
it really is, and as a result may overpay for it. This option has a price.
This is so both because of its inherent value to the purchaser, and because
it comes at a cost to the firm.94 Where possible, firms will strive to roll
such costs over to the ex ante consumers (as opposed to rolling the costs
ex post to those making use of the OD95). The price would thus be the
incremental raise in the overall price of the transaction as a result of the
OD option.
While this analysis is interesting and calls for further economic
modeling, we will not pursue this line of thought further. We believe that
the inefficiencies and unfairness towards the weaker parties in play here
are relatively minute. The "price" of the option cannot be more than a
small fraction of the overall price, and the unfair increment will not be
more of a small fragment of that. Hence, it is questionable whether
setting the mechanisms of regulation and enforcement to pursue such
limited inefficiencies is worthwhile.96
In addition, there might be several countering cognitive heuristics in
play – at times possibly offsetting each other's effects. 97 For instance,
countering the tendency of one-shot players to overvalue the option will
94
For an explanation of the costs in terms of depreciation of the product, see Ben
Shahar & Posner. For a fuller description of other costs and expenses, see Becher &
Zarsky, HEBREW.
95
In way of restacking fees and fines. Firms usually try and refrain from setting fees so
high as they will clearly impede on the perception of the Open Door. For a call to extend
such fees, see Ben Shahar & Posner.
96
Furthermore, the analysis calls for an extensive set of assumptions which is not
supported by empirical findings. For instance, we must assume that not only is the OD
option salient in the eyes of the ex post party, but the incremental raise in the overall
costs of the transaction – a questionable notion which would be very difficult to prove
empirically.
97
We note this point with caution, as at times cognitive effects which seem to be
pointing in opposite direction and thus offsetting each other, rely on very different
cognitive processes. For a problematic example of such an offsetting, see Eisenberg. For
a critical analysis of such practices, see Avishalom Tor, The Methodology of the
Behavioral Approach to Law, 4 HAIFA L. REV. 237 (2008)..
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be the false tendency to underestimate the chance of actually needing to
exercise the option (given the discovery of negative information regarding
the transaction or the manifestation of other risks). This is in view of the
well-reported tendency of individuals to be overoptimistic. When taking
this element into consideration, it is quite possible that one-shot players
will be under-pricing (rather than over-pricing them) these options – and
thus rendering the subsequent policy analysis moot.
Returning to the various dimensions mentioned, this problem pertains
to all form of OD options (mandatory,98 default or voluntary) that might
be all overpriced, but will be proven salient. However, it is questionable
whether this concern goes beyond a general market failure and into the
fears of actual manipulation and active deception by the firms.99 It is hard
to believe that firms will risk public backlash for such minute gains.
Our analysis, therefore, indicates that this issue is not the problematic
notion in the OD story. It can even act as a "red herring" set in place to
divert the analysis from its real concerns – which is the main reason why
we chose to address this issue here. The misperception at play here is far
broader, and pertains to the entire underlying transaction, as we explain
next.
ii. OD & Risk Miscalculation of the Overall Transaction
The second element to be considered is whether the misperceptions
regarding the OD option have a substantial impact on the parties'
perception of the entire transaction. We argue that this is indeed the case.
We further assert that this leads parties to engage in transactions that are
contrary to their true preferences.
The existence of an OD affects the decision-making process of the
relevant parties. Typically, transacting parties focus their attention and
calculation at the time of contract formation. However, the existence of
an OD allows the contracting party to split the decision-making process
into two distant stages.100 The first takes place at the time of the
transaction (T'0). The second occurs later on, close to the point that the
OD is about to close (T'1). This "split" in the decision making process is
perhaps the most crucial outcome of the OD – which lead to surprising
results.
With T'1 in sight, the consumer would postpone part of his
deliberation process, and thus pass through T'0 with greater ease. How
much of the overall decision-making process will the consumer allocate
to T'0? Thaler explains, that in the context of a two-week return policy
"[i]f the transactions costs are less than the value of the utilization of the
good for two weeks, then the maximizing consumer pays for the good and
takes it home".101 While one can easily argue that the average consumer
is not a "maximizer", the postponing of a substantial part of the overall
decision-making process to T'1 seems very plausible. And when taking
into account the general tendency towards maintaining flexibility and
delaying irreversible decision,102 such actions are indeed feasible.103
98
The problem in the context of mandatory OD will resemble that of monopoly pricing
[develop].
99
Possible analysis of the question whether competition can resolve this issue – probably
not – since all the firms are aware of the cognitive failures at play (check if this does not
contradict prior statements).
100
This two step paradigm is used by many of the scholars addressing this matter. [Cite
Thaler (1980), Arieli?]
101
[cite] Richard Thaler.
102
Wood, referring to Kahn, Moore & Glazer (1987).
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On the face of it, the mere splitting of the decision-making process
should not be deemed problematic. However, the (usually subconscious)
analysis carried out at T'0 with regard to splitting this decision making
process is flawed in a systematic manner. At T'0, individuals base their
analysis on an assumption regarding a specific level of costs which the
decision at T'1 will entail. In addition, the analysis is premised on a
presumption that their preferences will remain stable and that the process
on a whole will not prove unpleasant. As we explained above in length,
all three assumptions are systematically wrong, and to the disfavor of the
one-shot players.
When accounting for these factors, OD seem less like a consumer
perk, and more as a seductive retail trap. It lures individuals into
transactions with the promise to exit, while this promise is not likely to be
fulfilled. As Ariely states: "If we are not sure whether or not we should
get a new sofa, the guarantee of being able to change our mind later may
push us over the hump so that we end up getting it."104
To summarize, one-shot players end up making wrong decisions by
accepting contracts which do not meet their second-order preference –
after wrongfully believing they will be able to easily exit these
transactions. Such decisions are detrimental not only to the mistaken
party, but also to the market at large. They lead to inefficient outcomes
that distort the market and undermine firms' incentive and ability to
provide better products and services.
While the troubles we identify with this dynamic can occur
inadvertently (yet only if the existence of OD provisions is salient to a
sufficient number of consumers), they can also result from a careful
manipulative scheme. This is so, since repeat players can strive to
enhance the salience of specific elements – such as the existence of the
OD option and the ability to split the decision making process.105 This
could be done through advertising – which clearly emphasizes the
benefits of OD, while leaving out the low rate of its use, as well as the
hidden effects of endowment and procrastination. It would, of course, be
quite difficult to establish whether firms are doing so deliberately.
However, as Kyser and Hanson point out,106 when an opportunity to
manipulate is in place, and incentives to do so exist, there is a very high
chance that this would indeed occur.
Once again, the vigilant reader might wonder whether the cognitive
failures we rely upon here do not cancel or mitigate one another. On one
hand, individuals do not grasp the need for exercising the OD option
(which might systematically lead to underestimating such occurrence).
On the other, they are likely to be manipulated by sellers (and thus
overestimate its value).
We do not find this argument persuasive, as it seems to rely on an
intertemporal confusion. The OD option facilitates the splitting of the
decision-making process, and pushes a substantial part of it into the future
– where the cognitive fallacies addressed above spring to life. In other
words, sellers' manipulation transpires at T'0, as opposed to the other
cognitive failures occurring at T1. Hence, procrastinating a decision and
the other enticing elements the OD involves are sufficient to tempt
individuals into splitting their decision-making process. Once the
103
Once again we assume that the existence of the OD option is salient. Yet, our
assumption here is somewhat more limited. We merely assume that individuals take into
account the existence of the OD (and not necessarily its price and terms).
104
ARIELI, supra note 73, at [cite].
105
For recent examples, see General Motors… [cite].
106
Kyser & Hanson [cite].
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decision making is split, it leads to the other pitfalls (such as the
endowment effect). Keeping the inner workings of this dynamic in mind
is of great importance, as it should assist policy makers and others when
structuring the relationship between OD and the law. Future work will
establish whether applying mandatory or default ODs can impact this
problem).
Finally, we must emphasize that the behavioral and cognitive failing
(or "trap" – depending on the sellers' intent) will, of course, not pertain to
all. Some savvy consumers will learn to adapt to new market strategies;
others will learn of the seductive pull of the OD mechanism from peer
and contacts, and act accordingly. Others will do even better, and will
benefit from the additional time to contemplate the transaction. Even
more "sophisticated" consumers will use OD to "borrow" products and
substitute short term uses for the actual purchase (of course at no fee).
Yet, the analysis here concerns the marginal consumers who are on the
other side of the consumer spectrum; those whom the lenient OD options
finally convince to engage in a transaction – a transaction that in the end
of the day does not conform to their true preference. These are the
consumers which the firms will strive to gain by adopting these strategies;
these are the consumers that law must take into account when formulating
a response to OD. Only when their number is significant and their damage
severe, does this discussion turn relevant. Our belief is that these cases are
far from rare or trivial.
iii. OD as an Inaccurate Signaling Mechanism
Another way to view OD options is as a "signaling mechanism". An
OD assures buyers that the firm is willing to rescind the contract and
incur associated costs107 at their will. By doing so the firm is signaling
that it is confident that buyers will rarely be dissatisfied (dissatisfaction
that will lead to exercising the OD) with its product or service.108 Thus,
vendors indicate implicitly and at time explicitly, by spelling this out in
their ads and promotions that the reasons for exercising the OD will not
occur - that the product will meet the buyer's expectations, that it will
work properly, and so on.109
Signaling could play out in several ways. First and foremost, it could
transpire in the mere existence of the OD provision (as opposed to none).
Furthermore, it could be evident in the OD's features: the extended time
period for rescinding the original contract, the limited transaction costs
associated with rescinding the contract ("hassle free!"), and the like.
Clearly, this form of signaling is added to the great variety of signals
coming from parties in the market place, such as price, brand, reputation,
and so forth.
This approach relies on several assumptions regarding the salience of
ODs. Obviously, for such signaling to transpire, the ex ante one-shot
party must take into account the OD option. For other–more detailed
elements of this signal (period, cost, etc.) –we must assume that the
107
We further explain below that in many cases, at least some of the costs are rolled over
to the other party. While this is clearly true, it is not necessarily known or salient to the
average consumer at the time of contract formation. In addition, in competitive markets,
the consumers' intuition that at least some of the costs would be borne by the seller is
mostly correct.
108
[Cite Wood, at 159].
109
["Our product is so good" – a variety of ads exclaim – "that you can return it and get
your money back – but you will not do it!" [Cite.]
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parties account, recall and even compare among various facets of the
available ODs.
In view of our previous analysis of the OD dynamic, we can now
clearly assert that the signaling mechanism at play is flawed (at least for a
segment of the consumer population, as explained above). The analysis
shows that the firms' exposure to expenses in view of an OD (or a lenient
OD for the matter) is substantially less than the average individual might
assume.110 Therefore, the signal sent out by the firm is not backed by the
firm's or the product's actual performance. Thus, the one-shot consumer
would be willing to overpay or even initially engage in transaction in
view of an inaccurate signal. What makes this issue exceptional and
complicated is that the firm's presentation is factually true, and they will
probably follow it in practice. Yet they might still be deceiving given the
consumers' lack of understanding of their own behavior!
Shifting to a brief discussion of possible solutions, one might argue
that the response to consumers' misunderstanding as to the true meaning
of an OD (especially lenient ones) is information disclosure. According
to this line of reasoning, we might want to require sellers to disclose
information regarding the extent of actual returns. By making such
information available, the consumer will learn that the OD is hardly a
signal for quality. However, matters are probably more complex, as such
disclosures might backfire. Providing consumers with information (by
mandate!) about the limited number of withdraws might exacerbate the
signaling distortion. This is so, since once again consumers might
wrongfully interpret the low rate of returns as a signal of satisfaction
(while the reasons for low levels of return are far more complex, as
explained above).
While signaling clearly occurs in situations in which OD are
voluntary (and especially when rendered salient by advertising), it is a
more complicated issue once dealing with mandatory and default ODs.
Seemingly, the enactment of mandatory ODs neutralizes all signaling. In
such a case, the OD is not a result of the firms' goodwill (but a
governmental mandate).111 One might argue, that even in such cases firms
might still be able to signal by providing terms which go beyond the
regulatory mandate. Yet, this would be a costly venture that might go
beyond the eyes of the average consumers (and thus prove fruitless).
Thus, a mandatory OD policy is to a certain extent a partial solution to the
signaling problems – although it comes at a high price to market
efficiency and the parties' autonomy112 (yet this is clearly an issue which
requires additional research).
Default OD mechanisms lead to an interesting question. Would
consumers view adhering to a government standard as a positive sign of
the firms' goodwill? We believe that setting defaults (if those are indeed
well known to the public) will indeed weaken the signaling force of
lenient OD. However, firms might be prohibited from signaling to
consumers that OD set in place is a result of their "generosity", but merely
adheres to the legal default standard. This issue will be developed in
future work.
110
This is beyond the fact that the costs are in part borne by the buyers from the very
beginning.
111
One might indeed argue that the analysis assumes that the public is aware of the
mandatory element in the OD policy. Whether this is true or not is for empirical testing
to decide. Yet, this issue could be resolved by increasing education regarding the
existing and future mandatory OD to limit this problem.
112
Ben Shahar & Posner; Becher and Zarsky, Hebrew. Cite.
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IV. CONCLUSION: OPENING DOORS TO NEW PERSPECTIVES ON OD
The legal response to OD presents an intriguing analytical question,
which is intensified by the extremely different approaches taken on both
sides of the Atlantic; As the US vendors continue to voluntarily offer
extremely lenient return polices, EU regulators are pushing to expand
mandatory return polices in many markets. Yet our sense is that
regulators on both sides of the "pond" are missing crucial elements which
are an inevitable part of the OD dynamic. We have addressed these
elements, which are rooted in behavioral, cognitive and economic science,
above.
Yet connecting these discussions to actual policy recommendations
requires additional studies to transpire (some of which we outlined
above). Much of this work must be empirical and carried out by
experimental economists and psychologists. Our analysis points out
distinct differences between instances when the existence of OD is salient
and when it is not. Such salience must be tested. These tests must also
examine which elements of the OD are accounted for by consumers, and
which are ignored. Furthermore, the endowment effect plays a crucial role
in this analysis. While economists and psychologists are extremely
interested in this effect, our analysis (and policy recommendations which
it might lead to) call for refined experiments and results, which will take
into account various products and elements of OD provisions. Finally,
studies must address the inertia and procrastination trends of behavior,
and again differentiate among various markets and products.
These studies will no doubt indicate the existence of several kinds of
consumers; those benefiting from the OD option they were provided with,
and those whom are deemed to suffer from its detrimental effects.
Regulators will have to make tough decisions as to which groups' interests
should be preferred at every juncture. It is possible these decisions will be
different in various consumer markets, depending on the nature of the
products and services, as well as the underlying contracts facilitating the
transaction.
When mapping out this market-specific response to OD, two crucial
elements (which we did not get to explore in this paper) must be
accounted for. First, forms of markets where the existence of OD is
especially constructive, given the consumer risks involved as well as the
information gaps which it could assist in filling.113 Second, they must
consider the costs that the OD options generate to both firms and
eventually consumers. Beyond the obvious cost of depreciation, 114 these
include operational costs, loses of transactions (which will never occur) in
view of return policy abuse, as well as plain theft which such options at
times enable.115 The existence of the former factor (benefits) will promote
broad default or even mandatory ODs, as well as lesser intervention in
such voluntary provisions. The latter factor might point regulators in the
other direction.
Finally, academics and regulators should explore novel solutions
which might allow them to "eat the cake and have it too"; finding
solutions which will allow some consumer to enjoy the benefits of OD,
while protecting others from its seductive pull. This might be achieved
113
See discussion of such specific markets in Ben Shahar & Posner, as well as Becher &
Zarsky, Hebrew – both of which point to home electronic appliances as examples.
114
The dominant element considered by Ben Shahar & Posner.
115
See Zarsky & Becher, Hebrew.
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through consumer education, smart disclosures or sticky defaults. In
conclusion, the seemingly simple story of Open Doors indeed opens many
interesting doors to future intriguing questions of human behavior,
markets, policy and law.
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