Cognitive science

John N. Drobak

Economists have looked to cognitive science and psychology to help understand the rational actor assumption in neoclassical theory. Much of legal theory, like economics, assumes that people act rationally or at least can be induced to act rationally by the correct rules.

The ‘reasonable person’ standard is a hallmark of tort law. A natural extension of the economic rationality scholarship has been the re-examination of legal rules using cognitive science (see Langevoort, 1998). Sometimes the use of cognitive science has complemented the neoclassical law and economics literature and reinforced the conclusions reached under neoclassical theory. In connection with contract law, however, the teachings of cognitive science raise the question of whether some parties can truly assent to some contracts. This undercuts a basic premise of both contract law and law and economics theory.

Cognitive scientists have reached a consensus on many aspects of human decision making that are useful for analysing the law. The following brief summary highlights a few of these findings. Humans have bounded rationality, sometimes inherently as a result of limitations in information processing or lack of adequate information, and sometimes intendedly as a way to simplify complexity (Simon, 1982; Clark, 1997). Occasionally, people are rationally ignorant because it helps to simplify a complex world. Likewise people often use heuristics or simple rules of thumb (Kahneman et al., 1982). Invariably, we are overoptimistic, believing that we will do better than statistics show. Cognitive scientists have shown that defective decision-making capabilities stem from a number of attributes. People tend to give more weight to recent experience, to overemphasize short-term consequences and to believe that small samples are representative. People are also not very good at risk estimation, especially for low probability events (Eisenberg, 1995, pp.

213-25).

Although these limitations on human decision making are relevant to legal rules in virtually all the various disciplines of the law, focusing on tort and contract law will illustrate the consequences of using cognitive science. Laws mandating the use of seat belts in cars have been a controversial issue throughout the United States. Opponents of the laws viewed them as an unnecessary government intrusion on private decision making. They believed that government should not impose its will on those who were willing to take the risk that came from driving without seat belts. The implication was that these drivers were making rational decisions. A number of scholars justified these mandatory seat belt laws by relying on principles from cognitive science. Overoptimism and faulty risk estimation make it very difficult for people to understand the risk of being involved in an accident. Since a car accident is a low probability event, and a fatal or otherwise serious accident is of even lower probability, drivers cannot make rational decisions about whether to wear seat belts (Ulen, 1989, 403-6). Thus the seat belt laws were viewed as a modern equivalent to Ulysses protecting himself and his sailors from the enticing singing of the sirens (Elster, 1984).

The choice between a tort regime of negligence law versus a regime of strict liability has been examined using cognitive science principles. This involves a determination of whether people can be deterred from negligent conduct and whether they can be induced to take precautions. Cognitive science has also been used to analyse the rules governing warnings on potentially harmful products, such as lawnmowers. This, in turn, requires an understanding of when and why consumers fail to read product warnings, fail to understand them and fail to follow them (Latin, 1994). The use of cognitive science has generally confirmed the premise of tort law that people can be induced to act in a safer manner, although it is shown that safety is sometimes much harder to achieve than the law seems to assume (for example, Schwartz, 1994, pp.

378-9, 434-6, 443-4).

The biggest impact of cognitive science has been on contract law because it often brings into question the basic contract requirement of assent. Contracts come into effect when the parties truly agree to their terms. Assent has seldom been a problem, since a party’s signature or verbal agreement are enough to show the existence of assent. Cognitive science has begun to question whether there is true assent in many contracts. Under traditional contract law, the doctrine of unconscionability allows courts to undo a contract in those rare instances when the bargain ‘shocks the conscience’. The notion is that something about the contract itself or in the process of reaching agreement shows that there could not have been assent to the contract. That doctrine has been soundly criticized because it leaves so much discretion to judges and juries to overturn an agreement. The vast majority of contract law scholars, as well as law and economics scholars, emphasize the great importance of enforcing agreements as they are written. Cognitive science has helped our understanding why some agreements seem so outrageous that they should be unenforceable. By identifying the precise attributes of those transactions, cognitive science is helping to limit the court’s discretion and to establish parameters to guide the use of the unconscionability doctrine. In this manner, cognitive science has advanced contract law.

Cognitive science has, on the other hand, raised a question about the validity of a large body of contracts for their potential lack of true assent. The case of Carnival Cruise Lines, Inc. v. Schute (1991) illustrates the problem vividly. Eulala Schute purchased a ticket for a seven-day cruise through her travel agent in the state of Washington. Later she flew to Los Angeles, where she boarded the vessel for Puerto Vallarta, Mexico. Off the coast of Mexico, Schute slipped and was injured. After she returned to her home in Washington State, she sued the cruise line.

The back of her cruise ticket had contained a contractual forum selection clause, which required all disputes of any kind to be litigated in the courts in the state of Florida. The cruise line argued that Schute’s suit was improper in Washington; rather, it had to be brought in Florida. The Supreme Court of the United States relied on the contractual provision in agreeing with the cruise line as to the proper forum. This result is what ordinarily would be expected under principles of contract law. If the case is viewed from a cognitive perspective, however, it is clear that Schute never agreed to the forum selection clause, probably never knew about the existence or terms of the forum selection clause and was rational in those acts.

An ocean cruise is a complex product, with many dimensions. It is likely that Schute was most concerned about the destination, the dates, the price and the amenities offered by the class of service. There were probably many other dimensions of the cruise that were of greater interest to her than where she would have to bring a lawsuit against the cruise line. Even if she had been interested in the forum, it would have been time consuming and expensive for her to attempt to bargain with the cruise line over the forum selection clause. It is also highly likely that the company would not have altered its standard terms. Bounded rationality meant that she should exclude consideration of the forum in making her decision. Even if she had thought about the forum selection clause, overoptimism and defective decision-making capabilities make it likely that she would have assumed she would never have to sue the cruise line. The clause would have been irrelevant to her. For all these reasons, one would have to conclude that Schute never really assented to the forum selection clause and that it should not be used against her as a matter of contract.

This kind of approach would give similar reasons for disregarding many other kinds of contractual provisions.

Consumer form contracts, such as those used to establish credit purchases, often contain terms dealing with non-performance that relate to future uncertain low-probability risks. What we know from cognitive science suggests that the vast majority of consumers who sign these kinds of form never truly understood or agreed to what they were signing, nor can the law change that result. In recognition of the potential unfairness to consumers, there have been proposals in the United States to treat consumer contracts differently from business ones in the part of the Uniform Commercial Code that governs contracts (Greenfield, 1997). Similarly, many US states contain uniform landlord-tenant laws that establish rules for residential leases, which cannot be modified by the written lease. These follow from the view that tenants are unable to protect themselves, not only from a lack of bargaining power but also from cognitive factors. Agreements by people dealing with future unknown changes also raise problems. Prenuptial agreements are probably the best example of this. Although courts routinely treat prenuptial agreements as binding (with limited exceptions), there are many cognitive limitations on understanding the actual future implications of the agreement. Undoubtedly, people enter a marriage bursting with undue optimism about their fate. People in love do not expect to end up in divorce, notwithstanding the abstract statistics that show the probability of that outcome (divorce). Bounded rationality is also a problem, since no-one can really predict future changes that would bring the agreement into effect (Eisenberg, 1995, pp. 254-8).

These same cognitive issues arise with business contracts as well. Many law and economics scholars have criticized the courts’ special scrutiny of liquidated damage provisions, based on the view that parties can bargain over those provisions just as well as they bargain over other terms. The lesson of cognitive science is that liquidated damage clauses are more likely to be affected by faulty decision making, given the uncertainty of future events.

Bounded rationality, the difficulties of obtaining information and representative samples of similar problems, unrealistic optimism and the tendency to give undue weight to recent events all lead to questions about the validity of these provisions. A similar problem arises with the ‘battle of the forms’. Purchases often take place through an exchange of forms, with the purchaser first sending a purchase order, followed by receipt of an invoice with the goods, and then sometimes followed by an acknowledgement of the invoice. Generally, the forms tendered by the two parties show agreement on the key terms of the contract (such as the price and the description of the goods), but differ significantly on many peripheral terms. For decades, contract scholars tried to devise methods to encourage people to draft contracts that embodied the complete terms of their purchase and sale (White, 1977). The Uniform Commercial Code in the United States was eventually changed in recognition of the impossibility of the parties ever agreeing on all the terms. Now the code sets up a way to fill in the gaps and to resolve inconsistency between the various forms (Greenfield, 1997, p. 292). What we have learned from cognitive science has confirmed the code’s current approach to resolving this problem of inconsistent forms.

Both contract law and economic theory rely on the courts to enforce the bargains reached by people. Trade and a market system depend upon the enforceability of contracts. In addition, transactions costs are minimized by bargains being enforceable according to the terms embodied in the contract. The lessons from cognitive science, that people often never truly assent to contract terms, nor understand or pay attention to them, undermine the enforceability of contracts. They also increase the likelihood of opportunistic behaviour by parties who ex post decide that they do not like the consequences of a contract and so claim that they never assented, even though they understood the transaction and willingly took the risks ex ante. It is, of course, unlikely that much of contract law will be undone by cognitive science. Most likely, there will be adjustments at the margin, as with special provisions for consumer contracts. There may also be a greater recognition that contract terms should be enforced for reasons other than reflecting the true bargains between the parties. In Carnival Cruise Lines, Inc. v. Schute, the United States Supreme Court was careful never to say that Schute had truly understood and agreed to the forum selection clause. Rather, the court indicated that enforcing the clause made good business and economic sense. It was a way for the cruise line to limit its litigation expenses by directing all of its litigation to Florida, where its corporate headquarters was located.

The law and economics movement will continue to benefit from what we learn from cognitive scientists. Recently, cognitive and behavioural science has been used to shed light on the incoherence of administrative regulations (Sunstein et al., 2002), death penalty decision making (Rachlinski and Jourden, 2003) and tax policy (Fennel, 2003), among other topics (see Sunstein, 2002; Ross and Shestowsky, 2003). The actual law will, however, only change slowly from that learning.

References

Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 586 (1991).

Clark, Andy (1997), ‘Economic reason: the interplay of individual learning and external structure’, in John N. Drobak and John V.C. Nye (eds), The Frontiers of the New Institutional Economics, San Diego, CA and London: Academic Press, pp. 269-90.

Eisenberg, Melvin A. (1995), ‘The limits of cognition and the limits of contract’, Stanford Law Review, 47 (2), January, 211-59.

Elster, Jan (1984), Ulysses and the Sirens, Cambridge: Cambridge University Press.

Fennel, Lee Anne (2003), ‘Death, taxes, and cognition’, North Carolina Law Review, 81 (2), January, 567-652.

Greenfield, Michael M. (1997), ‘The role of assent in Article 2 and Article 9’, Washington University Law Quarterly, 75 (1), spring, 289-314.

Kahneman, Daniel, Paul Slovic and Amos Tversky (eds) (1982), Judgment Under Uncertainty: Heuristics and Biases, New York: Cambridge University Press.

Langevoort, Donald (1998), ‘Behavioral theories of judgment and decision-making in legal scholarship: a literature review’, Vanderbilt Law Review, 51 (6), November, 1499-515.

Latin, Howard (1994), ‘“Good” warnings, bad products and cognitive limitations’, UCLA Law Review, 41 (5), June, 1193-295.

Rachlinski, Jeffrey J. and Forrest Jourden (2003), ‘The cognitive components of punishment’, Cornell Law Review, 88 (2), January, 457-85.

Ross, Lee and Donna Shestowsky (2003), ‘Contemporary psychology’s challenges to traditional legal theory and practice’, Northwestern University Law Review, 97 (3), Spring, 1081-113.

Schwartz, Gary T. (1994), ‘Reality in the economic analysis of tort law: does tort law really deter?', UCLA Law Review, 42 (2), December, 377-444.

Simon, Herbert (1982), Models of'BoundedRationality, Cambridge, MA: MIT Press.

Sunstein, Cass (2002), Risk and Reason: Safety, Law, and the Environment, Cambridge: Cambridge University Press.

Sunstein, Cass, Daniel Kahneman, David Schkade and Illana Ritov (2002), ‘Predictably incoherent judgements', Stanford Law Review, 54 (6), 1153-214.

Ulen, Thomas S. (1989), ‘Cognitive imperfections and the economic analysis of law', Hamline Law Review, 12 (2), spring, 385-410.

White, James J. (1977), ‘Form contracts under revised Article 2', Washington University Law Quarterly, 75 (1), spring, 315-56.

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Source: Backhaus Jürgen G. (ed.). The Elgar Companion to Law And Economics. Second Edition. Edward Elgar,2005. – 777 p.2. 2005

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