Class 1 – The Rational Actor Model and Its Complications

1. Social Networks, Social Norms, and Behavioral AnalysisLior Strahilevitz , University of Chicago Law School Class 1 – The Rational Actor Model and Its Complications

2. Course OVErview • Today’s lecture: The Rational Actor Model and Its Complications – How does classical economics assume people will behave and how consistent are these assumptions with laboratory and real-world observations? • Tomorrow’s lecture: Law & Social Norms – What role do informal social norms play in supplementing formal law? Are such norms efficient? How are they enforced? • Wednesday’s lecture: Social Psychology & Personality Heterogeneity – Do people have similar or dissimilar personalities and dispositions? Can variation be understood in a systematic way? How might law be tailored in light of personality heterogeneity? • Thursday’s lecture: Social Network Theory – How does information flow among people and within organizations? Is information transmission predictable? What are the economic consequences of particular pathways for information to flow? Is knowledge transmission culturally contingent? • Friday lecture: Legal applications – How might behavioral law & economics influence regulatory policy? How do social norms incentivize the creation of intellectual property? Can personality explain variation in the way judges think about criminal procedure? Can social network theory explain and rationalize information privacy law? Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

3. Theme of this course: Breadth not depth Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

4. Reminder • Slides for every lecture will be made available to you in electronic form after class. • Also, there will be a short (5 minute) break after approximately 60 minutes Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

5. Homo Economicus – The Rational Actor • Rational actor model assumes that people: • Maximize their utility • Utility is based on stable set of preferences • Obtain optimal quantity of information and other inputs Gary S. Becker, The Economic Approach to Human Behavior (1976) • Application: Ultimatum Game • Two-player game. Player A is given $10. Player B is given nothing. Player A offers some amount of that dollar to Player B, who can accept the offer and obtain the offered amount or reject the offer and obtain no money. • Rational Actor A offers $.01 dollar to Rational Actor B. Rational Actor B accepts and takes $.01. Rational Actor A keeps $9.99. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

6. Need for Behavioral Analysis • Results from experiments suggest that very few people playing ultimatum game will accept an offer of $.01, and rejected offers are common below $4.00 (Jolls et al. at 1491). This experimental result does not surprise many people. Even when the stakes are high (several months’ wages in Indonesia), ultimatum participants tend to offer a high percentage, and offers below 35% were frequently rejected. Cameron, Raising the Stakes in the Ultimatum Game: Experimental Evidence from Indonesia, 37 Econ. Inquiry 47 (1999). These results and intuitions help spark desire for a model of human behavior that better reflects the real world. • Jolls, Sunstein & Thaler, A Behavioral Approach to Law and Economics, 50 Stan. L. Rev. 1471 (1998). • Bounded Rationality • Bounded Willpower • Bounded Self-Interest Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

7. Bounded rationality • Origins in the work of Herbert Simon, A Behavioral Model of Rational Choice, 69 Q.J. Econ. 99 (1955). Simon awarded Nobel Prize in 1978. • Finds that people often satisfice instead of optimizing. They make a “good enough” decision, given constraints on information available to them, time constraints, cognitive limitations, etc. Example: I am running a small business, and I need to hire a sales clerk. There are 100 applications for the position. I read the first ten applications, find someone with good experience, interview her and hire her. Stipulate that there is a stronger applicant whose application was not reviewed, but I didn’t want to invest the time to find him, I wasn’t going to enjoy interviewing additional people and making a harder decision, and I was not sure I would be able to identify the stronger applicant correctly. I have satisficed instead of optimizing. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

8. Bounded Rationality (Continued) • Kahneman (Nobel Prize in 2002) & Tversky show how heuristics(rules of thumb) are systematically employed to guide decisionmaking. These can lead to common errors. • Losses and Gains are not treated equally (Prospect theory) • 89% of undergraduates given a mug will refuse to trade mug for chocolate bar of equal value; 90% of undergraduates given a chocolate bar will refuse to trade it for mug of equal value. Knetsch, The Endowment Effect and Evidence of Nonreversible Indifference Curves, 79 Am. Econ. Rev. 1277 (1989). Effects diminish as consumers get more sophisticated and experienced. List, Neoclassical Theory versus Prospect Theory: Evidence from the Marketplace, 72 Econometrica 615 (2004). • Availability heuristic: Events that are easier to recall or salient are likely to weigh heavily on decisionmakers; events that are harder to recall or less salient will weigh less heavily. Example: Are there more words in the English language that begin with “R” or more words that have “R” as their third letter? • Words with R as a third letter (e.g., north, shrink, burn) are more than twice as common as words with R as the first letter (range, railroad, rower). But it’s easier to recall words that begin with R. • People even make logical mistakes thanks to availability. People say that there are more words ending in “ing” than there are words in which “n” is the second-to-last letter, even though this is logically impossible. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

9. Are you more Likely to be killed by a Shark or a horse? Sharks: One death per year in US Horses: Twenty deaths per year in US Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

10. Sunk costs Rational Actor Prediction Experimental Results • Students asked to play the ultimatum game in which $10 was to be divided – with funds provided by experimenters – average minimum amount demanded by Responders is $1.94 • Students asked to play the ultimatum game in which each contributes $5 from own pocket – average minimum amount demanded by Responders at least $3.21, with 23% to 40% demanding $5.00 back • Sunk Costs will be ignored Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

11. Hindsight bias Rational Actor model Behavioral Model • Lay people, in groups or as individuals more likely to say defendant negligent when plaintiff was harmed, even holding all facts pertinent to negligence constant • Interestingly, judges appear capable of combating hindsight bias (or are drawn from a pool not prone to it). See Chris Guthrie et al., Blinking on the Bench: How Judges Decide Cases, 93 Cornell L. Rev. 1 (2007) (judges asked to rule on motion to suppress and search warrant application – both requiring probable cause – statistically indistinguishable). • People can evaluate matters probabilistically, assess what might have occurred regardless of what did occur Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

12. Bounded Willpower • People succumb to temptation and engage in acts that they know they shouldn’t engage in • Example: Utilization of exercise facilities is much higher in the first few months of the year (January, February) than in the last few months of the year (November, December). New Year’s Resolutions are a major reason why, and exercise clubs aggressively market one-year and two-year plans to new members around the beginning of the year. • People try to cope with bounded willpower by constraining themselves • Tardy people set their watches five minutes early to avoid being late • People install web site blocking software on own computers to prevent them from accessing entertainment web sites when they should be working Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

13. Bounded Self Interest • Experimental results from ultimatum game are consistent with bounded self-interest • Many people are more sensitive to their relative wealth rather than their absolute wealth. Example: Would you prefer to make $50,000 if your peers typically earn $25,000 or $100,000 if your peers typically earn $200,000? Roughly half the population chooses the former and half chooses the latter, even after being told that the purchasing power of money is constant across conditions (i.e., $100,000 buys twice as much as $50,000). Solnick & Hemenway, Is More Always Better? A Survey on Positional Concerns, 37 J. Econ. Behav. & Org. 373 (1998). • Many people are reciprocators. They will forego monetary rewards to share resources with people who have shared with them, and they will expend scarce resources to punish people who have treated them (or others) in an opportunistic manner. See Kahan, The Logic of Reciprocity: Trust, Collective Action, and Law, 102 Mich. L. Rev. 71 (2003) (reviewing studies). Reciprocal behavior tends to promote positive regard for others. See, e.g., Sprecher et al., Taking Turns: Reciprocal Self-Disclosure Promotes Liking in Initial Interactions, 49 J. Exper. Social Psych. 860 (2013). Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

14. Rational actor model suggests that after litigation, parties should bargain • Coase Theorum presupposes that some bargaining will occur once a court determines which party in a dispute has the legal entitlement • Bilateral monopoly means transaction costs could be high • But in some category of cases the available surplus should exceed transaction costs associated with bilateral monopoly and other forms of strategic behavior • Ward Farnsworth, Do Parties in Nuisance Cases Bargain After Judgment?, 66 University of Chicago Law Review 373 (1999). • Key finding is that none of the 20 cases that he looked at (nuisance only cases, litigated to court of appeals, injunction entered or denied) had any substantial talk of selling the injunction / entitlement. And none of the lawyers felt that things would have been different had the other party won. • There was a post-decision offer in only 1 of the 20 cases, and the parties never got close to a deal • Lawyers in these cases often got along well, but the clients did not – lawyers describe an “Acrimony premium” Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

15. Rational actor model suggests that after litigation, parties should bargain • Farnsworth at 405: This discrepancy between the market-like norms about bargaining that economists imagine and the other norms that lawyers may encounter even when transaction costs are low might be behind the odd suggestion, made by one of the plaintiff's lawyers in Payne v Skaar, that “(i)f Easterbrook ran the feedlot and Posner were the neighbor, we might have been able to negotiate something,” but that the “frame of reference of these people” was different. At first this sounds like a mistake on the order of supposing that a Freudian is someone who acts as Freudian theory would predict. But the attorney was gesturing toward a more reasonable point: translating entitlements into opportunities for pecuniary improvement does not come naturally or comfortably to everyone. • To what extent is this a selection effect in operation? Perhaps only psychopaths litigate cases to their conclusion (especially against a neighbor). Rational actors settle. It appears that firms that litigate cases to conclusion sometimes negotiate post-judgment. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

16. The utility of the behavioral account • Authors use it to explain existence of laws against ticket-scalping and usury, impulse for price regulation following natural disaster • Sharp deviation in price from the “reference transaction” likely to engender a fairness-based backlash • Reference transaction (ordinary price) acts as an “anchor” for subsequent transaction • Sometimes, though, rationality prevails. Article (from 1998) says using demand to price Broadway tickets would amount to a public relations “disaster” • In 2011 the taboo was broken, and dynamic pricing has become the norm for popular Broadway shows Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

17. The utility of the behavioral account • Availability heuristic may explain enactment of many laws • Love Canal public emergency of 1978 leads to enactment of Superfund law in United States. Significant expenditures on enforcement even though apparent health consequences from toxic waste dumps are low compared to other environmental problems Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

18. More availability cascades? Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

19. Debiasing through law • Limiting juror access to information to combat hindsight bias • Inform jurors of competing risks weighed ex ante by company • Risks of commission: Using chemical may cause cancer that will kill x residents living near manufacturing facility • Risks of omission: Not using chemical may cause bacterial contamination that will kill x consumers who use their otherwise beneficial product • Jurors would not know which risk was actually manifested at time they must determine liability • Adjust the liability threshold where hindsight bias is quite likely. • If hindsight bias causes jurors to overestimate probability of harm, then raise plaintiff’s burden to proving 75% probability of harm, rather than 51% probability (but jurors are poor at making these judgments). • For a much lengthier treatment, see Jolls & Sunstein, Debiasing Through Law, 35 J. Legal Studies 199 (2006). Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

20. Sunstein to Office of information and regulatory affairs • Sunstein appointed by President Obama to become “regulatory czar” of United States, served from 2009 to 2012 • “What’s OIRA?” • OIRA has implemented an aggressively behavioralist agenda during Obama Administration – see Sunstein, Empirically Informed Regulation, 78 University of Chicago Law Review 1349 (2011). We will explore this in a bit more detail on Friday. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

21. Examples of recent oira regulations • Nutrition labeling: If product describes meat as 90% lean, it must also include its fat percentage • Auto mileage labeling: Miles per gallon misleads consumers into thinking fuel costs gains are linear. Increasing economy from 20 to 25 mpg saves more fuel than increasing from 30 to 38 mpg. • Retirement savings: Regulations making it easier for employers to adopt automatic enrollment 401(k) pension plans • Direct enrollment (no forms to fill out) for subsidized school lunch programs, bring additional 270,000 children into program Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

22. Some Other key works in behavioral law & economics • Richard A. Posner, Rational Choice, Behavioral Economics, and the Law, 50 Stanford Law Review 1551 (1998) (responding to Jolls et al.) • Oren Bar-Gill, The Behavioral Economics of Consumer Contracts, 92 Minnesota Law Review 749 (2008) • Uri Gneezy and Aldo Rustichini, A Fine is a Price, 29 Journal of Legal Studies 1 (2000) • John Bronsteen, Christopher Buccafusco, and Jonathan Masur, Happiness & Punishment, 76 University of Chicago Law Review 1037 (2009) • Avishalom Tor & William J. Rinner, Behavioral Antitrust: A New Approach to the Rule of Reason After Reegin, 2011 University of Illinois Law Review 805 • Tess Wilkinson-Ryan, Breaching the Mortgage Contract: The Behavioral Economics of Strategic Default, 64 Vanderbilt Law Review 1547 (2011) Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

23. Up next: CheatingBefore we Transition: What have I missed? ? Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

24. In-Depth Look at Cheating through a behavioral lens • Classical Economics: Gary Becker’s (Nobel Laureate 1992) Model of Crime (Crime and Punishment: An Economic Approach, 76 J. Political Econ. 169 (1968)). • Let B = Monetary Gain from Committing Crime • Let L = Likelihood of Detection, Apprehension, and Conviction for Committing Crime • Let P = Criminal Justice System’s Penalty for Committing Crime • Homo economicus (rational actor) criminal will commit crime if B > L X P • If fines can be imposed then increasing P is less expensive to state than increasing L • See Levitt & Miles, Empirical Study of Criminal Punishment, 1 Handbook of Law & Econ. 455 (Polinsky & Shavell ed. 2007) (for much more analysis and a review of the empirical evidence). • Now suppose that the Criminal’s Self Worth declines if he commits a crime • Let W = Self Worth Effect from Committing Crime (typically a negative number = lower self worth) • Hence, homo behavioralis criminal will commit crime if (B + W) > (L X P) • Note that W is insensitive to probability of detection; Criminal knows he broke law • Shift from homo economicus to homo behavioralis, ceteris paribus, should permit society to reduce investments in raising L and / or reduce P Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

25. What do we Know about “W”? • Mazar, Amir & Ariely, The Dishonesty of Honest People: A Theory of Self-Concept Maintenance, 45 J. Marketing Research 633 (2008). • Experiment 1 • Participants asked to write down either ten books they read in high school or the Ten Commandments (Thou Shall Not Steal, Thou Shall Not Commit Adultery, etc.) • Participants asked to do simple test problems, rewarded for number of correct answers. Control group answers checked by experimenter, Experimental group answers not verified, subject to self-reporting with ability to cheat. • Participants in experimental group primed with books cheated significantly more, but magnitude of extra cheating was modest (6.7% of maximum) • Priming with Ten Commandments eliminates observable cheating in experimental condition • Experiment 2 reveals that mention of fictitious honor code has same effect as Ten Commandments reminder on cheating, but this could affect perceived P, not W Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

26. Mazar, Amir & Ariely (Continued) • Experiment Four • Task 1: Solve one set of problems – control group has answers verified (no cheating), experimental group answers not verified (cheating possible, occurs) • Task 2: Questionnaire asks participants how honest they are, how moral they felt today compared to previous day • Task 3: Participants told they will solve second set of similar problems, asked to predict how many they will answer correctly with incentives to be accurate, all are told their answers will be verified (no ability to cheat) • Task 4: Solve second set of problems – control group and experimental group both have answers verified Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

27. Mazar, Amir & Ariely (Continued) • Experiment Four results: • Experimental group cheated (6.7 correct answers) on problem set 1 (4.2 for control) • Experimental group predicted 6.3 correct answers on problem set 2 (6.3 for control) • Experimental group & control equally confident about predictions • Suggests that experimental group knew they had cheated and adjusted prediction • No significant difference between experiment and control groups re: reported self-assessment of own honesty, or how moral they feel today compared to yesterday • Authors say overclaimers do not update self-concept in terms of honesty even though they recognize their actions (p. 639). • Another (unmentioned) possibility is that having lied once to experimenter, it was easy to lie again about honesty and morality, despite experienced reduction in self-worth. Paradox of relying on self-reports in experiment that studies subject deception Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

28. Mazar, Amir & Ariely (Continued) • Experiment Six • Multiple choice, general knowledge test administered to 326 students, students given $.10 for each correct answer. $5 maximum award for perfect score. • Control Group: Answers are checked by experimenter • Experimental Groups: Expected chance of being caught decreases for each of three groups: (1) Experimenter given bubble sheet and test (showing discrepancy), (2) Experimenter given bubble sheet only (subject shreds test), (3) Subject shreds both bubble sheet and test sheet, removes amount of money earned from jar using honor system (experimenter then counted amount remaining to see how much money was taken.) Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

29. Mazar, Amir & Ariely (Continued) • Experiment Six Results • Control group answers 32.6 questions on average • Each of the experimental groups report higher number of correct answers, indicating cheating (36.2, 35.9, and 36.1, respectively). • Given the opportunity to cheat, subjects overwhelmingly did so, but typically only by a little. (Approximately 10% of respondents reported 45 or more correct answers). • Subjects cheated when cheating was possible but did not increase their cheating when cheating became really easy / probability of detection fell. This result was replicated by a more recent paper. See Gamliel & Peer, Explicit Risk of Getting Caught Does Not Affect Unethical Behavior, 43 J. Applied Social Psych. 1281 (2013). • Interpretation: Subjects can justify a little cheating while maintaining self-concept. High levels of cheating undermine self-concept, and the desire to maintain a positive self concept deters cheating regardless of risk of getting caught and punished. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

30. Mazar, Amir & Ariely (implications) • This evidence complicates the Becker model. Subjects seem unresponsive to L (likelihood of detection) in experimental setting. As B (Monetary Gain) rises, W (Self Worth Effect of Committing Crime) grows more negative, though the precise relationship is undetermined. (B+W) > L X P may present difficult calculations to policymakers. • Only 5 of 791 participants cheated the maximum amount across experiments. Slight cheating common, but the cheating doesn’t flow from a small number of people cheating a lot. • See also Jolls et al. at 1540 (suggesting that criminals aren’t terribly responsive to lengthened prison terms – five years in prison rated only twice as bad as one year in prison). Policy dilemma. • But let’s not get carried away. Some real-world evidence supports the Becker hypothesis. See Levitt & Miles at 457 ([Despite challenges created with demonstrating causal relationships and difficulty of disagregatingdeterence and incapacitation, “researchers have enjoyed significant progress in recent years in testing the economic model. They have found that deterrence has a substantial but far from complete role in explaining observed patterns of criminal activity.”). • As Mazar et al. note, their finding that being informed about higher scores of others does not increase cheating is surprising. Mazar et al. at 643. Other evidence is contrary, see, e,g., Coleman, The Minnesota Income Tax Compliance Experiment: Replication of the Social Norms Experiment(Nov. 2007); Rettinger & Kramer, Situational and Personal Causes of Student Cheating, 50 Res. Higher Educ. 293 (2009), and it would seem that “everyone is cheating” would permit cheaters’ self-concept to be maintained. We will explore this issue in more detail tomorrow. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

31. Questions on mazar et al.? ? Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

32. Scott Wiltermuth , Cheating More When the Spoils are Split, 115 Org. Behav. & Human Decision Processes 157 (2011) Simple Becker Rational Actor Model (B > L X P) predicts that if a criminal internalizes all the benefits from a crime, the incentive to commit the crime will be maximized. If benefits are split, then incentive will be reduced. But people may experience utility based on the “warm glow” of helping others. See Andreoni, Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence, 97 J. Pol. Econ. 1447 (1989). Still, even incorporating altruistic criminals into Becker’s model, splitting the spoils from crime should not increase crime. As Wiltermuth says: “even if the individual were not particularly self-interested and valued helping others more than she valued benefiting herself, rational choice theory (e.g., Becker, 1968) would predict that she would be no more likely to behave unethically when forced to split the spoils of cheating in a particular distribution than when she could accrue all of the spoils of cheating and later decide how to allocate some of those benefits to others. In other words, the cheater could give away the money she earned later and still derive a warm-glow benefit from giving, assuming that she could do so easily and without fear of detection and punishment. Whether the allocation occurs as a direct result of the unethical act or as a result of giving away some of the proceeds of the unethical act should therefore not affect an individual’s utility.” Wiltermuth at 159. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

33. Cheating More When the Spoils Are Split • Experiment 2 • 262 Participants in online experiment earn $1 - $2 for each additional word jumble solved, but as soon as participant is unable to solve one jumble, ability to earn additional money ceases • Taguan? • Semovedly = separately Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

34. Cheating More (Continued) • Experiment 2 (continued) • Subjects Assigned to one of five conditions: • Self-Alone Low Benefit: You will receive $1 per word jumble solved • Self-Alone High Benefit: You will receive $2 per word jumble solved • Self-and-friend Benefit: You will receive $1 per word jumble solved and a friend of your choosing will also receive $1 per word jumble solved • Self-and-other Benefit: You will receive $1 per word jumble solved, plus a randomly selected participant from another experiment will receive $1 per. • Other-alone Benefit: Your performance will not affect the payment you receive. However, a randomly selected participant from another experiment will receive $2 for each word jumble you solve. • Participants indicated which word jumbles they successfully unscrambled but not asked to write out any unscrambled words. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

35. Cheating More (Continued) • Experiment 2 Results • Self-Alone Low Benefit: You will receive $1 per word jumble solved (26.7% report solving Taguan; 3.5 Anagrams reported solved) • Self-Alone High Benefit: You will receive $2 per word jumble solved (22.4% report solving Taguan; 3.18 Anagrams reported solved) (not significantly lower) • Self-and-friend Benefit: You will receive $1 per word jumble solved and a friend of your choosing will also receive $1 per word jumble solved (43.1% report solving Taguan; 4.45 Anagrams reported solved) • Self-and-Other Benefit: You will receive $1 per word jumble solved, plus a randomly selected participant from another experiment will receive $1 per correct answer (36.7% report solving Taguan; 3.93 Anagrams reported solved) • Other-Alone Benefit: A randomly selected participant from another experiment will receive $2 for each word jumble you solve; you receive nothing for solving jumbles (16.3% report solving Taguan; 2.86 Anagrams reported solved) Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

36. Cheating More (Continued) • Experimental Results (continued) • No statistically significant relationship between Individual Benefit and Propensity to Cheat, and direction of effect is contrary to Becker Model predictions • Perhaps subjects used stakes as proxy for likelihood of detection / seriousness of punishment? • Post Hoc Gender Result: 52% of Women but only 28% of Men in Self-and-Friend Benefit report solving Taguan. 26% of Men and 18% of Women in Self Alone Conditions reported solving Taguan. Gender effect not significant in follow-up experiment (Study 3). • Splitting the Proceeds 67% - 33% rather than 50% - 50% did not seem to make any difference (Experiment 4) • Subjects told that spoils would be shared with beneficiary “randomly selected from a group of participants whose responses indicated that they are highly prejudiced against racial minorities” did not cheat more than those in Self-Alone condition (Experiment 4) • Subjects rarely wanted (11.9%) to share some of money obtained with third parties (Experiment 4) Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

37. Cheating More (Continued) • Interpretation • “[P]eople may be most susceptible to engage in activities such as lying, cheating, or stealing when others can share in the benefits of those transgressions. When individuals would stand to gain all of the rewards of their dishonesty, their own need to see themselves as moral may stop them from behaving unethically. When they could attribute some of their behavior to the desire to benefit others, they may be able to see themselves as moral even as they behave in ways most people would deem immoral.” Wiltermuth at 166. • In real world setting, danger of sharing information about crimes with third party beneficiaries may confound this effect. Sharing gains with others may entail informing others of criminality, which raises the risk that third parties will inform police. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

38. Cheating More (Continued) • Implications of Research • If the Self-Concept Benefits from Sharing Spoils + Increased Probability of Success if Third Parties Help in Criminal Enterprise > Increased Risk of Detection from Criminal Cooperation, then Well-Publicized Penalty Enhancements for Joint Efforts (e.g., Conspiracy Liability) May be Warranted. • Legal Design Implication: Be wary of designing opportunities to cheat where rationalization is easy for cheater. Ability to assist strangers may be almost as tempting as ability to assist friends, assuming assistance can occur anonymously and without risk of detection. • Concern about Generalizability: This is a student population and the stakes were low. How well would these effects hold up among people tempted to commit serious crimes? Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

39. Questions on wiltermuth(or anything else connected to today’s topics) ? Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics

40. Thank you! • I’ll be here or in the hallway outside for as long as there are questions, and I will see you all tomorrow. Professor Lior Strahilevitz, University of Chicago Law School 2013 Summer School in Law & Economics