(left: the "reasonable man?")
According to Saturday's New York Times Talking Business column Can We Turn Off Our Emotions When Investing?, few of us could make the boast ascribed to Los Angeles lawyer Charles T. Munger when asked the secret to being a great investor.
"I'm rational," he said.
Lawyers, Economists and "Reasonable Men"
Both law and economics have long assumed a hypothetically objectively "reasonable man" or investor.
I can still recall the precise moment during my first year of law school when all of my core courses came together under the rubric "reasonable." The potential tortfeasor was liable to his victim only if he failed to behave "reasonably" -- a standard also imposed upon the plaintiff lest she be found contributorily or comparatively negligent. In actions for the breach of an agreement, the contracting parties were required to demonstrate that their performance expectations were objectively reasonable. Even the ancient law of property rights required that covenants and restrictions not unreasonably burden the use or transferability of real estate.
The dry rules of civil procedure were also governed by standards of reasonableness. They assumed the giving of reasonable notice when civil actions were filed and required that pleadings contain reasonably detailed allegations of wrongdoing. Finally, every generation of television watching Americans knows that an accused could be convicted of a crime only if his guilt were proven "beyond a reasonable doubt."
We lawyers were thus trained to be reasonable, rational people, unaffected by passion and prejudice, unemotional.
That's a good thing right? Well, not if we believe we're acting reasonably and rationally when we're not.
For the last several years, even the stuffy business pages of the Wall Street Journal and the New York Times have been reporting that our hypothetical rational edifice is crumbling. There are no rational "Mr. Spock's" among us. We are all driven by irrational emotion and most of us rarely act "reasonably."
What's Emotion Got to Do with It?
Before we dive into Joe Nocera's article about the neuroeconomics of investing, let's remember that litigation is every bit as much an investment as a stock portfolio. So what do the neuroeconomists say about litigants' decision-making processes?
- The part of our brain that tells us to act like rational investors tends to be completely overtaken by much more powerful emotional impulses — impulses . . . "that make us human.”
- Our "phenomenal ability to detect and interpret simple patterns . . . leads us to assume that order exists where it often doesn’t,” misleading "economic man" to search for and act on "trends that are consistent and repeatable (even though they’re not)."
- Even if we believe ourselves to be "risk taking" or "risk averse," we forget that "risk tolerance is not a fixed thing, but changes from day to day, even hour to hour, depending on our mood."
- Risk tolerance is also influenced by "how others have framed the question for us. Amazingly, for instance, people tend to be more sanguine about risk when it is expressed as a percentage (10 percent, say) than when it is expressed as a frequency (one out of 10)."
The Good News: with a Little Help, Our Settlement Decisions Can Be as Rational as is Possible for Fallible Humans to Be
Most good commercial mediators know that business litigation can be as emotional as family law or employment litigation. Business people are not unemotional drones. They are vibrant, creative, innovative, hard working people who have poured their life's blood into building a business, inventing a product, or selling an idea.
When someone breaches an agreement, the aggrieved business woman feels betrayed. When someone steals the product of our labor; the customers we have developed; or, the algorithm we have devised, we feel ripped off. When someone defames our character or slanders our enterprise, we feel, hurt, injured and angry.
Emotions in litigation -- and at the negotiation table -- often run extremely high. It is for this reason that so many lawyers want to avoid joint sessions altogether and conduct their entire bargaining session in separate caucus with a "shuttle" mediator.
What I can tell you from three years of full-time mediation practice, however, is this -- when business people -- properly coached -- are finally willing to sit down and speak to one another, to explain their circumstances rather than their legal and factual position -- cases get settled rather quickly. (See Geoff Sharp's In Praise of Joint Sessions here)
Because they have more in common with one another -- including most particularly the dispute -- than with anyone else.
We'll continue to link to the emerging insights of neuroscience that are steadily replacing our old notions of the "reasonable" and the "economic man" and reminding ourselves that the business of business is also the business of people.