Behavioral science and consumer standard form contracts

Louisiana Law Review

Volumn 68, Issue 1, 2007, Pages 117-179

  Becher, Shmuel I ^a  

^a School of Law ^*  (Israel)

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EID: 37149037607     PISSN: 00246859     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (236)

1. RESTATEMENT (SECOND) OF CONTRACTS § 1 (1981) ("A contract is a promise or a set of promises . ...").
2. U.C.C. § 1-201(b)(12) (2001) ("'Contract' . . . means the total legal obligation that results from the parties' agreement as determined by [the Uniform Commercial Code] as supplemented by any other applicable laws.").
3. See, e.g., Daniel Markovits, Contract and Collaboration, 113 YALE L.J. 1417, 1419 (2004).
4. See, e.g., W. David Slawson, Standard Form Contracts and Democratic Control of Lawmaking Power, 84 HARV. L. REV. 529, 530 (1971).
5. One could say, in other words, that an unread biased contract is a hidden defect in a product.
6. In light of these departures, scholars have proposed a number of ways to deal with consumer SFCs. These proposals can be categorized into three groups. One group focuses on providing the judiciary with the necessary tools and discretion to intervene, ex post, in appropriate SFC cases. The second group seeks to advance legislation that will protect consumers, mainly by requiring information disclosure and assuring fair or efficient contracting practices. Yet a third group seeks to minimize legal intervention in the market for consumer contract terms, arguing that market forces can lead to an efficient equilibrium where sellers have a sufficient profit-incentive to draft efficient SFCs. For further discussion, see Shmuel I. Becher, Asymmetric Information in Consumer Contracts: The Challenge That Is Yet to be Met, 45 AM. BUS. L.J. (forthcoming 2008).
7. This fundamental presumption is based both on the rationality assumption that accompanies economic analysis of law and on respect for individuals' autonomy.
8. See Shmuel I. Becher, A "Fair Contracts" Approval Mechanism: Reconciling Consumer Contracts and Conventional Contract Law (Sept. 20, 2007) (work in progress), available at http://ssrn.com/abstract= 1015736.
9. Parts II, III, and V are based on behavioral economics models and studies. As detailed below, Part IV employs insights from different yet related disciplines.
10. Undoubtedly, both proponents and opponents of law and economics share this view. A very few examples are RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 23-26 (7th ed. 2007) (briefly reviewing the history of the economic approach to law and emphasizing the positive and normative scope of economic analysis);
11. Donald C. Langevoort, Behavioral Theories of Judgment and Decision Making in Legal Scholarship: A Literature Review, 51 VAND. L. REV. 1499, 1500 (1998);
12. Eric A. Posner, Economic Analysis of Contract Law After Three Decades: Success or Failure?, 112 YALE L.J. 829 (2003) (arguing that economic approach to contract law does not explain current doctrines and does not provide a sound basis for criticizing and reforming current contract law, but that it played a dominant role in contracts scholarship during the 1990s).
13. See, e.g., Russell B. Korobkin & Thomas S. Ulen, Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics, 88 CAL. L. REV. 1051, 1054-55 (2000).
14. See, e.g., Thomas Gilovich & Dale Griffin, Heuristics and Biases: Now and Then, in HEURISTICS AND BIASES, THE PSYCHOLOGY OF INTUITIVE JUDGMENT 1 (Thomas Gilovich, Dale Griffin & Daniel Kahneman eds., 2002) [hereinafter HEURISTICS AND BIASES].
15. Early skeptical approaches which rely, inter alia, on psychology and other social sciences are, for example, Mark Kelman, Consumption Theory, Production Theory, and Ideology in the Coase Theorem, 52 S. CAL. L. REV. 669 (1979)
16. and Arthur Allen Leff, Economics Analysis of Law: Some Realism About Nominalism, 60 VA. L. REV. 451 (1974). For a brief review of general criticism of the economic approach to law, see
17. POSNER, supra note 10, at 26-27.
18. For a survey of some of the literature that documents those departures, see, for example, Langevoort, supra note 10.
19. For a similar general statement see, for example, Korobkin & Ulen, supra note 11, at 1055.
20. See, e.g., Jeffery J. Rachlinski, The "New" Law and Psychology: A Reply to Critics, Skeptics, and Cautious Supporters, 85 CORNELL L. REV. 739, 765 (2000).
21. See, e.g., Korobkin & Ulen, supra note 11, at 1057;
22. Langevoort, supra note 10, at 1502. One prominent example is BEHAVIORAL LAW & ECONOMICS (Cass R. Sunstein ed., 2000).
23. For an argument that there is a sharp gap in the application of these competing models between law on one hand and other economic fields on the other, see, for example, Christine Jolls, Cass R. Sunstein & Richard Thaler, A Behavioral Approach to Law and Economics, 50 STAN. L. REV. 1471, 1473 (1998).
24. In many instances, these competing models differ from the classical economic ones since they focus on the concern that "[i]f people make systematic errors in judgment, then they will make bad choices even when they have the incentives and information needed to make good ones, and hence, do themselves harm if left to their own devices." Jeffery J. Rachlinski, The Uncertain Psychological Case for Paternalism, 97 NW. U. L. REV. 1165, 1166 (2003).
25. Scholars have been using different terms when referring to this field. The term "Behavioral Law and Economics" has been used, for instance, by Jolls et al., supra note 17,
26. and Langevoort, supra note 10.
27. For other terms, see, for example, Korobkin & Ulen, supra note 11 ("Law and Behavioral Science")
28. and Rachlinski, supra note 15 ("Law and Psychology"). I use these terms interchangeably.
29. See, e.g., Jolls et al., supra note 17, at 1474 ("The unifying idea in our analysis is that behavioral economics allows us to model and predict behavior relevant to law with the tools of traditional economics analysis, but with more accurate assumptions about human behavior . . . .");
30. Cass R. Sunstein, Introduction to BEHAVIORAL LAW AND ECONOMICS, supra note 16, at 1 (arguing that people's behavior, though not "rational" in the way that economists intend, "can be described, used and sometimes even modeled").
31. See, e.g., Jolls et al., supra note 17, at 1476;
32. Korobkin & Ulen, supra note 11, at 1058;
33. Rachlinski, supra note 15.
34. See, e.g., POSNER, supra note 10, at 7 ("Rational people base their decisions on their expectations of the future rather than on their regrets about the past.");
35. RICHARD A. BREALEY & STEWART MYRES, PRINCIPLES OF CORPORATE FINANCE 115 (5th ed. 1996) (articulating the famous phrase: "Sunk cost are like spilt milk: they are past and irreversible outflows.");
36. William Samuelson &Richard Zeckhauser, Status Quo Bias in Decision Making, 1 J. RISK & UNCERTAINTY 7, 37 (1988) ("One of the earliest lessons in economics is that decisions should be based on incremental benefits and costs.").
37. A more intuitive way to put it, however, is that "[a] person should not stop at the gym on the way home from work merely because he has paid a hefty annual membership fee; he should stop only if he expects that the utility derived from a workout will exceed the utility derived from getting home earlier." Korobkin & Ulen, supra note 11, at 1124.
38. See, e.g., Jolls et al., supra note 17, at 1482-83, nn.25-28, 1490-92 (discussing the theater patron study and the ultimatum game and its sunk-cost variation);
39. Korobkin & Ulen, supra note 11, at 1073-74 (noting the ample evidence demonstrating that many people attend a performance once they have paid for a ticket, reasoning that otherwise it is a waste of money);
40. id. at 1124 ("Notwithstanding economic wisdom to the contrary, people routinely cite sunk costs as a reason for pursuing a particular course of action.");
41. Hillary A. Sale, Judging Heuristics, 35 U.C. DAVIS L. REV. 903, 919 (2002) ("People facing high-risk situations, are more likely to gamble on a risky outcome than to accept the loss upfront. 'Rational' or not, their commitment to the situations escalates, sunk costs dominate, and the ability to pull back and reexamine the situation is diminished.").
42. See Richard Thaler, Towards a Positive Theory of Consumer Choice, 1 J. ECON. BEHAV. & ORG. 39, 47 (1980).
43. Hal R. Arkes & Catherine Blumer, The Psychology of Sunk Cost, 35 ORG. BEHAV. & HUM. DECISION PROCESS 124 (1985) (presenting a study of theater patrons that revealed that those who were randomly assigned discounted tickets attended significantly fewer performances).
44. Samuelson & Zeckhauser, supra note 22, at 37.
45. Probably the most famous and common examples are those of large public projects. See, e.g., Arkes & Blumer, supra note 26, at 124 (citing Senator Denton: "To terminate a project in which $1.1 billion has been invested represents an unconscionable mishandling of taxpayers' dollars," and Senator Sasser: "Terminating the [Tennessee-Tombigbee Waterway] project at this late stage of development would ... represent a serious waste of funds already invested.").
46. For modeling sunk cost and grounding it on prospect theory, see Thaler, supra note 25, at 48-49. According to Thaler's modeling, the sunk cost effect can be explained by referring to the "pain" (which corresponds to the value function in the domain of loss) that a consumer suffers from the loss of past investments.
47. Id. That modeling also explains why the more resources one invests, the more likely he is to display a sunk costs effect.
48. Arkes & Blumer, supra note 26, at 132 ("One reason why people may wish to throw good money after bad is that to stop investing would constitute an admission that the prior money was wasted. The admission that one has wasted money would seem to be an aversive event. The admission can be avoided by continuing to act as if the prior spending was sensible, and a good way to foster that belief would be to invest more.").
49. See, e.g., Korobkin & Ulen, supra note 11, at 1125 ("People often pay heed to sunk cost because they want to act consistently. And while the desire for consistency can be foolish in the face of changed circumstances, it can also be quite sensible when our past actions are based on reliable evaluations of costs and benefits." (footnotes omitted)
50. (citing ROBERT B. CIALDINI, INFLUENCE: SCIENCE AND PRACTICE 50-93 (3d ed. 1993));
51. Donald C. Langevoort, Ego, Human Behavior, and Law, 51 VA. L. REV. 853 (1995).
52. See, e.g., Richard Birke, Reconciling Loss Aversion and Guilty Pleas, 1999 UTAH L. REV. 205, 214 (1999) ("[T]his theory [that people hate certain losses] helps explain why otherwise rational business people will commit money to keep a venture alive that has lost them a great deal in the past, when new investors are reluctant to invest.");
53. Mark Scidenfeld, Symposium: Getting Beyond Cynicism: New Theories of the Regulatory State Cognitive Loading, Social Conformity, and Judicial Review of Agency Rulemaking, 87 CORNELL L. REV. 486, 500, 517 (2002) (revealing experiments that demonstrate that even experts who are aware of maximizing rules such as ignoring sunk cost may fail to utilize them).
54. See Arkes & Blumer, supra note 26, at 139 (concluding that "the sunk cost effect is a robust judgment error").
55. One prominent example is the stage in which individuals face a decision whether to settle a case or to litigate it in court. See, e.g., Samuel Issacharoff & George Lowenstein, Second Thoughts About Summery Judgment, 100 YALE L.J. 73, 113-14 (1990) (claiming that procedural mechanisms aimed at increasing up-front information sharing and evaluation may not have the desired prosettlement effect due to, inter alia, the sunk cost effect phenomenon);
56. Russell Korobkin & Chris Guthrie, Psychology, Economics, and Settlement: A New Look at the Role of the Lawyer, 76 TEX. L. REV. 77, 131-32 (1997).
57. For one exception, see Avery Katz, The Strategic Structure of Offer and Acceptance: Game Theory and the Law of Contract Formation, 89 MICH. L. REV. 215, 289-90 (1990). Katz argues that buyers prefer not to read SFCs sincethey know that once they do read standardized terms they incur sunk costs which may induce them to enter a "barely acceptable deal." In my opinion, however, Katz's application is fairly partial since it addresses sunk costs only with respect to reading a contract, rather than placing the phenomenon of sunk costs in the broader contexts of consumer search and behavior. Second, Katz's analysis seems not to distinguish between sunk costs and cognitive dissonance.
58. See infra Part II.B. Third, the assertion that consumers will avoid reading SFCs in order not to accumulate sunk costs, which might distort rational decisions, seems to attribute ordinary consumers with far too much rationality.
59. for another exception, see source cited infra note 56 and accompanying text. This application, as will be explained infra Part II.E, differs substantially from the one expressed here since it is tailored to a specific kind of contractual term (i.e., periodic payments).
60. For instance, it is reported that for the year 2006, total consumer online spending reached $170 billion. Online Consumer Spending to Hit $170 Billion in 2006, METRICS 2.0, Oct. 26, 2006, http://www.metrics2.com/blog/2006/10/26/ online_consumer_spending_to_hit_170_billion_in_200.html (last visited July 8, 2007).
61. See, e.g., Robert A. Hillman, Rolling Contracts, 71 FORDHAM L. REV. 743, 744 (2002) ("In a rolling contract, a consumer orders and pays for goods before seeing most of the terms, which are contained on or in the packaging of the goods. Upon receipt, the buyer enjoys the right to return the goods for a limited period of time."
62. (citing Hill v. Gateway 2000, Inc., 105 F.3d 1147, 1148 (7th Cir. 1997)).
63. For instance, a consumer who wants to return a product might need to go to the post office in order to ship it back or to call the seller and explain why he is not interested in the product.
64. 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").
65. See Katz, supra note 34, at 288-89.
66. See, e.g., SCOTT FLOUS, THE PSYCHOLOGY OF JUDGMENT AND DECISION MAKING 233 (1993) ("[The confirmation bias] usually refers to a preference for information that is consistent with a hypothesis rather than information that opposes it.").
67. See id. at 238-39.
68. See ARTHUR S. REBER, THE PENGUIN DICTIONARY OF PSYCHOLOGY 151 (2d ed. 1995) (defining confirmation bias as "the tendency to seek and interpret information that confirms existing beliefs" (emphasis added)).
69. Hulman and Rachlinski use the term "motivated reasoning" to illustrate this idea. See Robert A. Hillman & Jeffery J. Rachlinski, Standard-Form Contracting in the Electronic Age, 11 N.Y.U. L. REV. 429, 453 (2002) ("Because consumers usually encounter standard terms after they have decided to purchase the good or service, they will process the terms in the boilerplate in a way that supports their desire to complete the transaction.").
70. A harsh version of this technique is the notorious "bait-and- switch" selling tactic. The FTC considers "bait-and-switch" as a family of practices where an initial ad offers an especially tempting price on a certain model as "bait" to attract consumers. Thereafter, sales staff commences to "switch" the purchases to other items, usually at a higher price. The FTC has declared this technique as deceptive and therefore unlawful. See 16 C.F.R. § 238 (2003).
71. The term "teaser rate" is used in the context of mortgage and credit card agreements to describe a very low-yet very temporary-introductory rate. This "teaser rate" practice can be viewed, in a way, as a low-ball technique.
72. This second type of low-ball technique is related to people's propensity to focus on current consumption. See infra Part III.D.
73. See, e.g., Arkes and Blumer, supra note 26, at 138.
74. 133 N.W.2d 267, 274 (1965).
75. Id.
76. See Ian Ayres & Gregory Klass, Promissory Fraud Without Breach, 2004 WIS. L. REV. 507, 515-17 (2004) and accompanying notes.
77. Interestingly, the drafters of the U.C.C. were aware of this problem (at least in part). U.C.C. section 2-209 requires that contractual terms that bar oral modification should be separately signed. U.C.C. § 2-209(2) (2001).
78. However, this is not the only technique that sellers use when referring to the gap between what SFC terms state and what has been previously stated or promised. At times, and as supplementary measures, sellers ask customers to trust them or to ignore the "legal gobbledygook" in the SFC. Additionally, sellers might undermine the importance of the written contract and the prospects that it will be used against the customer. Finally, sellers might err (or exploit consumers' lack of legal expertise) and interpret or explain SFC terms incorrectly.
79. See Korobkin & Ulen, supra note 11, at 1126.
80. Id. Accordingly, they propose that "[t]o the extent that lawmakers believe that such contracts result in many consumers' failing to maximize their utility, those lawmakers might consider implementing restrictions on the way consumer contracts may be structured."
81. Id.
82. Some sellers restrict, by indicating a specific timeframe, the scope of rental payments that can be applied towards purchase. A common term will note, for instance, that the consumer "can apply all rental payments in the first 90 days towards ownership."
83. See, e.g., State of Wisconsin, Department of Financial Institutions, Brochures: Rent-to-Own, http://www.wdfi.org/ymm/brochures/credit/ rent_to_own.htm (last visited July 8, 2007) ("Purchasing merchandise from a rent-toown company usually costs two to five times as much as purchasing the merchandise from a department or appliance store. If the difference between the total payments and the fair market value of the product was expressed as an interest rate, the rate is commonly over 100%, and at times over 300%.").
84. These deals also exploit the Western consumer culture, where overconsumption and instant gratification are the norm. For relating behavioral failures to consumer culture, see infra notes 100-105 and accompanying text.
85. 350 F.2d 445 (D.C. Cir. 1965).
86. Id. at 447.
87. The court explained that, due to this term, "the debt incurred at the time of purchase of each item was secured by the right to repossess all the items previously purchased by the same purchaser, and each new item purchased automatically became subject to a security interest arising out of the previous dealings." Id.
88. This specific example was taken from Camcorder HQ, Camcorders: Terms of Use, http://www.digitalcamera-hq.com/camcorder/info/terms-of-use.html (last visited July 8, 2007). Similar pre-drafted contractual terms appear in many other websites' standardized agreements. See, e.g., TripAdvisor.com, Terms and Conditions of Use, http://www.tripadvisor.com/pages/terms.html (last visited July 8, 2007).
89. For example, Chase accompanies their Chase Visa Platinum offer with a term that reads: You understand that the terms of your account, including the APRs, are subject to change . ... We reserve the right to change the terms (including the APRs) for any reason, in addition to APR increases that may occur for failure to comply with the terms of our account. Any changes will be in accordance with your Cardmember Agreement. (emphasis added). Similarly, Elite Rewards Platinum Plus MasterCard Credit Card accompany their credit card offer with a detailed set of terms and conditions, which include a statement that reads, "Account and Agreement are not guaranteed for any period of time; all terms including the APRs and fees, may change in accordance with the Agreement and applicable law." See also John J.A. Burke, Contract as Commodity: A Nonfiction Approach, 24 SETON HALL LEGIS. J. 285, 323 (2000).
90. To the extent that a unilateral change clause is drafted with the intention of making a delayed change, other doctrines aimed at deterring insincere contracting, such as promissory fraud liability, may be invoked. Cf. Ayres & Klass, supra note 50 (arguing that breach of contract is not a necessary component of promissory fraud).
91. Note, however, that firms incorporate such modification terms in their pre-drafted agreements in order to maintain maximum flexibility and to allow better responsiveness to changing circumstances. Nevertheless, the argument here is that this technique also allows firms to degrade SFC terms and make them socially undesired in a more "elegant" yet not fully appreciated way.
92. See Roger G. Noll & James E. Krier, Some Implications of Cognitive Psychology for Risk Regulation, in BEHAVIORAL LAW AND ECONOMICS, supra note 16, at 325, 327-28.
93. Michael Spence, Consumer Misperceptions, 44 REV. ECON. STUD. 561, 561 (1977) ("To be misinformed about the probabilities of product failure, is to be misinformed about the product.")
94. See, e.g., Hillman & Rachlinski, supra note 43, at 450 and accompanying notes.
95. See generally HEURISTICS AND BIASES, supra note 12;
96. JUDGMENT UNDER UNCERTAINTY (Daniel Kahneman, Paul Slovic & Amos Tversky eds., 1982).
97. As was noted in Part I, cognitive theory aspires to demonstrate not only that such heuristics exist, but also how they can be documented and modeled. This part focuses on documented biases that past experiences and competitive markets are not likely to correct, and proposes that some kind of policy or legal intervention might be inescapable. For a discussion of policy implication in the context of misperception of low-probability, high-consequence risks, see, for example, Colin F. Camerer & Howard Kunreuther, Decision Processes for Low Probability Events: Policy Implications, 8 J. POL'Y ANALYSIS AND MGMT. 565 (1989).
98. For a discussion of low-probability, high-consequence events, see, for example, Howard Kunreuther, Nathan Novemsky & Daniel Kahneman, Making Low Probabilities Useful, 3, 5 (1990), http://grace.wharton.upenn.edu/risk/ downloads/01-17-HK.pdf (referring to previous research which demonstrates that "many people are not able to meaningfully use probability information in these contexts [of low probability high consequence events]" and stating more generally that "many studies find that people have difficulty interpreting low probabilities").
99. Cf. Melvin Aron Eisenberg, The Limits of Cognition and the Limits of Contract, 47 STAN. L. REV. 211, 222 (1995) and accompanying notes.
100. It should be noted, however, that underestimation (or complete disregard) of risk is not the only possible approach towards low-probability risks. There is also the possibility, under some circumstances, that such risks will be overestimated. This can happen when dealing with personal injury risks or where people cannot avoid risk confrontation. See, e.g., id. at 223-24 and accompanying notes.
101. See, e.g., Camerer & Kunreuther, supra note 69, at 570 (referring to two confirming studies).
102. See Eisenberg, supra note 71, at 240.
103. See Langevoort, supra note 10, at 1504.
104. See, e.g., Camerer & Kunreuther, supra note 69, at 570, 580.
105. Id.
106. This concern raises the fundamental tension between respecting individual choices (including irrational ones) on one hand, and governmental interference in the private sphere in order to promote efficiency (or other values) where market forces do not reach an optimal equilibrium on the other. For a discussion of product liability as a response to consumer misperception of risks, see Spence, supra note 66.
107. For behavioral law and economics writings that address paternalism from various perspectives and plausibly argue that at times paternalism is warranted, inevitable or even desired, see generally Colin Camerer et al., Regulation for Conservatives: Behavioral Economics and the Case of "Asymmetric Paternalism ", 151 U. PA. L. REV. 1211 (2003) (arguing in favor of asymmetric paternalism, which creates large benefits for those who make errors while imposing little or no harm on those who are fully "rational");
108. Rachlinski, supra note 18;
109. Cass R. Sunstein & Richard H. Thaler, Libertarian Paternalism Is Not an Oxymoron, 70 U. CHI. L. REV. 1159, 1187-88 (2003) (articulating the idea that paternalism is inevitable while explaining why libertarian paternalism is both possible and legitimate).
110. See, e.g., Jolls et al., supra note 17, at 1519.
111. Sunstein, supra note 20, at 5.
112. See, e.g., Amos Tversky & Daniel Kahneman, JUDGMENT UNDER UNCERTAINTY: HEURISTICS AND BIASES, supra note 68, at 13 ("[T]he risk involved in an undertaking may be grossly underestimated if some possible dangers are either difficult to conceive of, or simply do not come to mind.").
113. See, e.g., Herbert Simon, Rationality in Psychology and Economics, 59 J. BUS. S209, S215-16 (1986).
114. See, e.g., Camerer & Kunreuther, supra note 69, at 569 (referring to a study that demonstrates that "[p]eople perceive the likelihood of deaths from highly reported disasters such as fires and homicide to be higher than those of events such as diabetes and breast cancer. But the two diseases together actually take twice as many lives as the two more dramatic events.").
115. See, e.g., Kunreuther et al., supra note 70, at 2 ("Disasters, such as the explosion at the Union Carbide plant in Bhopal, India in 1984, have sensitized the public to the potential dangers from chemical facilities even though the likelihood of such accidents is extremely small. This concern with the impact of major accidental chemical releases can be illustrated by congressional passage of the Clean Air Act Amendments (CAAA) of 1990.").
116. See Timur Kuran & Cass R. Sunstein, Availability Cascades and Risk Regulation, 51 STAN. L. REV. 683 (1999).
117. See, e.g., Elizabeth Warren, The Over-Consumption Myth and Other Tales of Economics, Law, and Morality, 82 WASH. U. L.Q. 1485, 1507 (2004) (arguing that the myth of over-consumption serves high interest credit card issuers and sub-prime mortgage lenders, and noting that "[i]f millions of Americans believed that families were losing their homes and they were left to cope with repo agents and aggressive bill collectors because they have been fleeced by deceptive marketing and oppressive contract terms, then the regulations that support billions of dollars of profits in the consumer credit industry could be easily changed" (emphasis added)).
118. See supra text following note 69.
119. Sunstein, for example, uses this insight to support "a form of anti-antipaternalism." Sunstein, supra note 20, at 3 ("If people are unrealistically optimistic, they may run risks because of a factually false belief in their own relative immunity from harm, even if they are fully aware of the statistical facts. And if people's choices are based on incorrect judgments about their experience after choice, there is reason to question whether respect for choices, rooted in those incorrect judgments, is a good way to promote utility or welfare.").
120. Jolls et al., supra note 17, at 1541.
121. See, e.g., Neil Weinstein, Optimistic Biases About Personal Risks, 246 SCI. 1232 (1989).
122. See, e.g., 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).
123. See Rachlinski, supra note 18, at 1172 (noting a strong correlation between self-serving biases and well-being, and pointing out that "[o]nly those who suffer from clinical depression ... have realistic self perception").
124. Langevoort, supra note 10, at 1506.
125. See Rachlinski, supra note 18, at 1173 ("Over- confidence in one's own judgment magnifies the undesirable consequences of erroneous judgment. . . . Excess confidence impedes individuals' ability to learn from mistakes and improve their ability to make better decisions.").
126. Compare Hillman & Rachlinski, supra note 43, at 454 (linking overoptimism to voluntary acts and stating that "[b]ecause consumers voluntarily enter into contracts, they will tend to believe that they can also sagely discount the low-probability events covered by standard terms").
127. See source cited supra note 38 and accompanying text for the discussion regarding cognitive dissonance.
128. For an argument that people also tend to over-estimate the chances of what they perceive to be a positive occurrence, such as winning the lottery see, for example, Camerer & Kunreuther, supra note 69, at 578.
129. See Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 447 (D.C. Cir. 1965);
130. supra note 60 and accompanying text.
131. See Oren Bar-Gill, Seduction by Plastic, 98 NW. U. L. REV. 1373, 1432 (2004) (suggesting that underestimation due to the optimism bias might have affected Williams' ability to understand the relevant provision: "Due to the underestimation bias, Williams may have been insufficiently sensitive to the inclusion of the repossession clause"; and opining that "arguably, the seller designed the installment purchase contract to exploit buyers' behavioral biases .... Williams was lured in by the attractive purchase price, only to face later thethreat of repossession.");
132. see also Eisenberg, supra note 71, at 241-42 (noting that from a seller's perspective, consumers' over-optimism and overconfidence can justify incorporation of harsh protective terms, anticipating the need for a strong form of security, but that on the other hand, sellers take advantage of these biases by tempting buyers to enter into deals beyond their financial ability).
133. Langevoort, supra note 10, at 1505.
134. Camerer & Kunreuther, supra note 69, at 579.
135. See, e.g., Warren, supra note 86, at 1489 and accompanying figures 3-6. Although Warren believes that over-consumption is a myth, she surveys data that supports the statement that "families are not just spending more of what they earn, they are also spending what they have not earned. Over the space of a single generation, American families have transformed from a nation of savers to a nation of spenders."
136. Id. at 1489.
137. See Camerer & Kunreuther, supra note 69, at 573 (noting that in research conducted in Pennsylvania and New York, more than 70% of motorists participating in a survey said they would not purchase an automatic seat belt that cost $100 if this would decrease their annual insurance premium by $25; and reasoning that the drivers' reluctance could be attributed, inter alia, to high discounting of future benefits).
138. For such an analysis of how bounded will-power and the over-optimism bias may undermine consumers' rationality, see Bar-Gill, supra note 99, at 1432.
139. By using the term "consumption culture and ideology," I refer to the urge to consume and to the cultural importance that people commonly attribute to consumption. As noted, one might argue that this reflects, at least in part, bounded will power. I believe that the two bounds are interrelated here. Strong consumption habits and ideology might undermine one's ability to approach and evaluate transactions in a "rational" way. Cf. Bar-Gill, supra note 99, at 1400 ("Of course, the optimism explanation and the imperfect willpower explanation . . . reinforce one another.").
140. The implicit assumption here is that repeating an experience can help individuals to correct or minimize at least some cognitive mistakes. However, there is a serious debate over whether facing repeated decision tasks provides people with the adequate feedback to improve their ability to avoid cognitive biases and thus improve the quality of their decisions. Compare, e.g., Langevoort, supra note 10, at 1521 (presenting a relatively skeptical view),
141. with Rachlinski, supra note 15, at 757 (presenting a somewhat more optimistic viewthat "feedback is a pre-requisite for learning" but conceding that "novices in a field or one-shot players are unlikely to have had enough experience to have received adequate feedback"). Obviously, different biases require different debiasing techniques, and the success rate and efficiency of each technique vary substantially.
142. As employed by psychologists, the term "stress" is used to describe unpleasant emotional states that result from threatening environmental events. See generally IRVING LAW JANIS & LEON MANN, DECISION MAKING: A PSYCHOLOGICAL ANALYSIS OF CONFLICT, CHOICE, AND COMMITMENT 50 (1977).
143. See id. at 45 ("[P]eople are likely to regret in leisure the impulsive decisions they make in haste while undergoing emotional turmoil.").
144. See, e.g., Peter Wright, The Harassed Decision-Maker: Time Pressure, Distraction, and the Use of Evidence, 59 J. APPLIED PSYCHOL. 555, 560 (1974) (exploring the affect of noise and time pressure on individuals' tendency of "becoming extremely alert to discrediting evidence on a few salient dimensions").
145. See JANIS & MANN, supra note 107, at 62 (specifying four conditions for vigilant decision-making).
146. Id. at 45-134.
147. See generally Sunstein & Thaler, supra note 78, at 1187-88 (attributing successful door-to-door transactions to consumers' bounded rationality and bounded will-power).
148. See, e.g., Texas Attorney General, The Consumer Protection Door-to-Door Brochure, http://www.oag.state.tx.us/AG_Publications/txts/door. shtml (last visited Sept. 17, 2007) ("Be suspicious of anyone who tries to sell by playing on your emotions. For example, some sellers will suggest you are shirking your responsibilities to your family if you don't buy their product.").
149. See, e.g., Door-to-Door Sales Protection Act, N.Y. PERS. PROP. LAW §§ 425-31 (2007);
150. see also 16 C.F.R. § 429.1 (2007) (in which the Federal Trade Commission imposes a mandatory three days cooling-off period as well).
151. See, e.g., Warren, supra note 86, at 1495-99 (opining that a home purchase is not only "the single most important purchase for the average middleclass family" but that home prices are the most dominant factors that lead American families to substantial financial difficulties).
152. William N. Eskridge, One Hundred Years of Ineptitude: The Need for Mortgage Rules Consonant with the Economic and Psychological Dynamics of the Home Sale and Loan Transaction, 70 VA. L. REV. 1083, 1116 (1984).
153. See, e.g., Broemmer v. Abortion Servs. of Phoenix, Ltd., 840 P.2d 1013 (Ariz. 1992) (invoking the notion of "adhesion contract" and the "reasonable expectations" principle).
154. Cf. Eisenberg, supra note 71, at 242 ("[F]orm takers often encounter form contracts under circumstances that encourage the form taker to exert only minimal effort to understand the preprinted form. Few hurried travelers, for example, will pause to read the boilerplate provisions of their car rental agreements.").
155. See Hillman & Rachlinski, supra note 43, at 448 ("Businesses often present standard-form contracts at a moment when consumers are hurried and when stopping to read and understand the boilerplate will feel awkward or unpleasant. ...").
156. See generally Claire A. Hill & Christopher King, How Do German Contracts Do as Much with Fewer Words, 79 CHI-KENT L. REV. 889 (2004) (arguing that American contracts are particularly long and detailing possible reasons for this phenomenon).
157. I will use the term "reading consumers" when referring to this group of consumers.
158. See Hillman & Rachlinski, supra note 43, at 448 ("Consumers will feel uncomfortable suddenly indicating distrust to the reassuring agent by studying terms covering unlikely events.").
159. See, e.g., Michael I. Meyerson, The Efficient Consumer Form Contract: Law and Economics Meets the Real World, 24 GA. L. REV. 583, 600 (1990);
160. Daniel T. Ostas, Postmodern Economic Analysis of Law: Extending the Pragmatic Visions of Richard A. Posner, 36 AM. BUS. L.J. 193, 227 (1998) ("If the consumer has questions on a contractual term [in a form contract], the corporate agent, perhaps a relatively untrained salesperson, may not understand the language nor have the power to alter it.").
161. See Hillman & Rachlinski, supra note 43, at 448 ("At the very least, the business's agent may send signals that he is in a hurry.").
162. As noted, this is perceived to be a waste of time, especially since sellers' agents are usually not authorized to dicker over standardized terms. See generally, e.g., Ostas, supra note 123.
163. See source cited supra note 36 and accompanying text.
164. Hillman & Rachlinski, supra note 43, at 478;
165. see also id. at 480 ("Indeed, perhaps the most obvious difference between electronic and paper contracting is that, in the paper world, salespeople usually deal with consumers face to face, whereas electronic consumers transact business from the privacy of their homes or offices. All of the social factors that deter consumers from reading standard terms depend upon the influence of live social situation that electronic contracting lacks. E-businesses cannot easily duplicate the effects of an endearing, but manipulative, agent in the electronic format.").
166. This argument against e-commerce invites strong opposition. As before, one general objection is the one of anti-paternalism. Yet there is a strong intuition that a distinction should be drawn between protecting consumers from pressure and stress caused by sellers (who can manipulate consumers and profit from their mistakes), and protecting consumers from their own indifference arising from common behavioral patterns. Although this concern accompanies much of this Article's analysis, the "no pressure" argument raises strong doubts that should be carefully considered.
167. See source cited supra note 36 and accompanying text (relating this reality to the problem of sunk cost and cognitive dissonance);
168. see also Eskridge, supra note 116, at 1116 (making a similar argument to explain why home buyers are less inclined to shop for mortgage loans and related expenses).
169. See, e.g., U.C.C. § 2-206 cmt. 1 (Supp. 2006) (adopting a similar approach and rejecting technical rules of acceptance);
170. RESTATEMENT (SECOND) OF CONTRACTS § 30(2) (Supp. 2007) ("Unless otherwise indicated ... an offer invites acceptance in any manner and by any medium reasonable in the circumstances.").
171. See, e.g., Mark Lewis, Digital Signatures: Meeting the Traditional Requirements Electronically: A Canadian Perspective, 2 ASPER REV. INT'L BUS. & TRADE L. 63, 66 (2002) ("Canadian and American courts have held that signatures include names on telegrams, telexes, typewritten names, letterheads, and faxed signatures." (footnotes omitted)).
172. See U.C.C. § 1-201(b)(39) (Supp. 2006) (defines the term "Signed" as to include "any symbol executed or adopted by a party with present intention to authenticate a writing").
173. See, e.g., Anthony M. Balloon, From Wax Seals to Hypertext: Electronic Signatures, Contract Formation, and a New Model for Consumer Protection in Internet Transactions, 50 EMORY L.J. 905, 934 (2001) ("That a signature is the central formality in contract formation-particularly in a consumer transaction-cannot be overstated. Most consumers equate their signature with being bound to the terms of an agreement." (footnotes omitted)).
174. See, e.g., Peter Meijes Tiersma, The Language of Offer and Acceptance: Speech Acts and the Question of Intent, 74 CAL. L. REV. 189, 206 (1986) (noting that there are various ways to accept a contractual offer, and that, inter alia, "[a] party can accept an offer by affixing a signature to the contract").
175. This becomes even more evident when we recall that SFCs, which account for the vast majority of modern contracts, frequently require consumers' signatures.
176. See Balloon, supra note 133, at 934.
177. See Hillman & Rachlinski, supra note 43, at 480-81.
178. The Electronic Signatures in Global and National Commerce Act § 106(5) defines "electronic signature" to include an "electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record." The Uniform Electronic Transactions Act § 2(8), 7A pt. 1 defines "electronic signature" as an "electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record." See generally Julian Epstein, Cleaning Up a Mess on the Web: A Comparison of Federal and State Digital Signature Law, 5 N.Y.U. J. LEGIS. & PUB. POL'Y 491 (2002) (analyzing the intersection between the two approaches to electronic signature).
179. See also Balloon, supra note 133, at 933, who argues that this reality justifies some kind of reform. Balloon proposes that "[t]o make contract formation a more deliberate process, the law should require consumers to type their initials into boxes on the web page next to certain terms in the contract."
180. Id. He assumes this can function, inter alia, as a method that "makes contracting more intentional," since "[i]nitialing makes consumers stop and think about what they are agreeing to, instead of the typical scenario in which a consumer haphazardly clicks buttons and links to complete the contracting process in the quickest manner possible."
181. Id.
182. Cf. id. at 932 ("On the Internet, the terms of an agreement can be placed anywhere, with only an inconspicuous link alluding to the presence of the terms. . . . The law should not allow the terms of a contract to be so easily hidden.").
183. See id. at 935 ("[N]ew legislation should be passed that requires disclosure to a consumer that clicking a button on the Internet is legally equivalent to signing a name in a writing.").
184. Furthermore, some websites require the consumer to click a "continue" button in order to acquire the relevant service or merchant, without providing the consumer with any other alternative (aside from withdrawing the transaction at stake), and while noting that "[b]y clicking the Continue button you agree to the License Agreements and Privacy Policies for the software included." For one such example, see http://www.adobe.com/ products/acrobat/readstep2.html.
185. See Hillman & Rachlinski, supra note 43, at 481.
186. One might plausibly argue that this is mainly a transitional matter and that as times progress consumers will learn to better understand the new reality. This optimistic view has merit, but the transitional period might be long and the problems during this period can be substantially mitigated only if we pay close attention to them. Moreover, even if consumers will end up realizing the new reality, it might still be difficult for them to internalize its significance when sellers construct the contracting process in a way that does not generate alertness.
187. For a more complete yet very different analysis of online consumer SFCs, 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. (forthcoming 2008) (focusing on the legal significance of the ex post-ex ante information flows that the online realm provides).
188. See supra notes 13 8-142 and accompanying text.
189. See supra Part III.
190. This is the traditional theory of consumer search behavior. See, e.g., GEORGE J. STIGLER, THE THEORY OF PRICE 2 (4th ed. 1987).
191. Rachlinski, supra note 18, at 1177 (footnote omitted).
192. See, e.g., Charles E. Davis & Elizabeth B. Davis, Information Load and Consistency of Decisions, 79 PSYCHOL. REP. 279, 279 (1996) ("While there may be a belief that 'more is better,' decision-makers often complain of 'information overload' or an inability to respond to the abundance of information available.").
193. This has been acknowledged by many legal institutions, including the U.S. Supreme Court. See, e.g., Ford Motors Credit Co. v. Milhollin, 444 U.S. 555, 568 (1980) ("Meaningful disclosure does not mean more disclosure. Rather, it describes a balance between 'competing considerations of complete disclosure . .. and the need to avoid [informational overload].'"
194. (quoting S. REP. NO. 96-73, at 3 (1979)).
195. See generally Byung-Kwan Lee, The Effect of Information Overload on Consumer Choice Quality: The Moderating Role of Product Knowledge (2001), http://www.ciadvertising.org/student_account/fall_01/adv392/bklee/paper2/hom e.htm ("[U]p until now, information load studies have not produced unequivocal results. Some researchers found its presence but others did not." (quote found in "General Discussion" section; follow "General Discussion" hyperlink)).
196. See, e.g., David M. Grether, Alan Schwartz, & Louis L. Wilde, The Irrelevance of Information Overload: An Analysis of Search and Disclosure, 59 S. CAL. L. REV. 277, 278 (1986) (using a similar definition merely as a starting point).
197. See generally George A. Akerlof, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, 84 Q.J. ECON. 488 (1970).
198. The distinction between optimizing and satisficing is a fundamental distinction which is applied frequently in many contexts: Whereas "to optimize" means to choose the best option available, "to satisfice" means to choose a satisfactory option considering the circumstances.
199. See generally Russell Korobkin, Bounded Rationality, Standard Form Contracts, and Unconscionability, 70 U. CHI. L. REV. 1203 (2003).
200. This strategy is discussed in many different decision-making contexts. See id. at 1220;
201. see also, 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).
202. For those who find the idea behind the weighted adding strategy a subtle one, a concrete numerical example is provided next. Assume, for example, that a buyer seeks to purchase an automobile. At the first stage, the buyer identifies the characteristics she wishes to compare. Let's assume that there are only five features she values (and thus compares): safety, financing, warranty, maintenance expenses, and the cost of insurance. At the next stage, every factor is given a weight, according to its relative importance. For example, safety scores 40%; financings - 20%; warrant - 20%; maintenance expenses - 10%; and cost of insurance - 10% (reaching 100% in total). At the next stage, the buyer scores each attribute of every product being compared and multiplies it with the attribute's weight. Implementing this method with one car can result in the following evaluation (assuming each characteristic will be graded on a 1 to 100 point scale): Safety receives a complete satisfaction score of 100-the final score for this attribute is 40% × 100 = 40; financing receives a relatively high degree of satisfaction score of 80 - its final attribute score is 20% × 80 = 16; warranty receives an average satisfaction score of 50 - its final attribute score is 20% × 50 = 10; maintenance receives an above average satisfaction score of 70-its final attribute score is 10% × 70 = 7; and insurance expenses receives a score of 60 and a final attribute score of 10% × 60 = 6. It follows, then, that this specific car will get a total score of 40 + 16 + 10 + 7 + 6 = 79. This application, however, referred to only one car. After repeating the process for all cars that are being compared, the rational decisionmaker chooses the one that got the highest overall score.
203. See Korobkin, supra note 155, at 1226-29 (discussing complexity and selectivity).
204. See id. at 1223-25;
205. see also, e.g., Hillman & Rachlinski, supra note 43, at 435-45.
206. In the modern era, it is believed that most products and services that are accompanied by form contracts "are characterized by a relatively large number of attributes concerning functionality, aesthetics, cost, and terms." Korobkin, supra note 154, at 1229.
207. For a brief review of a few practical and prominent consumer choice strategies that fall below the accuracy that a weighted adding strategy offers, see, for example, id. at 1223-25;
208. see also Bettman et al., supra note 156, at 190-92.
209. See, e.g., Korobkin, supra note 154, at 1225.
210. Id. at 1226.
211. Korobkin defends this premise id. at 1231 (referring to terms that "are likely to cause elevated stress levels for buyers"); at 1232 (discussing terms that "govern eventualities that are extremely unlikely to occur" making it hard for decisionmakers to calculate properly); and at 1233 (noting that form terms are often presented "in ways that make them hard to read, hard to understand, and hard to compare ....").
212. See, e.g., Bar-Gill, supra note 99, at 1376 (arguing that this is the case in credit card contracts and noting that "if the credit card market is indeed as competitive as it appears to be, issuers have to exploit consumers' imperfect rationality in order to survive in this market");
213. Eisenberg, supra note 71, at 244 ("Indeed, competition is likely to degrade the quality of preprinted terms [e.g., in the context of a bank agreement]. Once some banks offer low-quality preprinted terms, competition will force other banks to include the same low-quality terms in their form contracts, so as not to be undercut on activity charges and interest rates. This is a special case of the market-for-lemons phenomenon.").
214. I here refer to information that is relevant to the product but does not directly involve the SFC itself (e.g., shape, color, consumer reports, etc.).
215. See generally Jeffery Davis, Protecting Consumers from Overdisclosure and Gobbledygook: An Empirical Look at the Simplification of ConsumerCredit Contracts, 63 VA. L. REV. 841 (1977).
216. Grether et al., supra note 152.
217. Grether et al. explicitly claim that their analysis is extendable to consumer contracts. Id. at 281 n.7 ("The text speaks mainly of search for products because the literature discusses products, but its analysis extends to contract terms. A contract can be regarded as another product attribute or as a product that has several attributes (i.e., different terms).").
218. Id. at 285.
219. Id.
220. Interestingly, some scholars have pointed out that consumers indeed find it hard to distinguish between the different types of information, and that this hardship might inflict harm on them. See Camerer et al., supra note 78, at 1235. A prominent example is the one of food labeling, such as "low-fat" or "fat free." In this context it is argued that requiring retailers to display detailed facts concerning food content "may have even contributed to the epidemic of eating disorders in the United States."
221. Id. (footnote omitted).
222. Generally speaking, empirical evidence tailored to the context of consumer SFCs is rare, and there are only a few empirical studies on this subject. For an exceptional example, see Dennis P. Stolle & Andrew J. Slain, Standard Form Contracts and Contracts Schemas: A Preliminary Investigation of the Effects of Exculpatory Clauses on Consumers' Propensity to Sue, 15 BEHAV. SCI.&L. 83 (1997).
223. Grether et al., supra note 152, at 285.
224. Id. (reasoning that "lowering airfares to a place one does not want to go should produce no emotion or the pleasant thought that if one's preference change, one can satisfy the new preference more easily").
225. Id. at 285 n.16 (referring to studies that support this claim).
226. See Melvin Aron Eisenberg, Comments: Text Anxiety, 59 S. CAL. L. REV. 305, 309 (1986).
227. Grether et al., supra note 152, at 286.
228. Id. (noting that in such a case information disclosure will produce a market failure, rather than cure it).
229. Id. Moreover, they argue, decisionmakers should limit disclosure requirements to attributes with which a substantial number of consumers are concerned, thus reducing the average search costs.
230. Id.
231. See, e.g., Eisenberg, supra note 71, at 243.
232. See, e.g., Korobkin, supra note 154, at 1206 ("[M]arket competition actually will force sellers to provide low-quality non-salient attributes in order to save costs that will be passed along to buyers in the form of lower prices.").
233. See generally Posner, supra note 10. Interestingly, Posner uses consumer contracts and the doctrine of unconscionability as one example that demonstrates the failure of economic analysis of law.
234. Id. at 842-45.
235. Id. at 872-73. Posner does not find this alternative persuasive, specifically "in the face of the poor fit of cognitive psychology and the penalty doctrine."
236. Id. at 873.