Listening to cassandra: The difficulty of recognizing risks and taking action

Fordham Law Review

Volumn 78, Issue 5, 2010, Pages 2329-2355

  Needham, Carol A ^a  

^a SAINT LOUIS UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 77952676316     PISSN: 0015704X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (185)

1. RICHMOND Y. HATHORN, GREEK MYTHOLOGY 375(1977).
2. Relevant cognitive biases, including confirmation bias, overconfidence bias, bounded search, and status quo bias, which have been shown to effect deliberations in many contexts, are discussed, infra, in Part IV.C.l.
3. Systemic risk is generally defined as the risk that a disruption (at a single corporation or other entity, in a market segment, or to a trade settlement system, for example) could cause widespread difficulties at other firms, in other market segments, or in the financial system as a whole. See, e.g., Paul Kupiec & David Nickerson, Assessing Systemic Risk Exposure from Banks and GSEs Under Alternative Approaches to Capital Regulation, 28 J. REAL EST. FIN. & ECON. 123, 123 (2004) ("Systemic risk can be defined as the potential for a modest economic shock to induce substantial volatility in asset prices, significant reductions in corporate liquidity, potential bankruptcies and efficiency losses.").
4. Marked to model refers to estimating the value of an asset based on a mathematical formula or judgment regarding the anticipated price the asset could hypothetically be sold for if an active market existed; marked to market refers to a value that reflects an actual price the asset actually would be sold for in an active market for the asset. See, e.g., Richard J. Herring, The Known, the Unknown and the Unknowable in Financial Policy: An Application to the Subprime Crisis, 26 YALE J. ON REG. 391, 395 (2009);
5. see also David Jones & John Mingo, Industry Practices in Credit Risk Modeling and Internal Capital Allocations: Implications for a Models-Based Regulatory Capital Standard, ECON. POL'Y REV., Oct. 1998, at 53, 55-56;
6. The Causes and Current State of the Financial Crisis: Hearing before the Financial Crisis Inquiry Commission, 111th Cong. 28 (Jan. 14, 2010) (statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corp.).
7. See, e.g., Saxon Mortgage Servs., Inc. v. Hillery, No. C-08-4357, 2008 WL 5170180, at *5 (N.D. Cal. Dec. 9, 2008) ("[F]or there to be a valid assignment, there must be more than just assignment of the deed alone; the note must also be assigned⋯. MERS purportedly assigned both the deed of trust and the promissory note ⋯. However, there is no evidence of record that establishes that MERS either held the promissory note or was given the authority ⋯ to assign the note." (citations omitted));
8. In re Vargas, 396 B.R. 511, 517 (Bankr. CD. Cal. 2008) ("MERS presents no evidence as to who owns the note, or of any authorization to act on behalf of the present owner.");
9. Landmark Nat'l Bank v. Kesler, 216 P.3d 158, 166 (Kan. 2009).
10. Pub. L. No. 96-221, §§ 101-108, 94 Stat. 132, 132-41 (codified as amended in scattcred sections of 12 U.S.C.).
11. Id. § 501(a)(1)(A), 94 Stat. at 161
12. (codified as amended at 12 U.S.C. § 1735f-7(a) (2006)).
13. Pub. L. No. 97-320, §§ 801-807, 96 Stat. 1469, 1545-48 (codified as amended in scattered sections of 12 U.S.C. and 42 U.S.C).
14. For a detailed discussion of the effect of these changes, see Patricia A. McCoy et al., Systemic Risk Through Securitization: The Result of Deregulation and Regulatory Failure, 41 CONN.L.REV. 1327, 1332(2009).
15. Pub. L. No. 103-325, §§ 151-158, 108 Stat. 2160, 2190-98 (codified as amended in scattered sections of 15 U.S.C.).
16. 15 U.S.C. § 1639(0)(2) (2006).
17. Gramm-Leach-Bliley Financial Modernization Act of 1999, Pub. L. No. 106-102, 113 Stat. 1338 (codified as amended in scattered sections of 12 U.S.C).
18. 12 U.S.C. § 1843.
19. McCoy et al., supra note 8, at 1345 n.41.
20. 12 U.S.C. § 1844(c)(2)(D). Unless an investment bank or insurance underwriting subsidiary meets one of three statutory tests, the Fed is to rely on reports of examinations conducted by others, such as the Securities and Exchange Commission, state securities regulators, or state insurance regulators, rather than initiating an examination.
21. Id. § 1844(c)(2)(BME).
22. McCoy et al., supra note 8, at 1334
23. (citing 15 U.S.C. § 1639(0(2));
24. see 15 U.S.C. § 1639(l)(2) ("The Board, by regulation or order, shall prohibit acts or practices in connection with - (A) mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the provisions of mis section; and (B) refinancing of mortgage loans that the Board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.").
25. Id.
26. See The Financial Crisis and the Role of Federal Regulators: Hearing Before the H. Comm. on Oversight and Government Reform, 110th Cong. 88-89 (2008) (statement of Alan Greenspan, Former Chairman, Board of Governors of the Federal Reserve System) [hereinafter Greenspan Testimony].
27. See McCoy et al., supra note 8, at 1334.
28. Greenspan Testimony, supra note 17, at 89 ("Well, let's take the issue of unfair and deceptive practices, which is a fundamental concept to the whole predatory lending issue⋯.[H]ow do [the staff of the Federal Reserve] determine as a regulatory group what is unfair and deceptive?").
29. Id. In his colloquy with Representative John Tierney, Greenspan stated that "maybe [ten] percent or so [of mortgage refinancings] are self-evidently unfair and deceptive, but the vast majority would require a jury trial or other means to deal with it."
30. Id.
31. Consumer Protections in Financial Services: Past Problems, Future Solutions: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 111th Cong. 3 (2009) (statement of Patricia A. McCoy, George J. and Helen M. England Professor of Law, University of Connecticut School of Law).
32. See, e.g., Gary Gorton, Bank Regulation When 'Banks' and 'Banking' Are Not the Same, 10 OXFORD REV. ECON. POL'Y 106 (1994);
33. Luigi Guiso, Paola Sapienza & Luigi Zingales, The Cost of Banking Regulation 1 (European Univ. Inst., Working Paper No. ECO 2007/43, 2007), available at http://www.kellogg.northwestem.edu/faculty/sapienza/htm/ costofregulation.pdf (studying the effects of bank regulation and the impact of deregulation across provinces in Italy).
34. The authors concluded that "where entry was more restricted the cost of credit was higher and - contrary to expectations - access to credit lower. The only benefit of these restrictions was a lower proportion of bad loans. Liberalization brings a reduction in rate spreads and an increased access to credit at the cost of an increase in bad loans." Id.
35. McCoy et al., supra note 8, at 1334-35
36. (citing Truth in Lending, 12 C.F.R. pt. 226 (2009)).
37. Fed. Res. Consumer Affairs Ltr. 98-1 (Jan. 20, 1998), http://vtwv.federalreserve.gov/boarddocs/caletters/1998/9801/caltr9801.htm.
38. Id.
39. Id. (formalizing the policy "not to investigate consumer complaints relating to these [nonbank] subsidiaries").
40. Fed. Res. Consumer Affairs Ltr. 09-8 (Sept. 14, 2009), http://www.federalreserve.gov/boarddocs/caletters/2009/0908/caltr0908.htm.
41. Id. (articulating a policy that includes "conducting risk-focused consumer compliance supervision of, and the investigation of consumer complaints against, nonbank subsidiaries of bank holding companies (BHCs) and foreign banking organizations (FBOs) with activities covered by the consumer protection laws and regulations the Federal Reserve has the authority to enforce").
42. Greenspan Testimony, supra note 17, at 87 (agreeing with Representative John Tierney's characterization of the issue).
43. Id. at 35.
44. Id. at 37-38.
45. The Financial Crisis and the Role of Federal Regulators: Hearing Before the H. Comm. on Oversight and Government Reform, 110th Cong. 2 (2008) (statement of Alan Greenspan, Former Chairman, Board of Governors of the Federal Reserve System).
46. For additional details on the interaction between these agencies, see, for example, McCoy et al., supra note 8, at 1348-51.
47. U.S. GEN. ACCOUNTING OFFICE, LONG-TERM CAPITAL MANAGEMENT: REGULATORS NEED TO FOCUS GREATER ATTENTION ON SYSTEMIC RISK 7 n.16 (1999), available at http://www.gao.gov/archive/2000/gg00003.pdf.
48. Press Release, Fed. Trade Comm'n, FTC Testifies on Enforcement and Education Initiatives To Combat Predatory Lending Practices (May 24, 2000), http://www2.ftc.gov/opa/2000/05/subprime2.shtm (discussing FTC involvement).
49. "When the FTC was created in 1914, its purpose was to prevent unfair methods of competition in commerce as part of the battle to 'bust the trusts.' Over the years, Congress passed additional laws giving the agency greater authority to police anticompetitive practices. In 1938, Congress passed a broad prohibition against 'unfair and deceptive acts or practices.'" Federal Trade Commission - About Us, http://www.ftc.gov/ftc/about.shtm (last visited Mar. 3, 2010).
50. Such practices violate section 5 of the FTC Act. See 15 U.S.C § 45 (2006);
51. FTC Office of the General Counsel, http://www.ftc.gov/ogc/brfovrvw.shtm (last visited Mar. 3, 2010). A short history of the sequence of legislation granting additional power to the FTC is also available on the FTC website. See Federal Trade Commission - About Us, supra note 36. Details of the numerous such suits prosecuted by the FTC are beyond the scope of this paper.
52. Complaint at 10-13, FTC v. Capital City Mortgage Corp., No. 98CV-237 (D.D.C. Jan. 30, 1998), available at http://www.ftc.gov/os/1998/01/capitcmp.pdf.
53. Id. at 8.
54. Id. at 9.
55. Id. at 7.
56. Id. at 8.
57. The litigation against Delta Funding Corporation was settled with an injunction in March 2000. Settlement Agreement and Order, United States v. Delta Funding Corp., No. CV-00-1872 (E.D.N.Y. Mar. 30, 2000), available at http://www.ftc.gov/os/2000/03/deltasettlement.pdf.
58. Cases against seven subprime lenders alleging violations of the high-cost provision of the Home Ownership and Equity Protection Act of 1994 (HOEPA), Truth in Lending Act, and section 5 of the FTC Act were settled in July 1999, on terms that included a ban on any future involvement with high-cost loans secured by consumers' homes and refunds for some of the borrowers. See Predatory Lending Practices in the Subprime Industry: Hearing Before the H. Comm. on Banking and Financial Services, 106th Cong. (2000) (statement of David Medine, Associate Director for Financial Practices, Federal Trade Commission's Bureau of Consumer Protection), http://www.ftc.gov/os/2000/05/predatorytestimony.htm.
59. Additional detail concerning the FTC's consumer protection efforts is available on The FTC website. See FTC Bureau of Consumer Protection, http://www.ftc.gov/bcp/index.shtml (last visited Mar. 3, 2010).
60. Telephone Interview with Attorney, Fed. Trade Comm'n (Oct. 13, 2009).
61. See id.;
62. see also Binyamin Appelbaum, As Subprime Lending Crisis Unfolded, Watchdog Fed Didn 't Bother Barking, WASH. POST, Sept. 27, 2009, at A1.
63. See generally U.S. GEN. ACCOUNTING OFFICE, supra note 34. Long-Term Capital Management (LTCM), at the time one of the largest hedge funds in the United States, lost almost ninety percent of its capital between January and September 1998.
64. Id. at 38-39.
65. Id. at 10.
66. Id. at 11. Among the reasons were that doing business with LTCM was profitable, competition for that business provided an additional incentive to relax credit standards, and "favorable economic conditions had prevailed for several years, contributing to an atmosphere in which financial firms liberalized their credit standards."
67. Id.
68. Id.
69. Id. at 11-12.
70. Id. at 33.
71. See U.S. DEP'T. OF Hous. & URBAN DEV. OFFICE OF POLICY DEV. & RESEARCH, CURBING PREDATORY HOME MORTGAGE LENDING (2000).
72. Id. at 106-07.
73. Id. at 111. Specifically, the Department of Housing and Urban Development (HUD) and the Treasury recommended that the Federal Reserve Board take the following steps: (1) Lower the HOEPA APR threshold to 8% above comparable Treasuries. (2) Include additional fees in the point-and-fee trigger, including ⋯ all compensation received by the mortgage broker. (3) Define as unfair, deceptive, or abusive practices and prohibit: loan flipping; sale of single-premium products along with mortgage loan; lending without regard to borrower's ability to repay. (4) Collect additional data items under Regulation C, including ⋯ APR and "all-in" cost of credit; reasons for denial; name of parent institution ⋯. (5) Repeal the Regulation C 10 percent rule. (6) Consider conducting risk-based examinations of non-bank lending subsidiaries of bank holding companies where it has a basis to believe that such subsidiaries are violating HOEPA or otherwise engaging in predatory lending.
74. Id. at 111-12.
75. Predatory Lending Practices in the Subprime Industry: Hearing Before the H. Comm. on Banking and Financial Services, 106th Cong. (2000) (statement of John E. Taylor, President and CEO, National Community Reinvestment Coalition), http://financialservices.house.gov/banking/52400tay.htm.
76. Additional information on the Consumer Advisory Council meetings is available on The Federal Reserve website. See FRB: Consumer Advisory Council, http://www.federalreserve.gov/aboutthefed/cac.htm (last visited Mar. 3, 2010).
77. Transcript of the Consumer Advisory Council Meeting 26 (June 22, 2006) (statement of Council Member Carolyn Carter), available at http://www. federalreserve.gov/aboutthefeo7cac-20060622.pdf.
78. Id. at 29 ("I'd like to stress that [there is more scrutiny] because of the assignee liability provision. And if you want any regulations, or any reforms, any protections to be effective, to actually be enforced by the market, you would have to pass that liability along so that the liability goes with the loan. If a loan can be washed by transferring it, then it will be transferred, and the market will not prevent those loans from being made.").
79. See, e.g., IAN AYRES & JOHN BRAITHWAITE, RESPONSIVE REGULATION: TRANSCENDING THE DEREGULATION DEBATE (1992);
80. EUGENE BARDACH, GETTING AGENCIES To WORK TOGETHER: THE PRACTICE AND THEORY OF MANAGERIAL CRAFTSMANSHIP (1998);
81. EUGENE BARDACH, THE IMPLEMENTATION GAME: WHAT HAPPENS AFTER A BILL BECOMES A LAW (1977).
82. Scott Harris, "Mr. Earthquake" and the Lives Not Lost: With Quake Safety Back on the Front Burner, Bernson Now Hopes To See These Quake Programs Restored, L. A. TIMES, Feb. 15, 1994, at B1, available at 1994 WLNR 4185711.
83. Id. ("Property owners lobbied hard, saying the cost of retrofitting their buildings was prohibitive. [The proposal was too expensive. Useable housing would be taken off the market.] Some apartment owners bused in elderly tenants to testify that their rents would go up and they'd be out on the street if such a law were passed.").
84. Los Angeles Municipal Code Chapter IX, article 1, division 68 was passed on January 7, 1981, and addresses earthquake hazard reduction in existing buildings. Division 68 requires retrofitting and reinforcement of multiunit dwellings in Los Angeles County to bring the dwellings up to current engineering standards for earthquake resistance. See City of Los Angeles Notices: Ordinance No. 154,807, Los ANGELES DAILY J., Jan. 13, 1981, at 6 (the official publication of the ordinance);
85. see also Richard Stuart Olson, The Political Economy of Life-Safety: The City of Los Angeles and "Hazardous-Structure Abatement," 1973-1981, 4 POL'Y STUD. REV. 670, 674-76 (1985) (discussing the four key factors leading the Los Angeles City Council to adopt the 1981 ordinance: (1) the role of Hal Bernson as an "insider leader" on the issue, (2) media attention from Southern California newspapers, particularly the Los Angeles Times, (3) AB 604, a bill passed by the state legislature authorizing the issuance of bonds to fund loan programs for owners of eligible buildings, and (4) a political agreement that the Department of Building and Safety would be told to slow down the abatement program if owners of private buildings had trouble obtaining private financing to complete the retrofitting).
86. The Northridge earthquake was a magnitude 6.6 earthquake on the Richter scale.
87. Richard Simon, Claire Spiegel & Hugo Martin, Apartment Collapse Probe Raises Questions on Codes, L.A. TIMES, Jan. 19, 1994, at A1.
88. Antonio Olivo, A Lukewarm Reaction to Gas-Valve Plan, L.A. TIMES, Jan. 27, 1995, at B2, available at 1995 WLNR 4390351.
89. Id.
90. Deborah L. Rhode & Barbara Kellerman, Women and Leadership: The State of Play, in WOMEN AND LEADERSHIP: THE STATE OF PLAY AND STRATEGIES FOR CHANGE 1, 27 (Barbara Kellerman & Deborah L. Rhode eds., 2007) (increasing equal access to leadership opportunities requires commitment to that objective, which is demonstrated in "workplace priorities, policies, and reward structures").
91. See Greenspan Testimony, supra note 17, at 15 ("The crisis, however, has turned out to be much broader than anything I could have imagined.").
92. See, e.g., JOHN LANCHESTER, I.O.U.: WHY EVERYONE OWES EVERYONE AND NO ONE CAN PAY (2010);
93. Edmund L. Andrews, Greenspan Concedes Flaws in Deregulatory Approach, N.Y. TIMES, Oct. 24,2008, at Bl;
94. McCoy et al., supra note 8, at 1347.
95. Greenspan Testimony, supra note 17, at 17.
96. Id. at 18-19.
97. Id. at 15.
98. See, e.g., Lynne L. Dallas, Proposals for Reform of Corporate Boards of Directors: The Dual Board and Board Ombudsperson, 54 WASH. & LEE L. REV. 91, 94 (1997).
99. IRVING L. JANIS, VICTIMS OF GROUPTHINK 9 (1972). When members of a group, such as a board of directors, are in the grip of groupthink, they unconsciously participate in shared illusions of superiority that hinder critical reflection and reality testing, thus leading groups to faulty judgments.
100. See id.;
101. see also James D. Cox & Harry L. Munsinger, Bias in the Boardroom: Psychological Foundations and Legal Implications of Corporate Cohesion, LAW & CONTEMP. PROBS., Summer 1985, at 83, 103-08 (applying groupthink analysis to decisions by corporate boards);
102. Robert J. Haft, Business Decisions by the New Board: Behavioral Science and Corporate Law, 80 MICH. L. REV. 1, 37-49 (1981) (analyzing corporate board decisions for instances of groupthink).
103. Enron's slide began in October 2001 with a $544 million charge to earnings and $1.2 billion reduction of shareholder equity in connection with related-party transactions with entities controlled by Andrew Fastow, Enron's CFO. Over a two-month period, with new details emerging about the company's off-balance-sheet contingent liabilities amounting to billions of dollars in exposure, the stock price declined dramatically and its credit ratings were downgraded. Enron filed for bankruptcy in December 2001. BETHANY MCLEAN & PETER ELKIND, THE SMARTEST GUYS IN THE ROOM: THE AMAZING RISE AND SCANDALOUS FALL OF ENRON 369-71, 405 (2003).
104. See John R. Kroger, Enron, Fraud, and Securities Reform: An Enron Prosecutor's Perspective, 76 U. COLO. L. REV. 57, 94-98 (2005).
105. See generally, e.g., Marleen A. O'Connor, The Enron Board: The Perils of Groupthink, 71 U. CIN. L. REV. 1233 (2003) (generally discussing groupthink in the context of the Enron collapse).
106. Troy A. Paredes, Too Much Pay, Too Much Deference: Behavioral Corporate Finance, CEOs and Corporate Governance, 32 FLA. ST. U. L. REV. 673, 740-47 (2005).
107. Edward M. Gramlich, Senior Fellow, Urban Inst., Booms and Busts: The Case of Subprime Mortgages, Luncheon Address at the Federal Reserve Bank of Kansas City Symposium: Housing, Housing Finance & Monetary Policy 263 (Aug. 31, 2007), available at www.kansascityfed.org/publicat/sympos/2007/pdf/2007.09.04. gramlich.pdf. The speech was delivered on Edward Gramlich's behalf because his leukemia had progressed to the point that he became too ill to travel to the conference.
108. Id. at 261 ("[T]hirty percent of subprime loans are made by affiliates of banks, holding companies, or thrifts. These affiliates are in a hybrid status - they typically are not supervised on a three-year basis by federal supervisors, though the supervisors do check in to the head office's routines for keeping affiliates in compliance. They are also subject to specific examination if problems are noted, through complaints, suits, or whatever.").
109. Id. at 262.
110. Gramlich elaborates on this further in his book and recommends solutions to address the problem of lax supervision. EDWARD M. GRAMLICH, SUBPRIME MORTGAGES: AMERICA'S LATEST BOOM AND BUST 91-92 (2007).
111. Gramlich, supra note 81, at 262. On July 17, 2007, the Federal Reserve and the Office of Thrift Supervision announced a joint program under which they would begin supervising a sample of the affiliates.
112. Id.
113. See, e.g., AYRES & BRAITHWAITE, supra note 61, at 6 ("The thesis of Chapter 5 is that in some regulatory settings, regulating only an individual firm (or a subset of the firms) in an industry can promote efficiency by avoiding the costs associated with industry-wide intervention or laissez-faire. The existence of a single (or a few) competitive firm[s] can have a dramatic effect on the competitive conduct and performance of an entire industry."). The potential downside of regulating only part of the home mortgage industry is now painfully apparent.
114. Gramlich, supra note 81, at 262.
115. Thomas Moore, The GM System Is Like a Blanket of Fog, FORTUNE, Feb. 15, 1988, at 48.
116. Dale D. Buss & Doron P. Levin, Smith and Perot, at Luncheon, Avoid Hostility over Recent Buyout by GM, WALL ST. J., Dec. 9, 1986, at 6.
117. The Financial Crisis Inquiry Commission, a bipartisan effort to examine the causes of the financial and economic crisis was authorized by section 5 of the Fraud Enforcement and Recovery Act of 2009. Pub. L. No. 111-21, § 5, 2009 U.S.C.C.A.N. (123 Stat.) 1617, 1625-31.
118. Id. § 5(c), 2009 U.S.C.C.A.N. (123 Stat.) at 1626-27.
119. See generally Herbert A. Simon, Invariants of Human Behavior, 41 ANN. REV. PSYCHOL. 1 (1990);
120. Herbert A. Simon, Rational Choice and the Structure of the Environment, 63 PSYCHOL. REV. 129 (1956).
121. See generally, e.g., HEURISTICS AND BIASES: THE PSYCHOLOGY OF INTUITIVE JUDGMENT (Thomas Gilovich, Dale Griffin & Daniel Kahneman eds., 2002);
122. JUDGMENT UNDER UNCERTAINTY: HEURISTICS AND BIASES (Daniel Kahneman, Paul Slovic & Amos Tversky eds., 1982);
123. Daniel Kahneman, Maps of Bounded Rationality: Psychology for Behavioral Economics, 93 AM. ECON. REV. 1449 (2003).
124. See Herbert A. Simon, Rationality as Process and as Product of Thought, AM. ECON. REV., May 1978, at 1,13.
125. Russell B. Korobkin & Thomas S. Ulen, Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics, 88 CAL. L. REV. 1051, 1093 (2000);
126. see also Linda Babcock et al., Biased Judgments of Fairness in Bargaining, 85 AM. ECON. REV. 1337, 1337-38 (1995);
127. Raymond S. Nickerson, Confirmation Bias: A Ubiquitous Phenomenon in Many Guises, 2 REV. GEN. PSYCHOL. 175, 175 (1998).
128. Jon D. Hanson & Douglas A. Kysar, Taking Behavioralism Seriously: The Problem of Market Manipulation, 74 N.Y.U. L. REV. 630, 649 n.71 (1999) (noting that a decision maker's need to view incoming data as being consistent with his preexisting beliefs can strongly influence the person's assessment of that data as supporting the expected result
129. (citing Dennis L. Jennings et al., Informal Covariation Assessment: Data-Based Versus Theory-Based Judgments, in JUDGMENT UNDER UNCERTAINTY, supra note 92, at 211, 227-30));
130. see also Matthew Rabin, Psychology and Economics, 36 J. ECON. LITERATURE 11, 29 (1998);
131. Jean R. Sternlight & Jennifer Robbennolt, Good Lawyers Should Be Good Psychologists: Insights for Interviewing and Counseling Clients, 23 OHIO ST. J. ON DISP. RESOL. 437, 454 (2008) ("[P]eople unconsciously tend to seek out additional information that confirms their already existing views and disregard conflicting information, rather than attempting to systematically gather accurate information."
132. (citing Nickerson, supra note 94)).
133. See Jeffrey J. McMillan & Richard A. White, Auditors' Belief Revisions and Evidence Search: The Effect of Hypothesis Frame, Confirmation Bias, and Professional Skepticism, 68 ACCT. REV. 443, 463 (1993) (calling for further investigation into "the possibility suggested by [their] study that auditors who begin the audit judgment process feeling that material errors are unlikely may be inclined to downplay evidence that indicates that material errors may exist");
134. see also Don A. Moore et al., Conflict of Interest and the Intrusion of Bias, 5 JUDGMENT & DECISION MAKING 37, available at http://joumal.sjdm.org/ 10/91104/jdm91104.pdf.
135. See, e.g., Charles G. Lord et al., Biased Assimilation and Attitude Polarization: The Effects of Prior Theories on Subsequently Considered Evidence, 37 J. PERSONALITY & Soc. PSYCHOL. 2098, 2105-07 (1979);
136. Lee Ross, Mark R. Lepper & Michael Hubbard, Perseverance in Self-Perception and Social Perception: Biased Attributional Processes in the Debriefing Paradigm, 32 J. PERSONALITY & Soc. PSYCHOL. 880 (1975).
137. Hanson & Kysar, supra note 95, at 648;
138. Gideon Keren, On the Ability of Monitoring Non-veridical Perceptions and Uncertain Knowledge: Some Calibration Studies, 67 ACTA PSYCHOLOGICA 95, 115-18 (1988).
139. See, e.g., Cynthia McPherson Frantz, I AM Being Fair: The Bias Blind Spot as a Stumbling Block to Seeing Both Sides, 28 BASIC & APPLIED SOC. PSYCHOL. 157, 166 (2006);
140. Cassandra Burke Robertson, Judgment, Identity, and Independence, 42 CONN. L. REV. 1, 1, 10-11 (2009).
141. See LEON FESTINGER, A THEORY OF COGNITIVE DISSONANCE 32-47 (1957) (positing that the pressure to reduce inevitable postdecision dissonance will be manifested in efforts to focus on the merits of the alternative selected and to increase cognitive overlap of the various alternatives).
142. Lord et al., supra note 97, at 2099.
143. Jorg Rieskamp et al., Bounded Rationality: Two Interpretations from Psychology, in HANDBOOK OF CONTEMPORARY BEHAVIORAL ECONOMICS: FOUNDATIONS AND DEVELOPMENTS 218, 219 (Morris Altman ed., 2006)
144. (citing Gerd Gigerenzer & Daniel G. Goldstein, Reasoning the Fast and Frugal Way: Models of Bounded Rationality, 103 PSYCHOL. REV. 650, 651 (1996)).
145. See, e.g., Jay J. J. Christensen-Szalanski & Lee Roy Beach, The Citation Bias: Fad and Fashion in the Judgment and Decision Literature, 39 AM. PSYCHOLOGIST 75, 77 (1984).
146. Donald C. Langevoort, Where Were the Lawyers? A Behavioral Inquiry into Lawyers' Responsibility for Clients' Fraud, 46 VAND. L. REV. 75, 95 (1993).
147. See, e.g., Michael Abramowicz, Information Markets, Administrative Decisionmaking, and Predictive Cost-Benefit Analysis, 71 U. Cm. L. REV. 933, 962-71 (2004);
148. Jennifer Arlen, The Future of Behavioral Economic Analysis of Law, 52 VAND. L. REV. 1765, 1769 (1998) (noting that "judges, legislators, [and] bureaucrats are also subject to various biases");
149. Stephen J. Choi & A. C. Pritchard, Behavioral Economics and the SEC, 56 STAN. L. REV. 1, 21 (2003) (discussing cognitive biases among regulators and the possibility that those biases are of greater magnitude than those influencing investors);
150. Russell B. Korobkin, Behavioral Analysis and Legal Form: Rules vs. Standards Revisited, 79 OR. L. REV. 23, 45 (2000) ("[T]here is considerable evidence that people tend to take predictable shortcuts in decisionmaking to economize on cognitive effort and are subject to predictable perceptual and cognitive biases, all of which impair optimal decision making. While this is true for citizens subject to the legal system, it also can be true for legal decision makers called upon to make legal pronouncements in a way that satisfies specified social goals." (footnote omitted));
151. Richard A. Posner, Rational Choice, Behavioral Economics, and the Law, 50 STAN. L. REV. 1551, 1575 (1998) ("The expert, too, is behavioral man. Behavioral man behaves in unpredictable ways. Dare we vest responsibility for curing irrationality in the irrational?");
152. Jeffrey J. Rachlinski & Cynthia R. Farina, Cognitive Psychology and Optimal Government Design, 87 CORNELL L. REV. 549, 558 (2002) (discussing the role expertise plays in increasing cognitive errors in certain situations);
153. Mario J. Rizzo & Douglas Glen Whitman, Little Brother Is Watching You: New Paternalism on the Slippery Slopes, 51 ARIZ. L. REV. 685, 724 (2009) (making this point on a tentative basis and noting that "the effects of these biases often run in opposite directions, have different degrees of importance, and interact with each other");
154. Kent Daniel et al., Investor Psychology in Capital Markets: Evidence and Policy Implications (Aug. 3, 2001) (The Ohio State Univ. Charles A. Dice Ctr. for Research in Fin. Econ., Working Paper No. 10, 2001), available at http://papers.ssrn.com/sol3/papers.cfm?abstractid=278848.
155. Donald C. Langevoort, Organized Illusions: A Behavioral Theory of Why Corporations Mislead Stock Market Investors (and Cause Other Social Harms), 146 U. PA. L. REV. 101, 142-43 (1997).
156. See generally Adam Benforado & Jon Hanson, Naïve Cynicism: Maintaining False Perceptions in Policy Debates, 57 EMORY L.J. 499 (2008);
157. Dan M. Kahan & Donald Braman, Cultural Cognition of Public Policy, 24 YALE L. & POL'Y REV. 149 (2006).
158. Cass R. Sunstein, Deliberative Trouble? Why Groups Go to Extremes, 110 YALE L.J. 71, 74 (2000) (surveying the literature on polarization of deliberating groups and concluding that there is strong evidence that "members of a deliberating group predictably move toward a more extreme point in the direction indicated by the members' predeliberation tendencies").
159. Timur Kuran & Cass R. Sunstein, Controlling Availability Cascades, in BEHAVIORAL LAW & ECONOMICS 374, 374 (Cass R. Sunstein ed., 2000) [hereinafter Controlling Availability Cascades];
160. Timur Kuran & Cass R. Sunstein, Availability Cascades and Risk Regulation, 51 STAN. L. REV. 683, 685 (1999) [hereinafter Risk Regulation].
161. Risk Regulation, supra note 108, at 685
162. (citing Amos Tversky & Daniel Kahneman, Judgment Under Uncertainty: Heuristics and Biases, in JUDGMENT UNDER UNCERTAINTY, supra note 92, at 3, 11).
163. Controlling Availability Cascades, supra note 108, at 374.
164. Id.
165. Id. at 376.
166. See generally Amos Tversky & Daniel Kahneman, Availability: A Heuristic for Judging Frequency and Probability, in JUDGMENT UNDER UNCERTAINTY, supra note 92, at 163 (reviewing studies investigating the psychological mechanisms through which people estimate the likelihood that a possible future event will occur).
167. See Arlen, supra note 105, at 1769;
168. Choi & Pritchard, supra note 105, at 20-42 (noting that SEC commissioners and staff not only share the same cognitive defects that all persons are subject to, but also, as experts, may be unable to see past their own set of biases));
169. Donald C. Langevoort, Behavioral Theories of Judgment and Decision Making in Legal Scholarship: A Literature Review, 51 VAND. L. REV. 1499, 1519 (1998) ("Less attention has been devoted to whether courts or regulators are likely to be biased along the lines suggested in the behavioral [literature], perhaps because bureaucratic activity seems more organizational than individual.");
170. Rachlinski & Farina, supra note 105, at 558-61 (discussing the role of expertise in increasing cognitive errors in some situations);
171. Rizzo & Whitman, supra note 105, at 724 (suggesting that policymakers exhibit cognitive and behavioral biases).
172. See Sternlight & Robbennolt, supra note 95, at 454 ("[P]eople unconsciously tend to seek out additional information that confirms their already existing views and disregard conflicting information, rather than attempting to systematically gather accurate information."
173. (citing Nickerson, supra note 94, at 175)).
174. See Russell Korobkin & Chris Guthrie, Heuristics and Biases at the Bargaining Table, 87 MARQ. L. REV. 795, 802 (2004) ("All other things equal, individuals on average tend to prefer an option if it is consistent with the status quo than if it requires a change from the status quo."
175. (citing Russell Korobkin, The Endowment Effect and Legal Analysis, 97 Nw. U. L. REV. 1227, 1231-42 (2003)));
176. see also William Samuelson & Richard Zeckhauser, Status Quo Bias in Decision Making, 1 J. RISK & UNCERTAINTY 7, 8 (1988).
177. Proposals to dramatically overhaul the system of oversight of financial institutions are currently under consideration.
178. Choi & Pritchard, supra note 105, at 44.
179. Id. ("We posit that regulatory decisionmakers with monopoly authority - such as the SEC with respect to most domestic securities regulation - should have to overcome a strong presumption against intervention to correct cognitive biases.").
180. The much-anticipated book by Mitt Regan and Tanina Rostain promises to shed substantial light on this subject. TANINA ROSTAIN & MILTON C. REGAN JR., CONFIDENCE GAMES: LAWYERS, ACCOUNTANTS, AND THE TAX SHELTER INDUSTRY (forthcoming 2011).
181. Karen C. Burke & Grayson M. P. McCouch, COBRA Strikes Back Anatomy of a Tax Shelter, 62 TAX LAW. 59, 59 (2008). The Daugerdas tax shelter used "offsetting options to inflate the basis of property that is distributed by a partnership and then contributed to and sold by another partnership, resulting in a large tax loss without any corresponding economic loss."
182. Id.
183. For more on tax shelters, see S. REP. NO. 109-54, at 1 (2005) (stating that Senate committee hearings in November 2003 focused on "generic abusive tax shelters sold to multiple clients")
184. and Peter C. Canellos, A Tax Practitioner's Perspective on Substance, Form and Business Purpose in Structuring Business Transactions and in Tax Shelters, 54 SMU L. REV. 47, 56 (2001) (distinguishing tax shelter professionals from legitimate tax planning lawyers).
185. Tanina Rostain, Pockets of Professionalism, 54 STAN. L. REV. 1475, 1483 (2002) ("During our interview, Williams returns time and again to the problem of pressure - the pressure to arrive at the tax result favored by a client - and the buffer provided by the firm.").