 Let me welcome you to this year's Closler Business Law Forum. I'm Kimberly's the Dean here at the law school, and I think I know everybody's in this room, so we know you're in that. I'm delighted to have Professor Claire Kale here with us today. She's at the University of Minnesota, and Professor Rothman will introduce her this morning until the minute. This forum was originally established in 2001. The general purpose is to enhance the exchange of ideas about business law in the law school, but then the legal and business communities, and Atlanta, Canada. I'm proud of the contributions our school makes in this area. We have a fair number of our business law faculty here today. I'm delighted to see both in the province, again across the country, and across the international. And this forum serves as a key component in our overall program for the year. I'm sure that you'll enjoy today's lecture. I'm sure you'll especially enjoy the presenter Claire Hild. I first came to meet Claire Hild when I was in my first year of teaching at Queen's University in charge of bringing in interesting visitors. And someone recommended Claire, and she came and gave a fabulous talk. She was enthusiastic, engaging, smart, energetic. When we went out for dinner, she ordered O2V, which I'd never heard of before, and it just translates literally into the water of life. And I think you'll find Mary and Claire thought that it's a perfectly appropriate drink. So, I'll turn to Professor Rothman. Thanks, Kim. I'm Len Rahman, the property profit chair in the business law here at the house. It's my pleasure to introduce Professor Claire Hill from the University of Minnesota Law School. I want to say a bit about Claire's very impressive background, and then I will turn things over to her for the paper. Claire has a BA and MA in philosophy from the University of Chicago. She graduated summa cum laude with her JD from American University, as well as she had as an LLM and SJD from Columbia where she was an Olin fellow, and joined the University of Minnesota Law School in 2006. Her teaching areas include corporate law, mergers and acquisitions, contracts, shells of teachers, law and economics. She is the founding director of the Law School's Institute for Law Rationality, associate director of its Institute for Law and Economics. She's also an affiliate faculty member of the University Center for Cognitive Sciences. She is currently the James L. Crewsmark chair in law, but she was appointed to in 2011. Previous to that, she had other prestigious appointments. She was the Jules K. Davis professor in 2007 and 2008. The Vance K. Auberman Research Scholar in 2008 and 2009. And the Solly Robbins Distinguished Research Fellow in 2009 and 2011. And prior to entering academia, she was the Nuclear Practice Corporate Law at various firms, including Millback, Swede, Hadley and McCloy in New York, and Dick Stein and Shapiro in Washington, D.C. In addition to teaching in Minnesota, she's also taught at the Law School at Boston University, George Mason University, Northwestern, Georgetown, where she was a Sloan visiting professor, and she was also a freelance scholar at the University of Chicago, Kansas. Her research interests include corporate governance, capital structure, structured finance, rating agencies, secured debt, contract theory, law and language, and behavioral economics. Claire's published numerous, numerous articles on a variety of topics including these, but she doesn't only publish in law reviews, which is quite interesting for a legal academic, she also publishes in journals in finance and journals in psychology. And I've had the pleasure to read a number of Claire's pieces, and particularly a lot of pieces that she's written with her colleague, Brett McDonnell, at the University of Minnesota. Claire, I think, is an example of what a lot of us corporate law profs aspire to be. Interesting. A lot of people seem to feel that we just talk about rules and this is how you do things. Claire looks beyond that. She's a deeper, it's much richer kind of scholarship and her interest, again, inspires and influences the rules and regulations that we do have to follow. But it also looks beyond obviously, okay, well why do we do these things? What's the rationale? What's the reason for looking at these and really, really interesting stuff? Her talk today is entitled, The Purvasive Effects of Priors. So, and here's my attempt at humor, which Mary and I have over well. I'm trying not to allow any prior knowledge that I may have influence what you may think about what Claire is going to be speaking about. But there's also, if you are interested in learning a bit more about what Claire is going to be speaking about today, she's blogged on this topic, concurrentopinions.com. I believe in April, I think of this year, March or April of this year, so that may be something that you want to check out. But please join me in welcoming Professor Clare Dill. I want to thank Kim for inviting me in the gracious introduction, and Len for the stunningly gracious introduction and for the setup where you say, I'm going to try not to let my priors influence me, because that gives me my punchline of the whole talk. And you won't succeed. So, there you have it. This talk may be a little bit, I mean he's used words like interesting, which presumably, I hope he means in the actual sense and not in the euphemistic sense, maybe a bit of both. You will judge for yourselves. This is sort of me taking a bit of advantage of how many years I've been doing things and trying to, in a sense, push the envelope, but in a way doing that by going back to basics, and you will see what I mean shortly. So here's this title, The Pervasive Effect of Priors, or, well, this is about business law. This is the pervasive effect of priors in business law. What is business law anyway? Well, kind of, I sometimes try to have slides that don't have a lot of stuff. This one on purpose, I wanted a lot of stuff because I want to take the position that business law really, in any proper parlance, encompasses lots of different kinds of law. Indeed, many fields, if not most fields of law, can properly be considered business law. So here's this long list. So here's my starting point, priors matter for law. What are priors? Well, when I give a version of this talk, people always say, so, what do you mean by priors? Well, I'm going to be spending the bulk of next year trying to figure that out, so I can't give a definitive definition. But what I can say is, I mean, philosophy has this concept called the given, which gives a flavor of it. I also say it includes temperaments, values, and beliefs. I have beliefs highlighted here because that's what I'm mostly going to talk about. And the other intuitive way to get at what priors are is some people say, well, isn't this paper just about, or this whole project, just about confirmation bias? A term you've probably heard, people like to confirm what they thought before. But the question is, what did they think before? What does confirmation bias seek to confirm? All of this is just by way of getting you to an intuitive sense of what priors are. Why do they matter? Well, they influence what we do, what we think, including what happened, what could happen, and what should happen. These are obviously big claims, and I'm going to try to defend them today. And again, next year, as I work on the book, why do these things, why do priors matter for law? Well, law tries to do sort of the same things. Law tries to influence behavior. It's one of the big things it does. It involves necessarily assessments of what happened by judges, jurors, administrative officials, and ordinary folk. It involves assessments of what could happen and what should happen. So what am I going to try to do today? I'm going to demonstrate priors matter for law, including with racy examples, I hope, and I'm going to argue that this approach has got some payoffs, ideally, you know, better policy, maybe better basis for an application of law, but more realistically just getting people to not make lens mistakes. Sorry. I'm going to not let my priors affect me. Well, not so hard. I'm going to argue, and perhaps impossible, including for me. So I'm going to do this by talking about corporate law debates and fulfilling the stereotype of a boorish person from the United States. I'm going to talk about hot policy debates in the United States. I mean, I may be in Canada, but hey, what are the important debates? The hot policy, yeah, okay. So one of them is so-called proxy access, and this debate is about whether or not when shareholders get management's proxy statement once a year to vote on directors, there ought to potentially be included on that proxy statement some nominees that other shareholders have picked. So once a year, shareholders ask, okay, vote for directors. Usually the people on the slate, the people that they're asked to vote on are people who the management effectively has picked, but there is some call to give shareholders more rights to include their own nominees, and I say the positions are basically more proxy access or less proxy access. I could talk for a very long time about this. I'm sure people would find it excruciating. Even I would find it kind of boring, and I find many obscure things interesting. So that's one debate, proxy access. Another one, so-called 13D. So this is a filing under the securities laws that people who get 5% or more shares of a company have to make to announce in effect that they have done this because this is deemed to pre-sage the possibility that they might be interested in taking over the company. So the idea is management perhaps should get a chance to prepare, should get a chance to know that there's Mr. 5.0001 guy out there who may be thinking to make a move. And the schedule, the question then is when do you have to disclose, and what do you get to do between the time you acquire and the time you disclose? So the position, the rule now, disclosure of more than 5% holdings within 10 days, question to you short in the number of days, and do you limit the ability to acquire shares during those days? So the present rule, you get 5.0001, and then you can just run out and you say, okay, in 10 days I'm going to file, and then you just buy everything in sight between now and then. And again, those are the two positions with respect to what to do with those debates. More debates at sort of a greater level of generality. How easy should it be to take over a company? And there's these devices, one of them called the staggered board. I don't know how much familiarity of this sort of stuff to assume. Basically two possibilities for a board, one of them is let's say nine people elected every year. The other possibility is nine people divided into three classes, and each one has a three year term, but no two terms expire at the same time. So to get a majority of the people on the board would take two years rather than one, because you need to get six directors out of the nine, let's say, and only three directors terms expire each year. So debate here, that's a staggered board, and so the question then in the debate is, who decides if a company should have a staggered board? Also, who decides if a company should have a so-called poison pill? Again, I don't know what familiarity to assume, but for our purpose is simply a device that makes it much more expensive to acquire a company unless you're someone the management really likes a lot. So with respect to proxy access, I've included here some arguments in favor and against, and just to anticipate my punchline. My punchline is basically going to be that the way to understand a lot of what's going on in these debates is via the priors. So here's the SEC chairman at the time, Mary Shapiro. As a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own. Nominating a candidate is not the same as electing a candidate. I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director. So, it sounds pretty unassailable, but massive, massive controversy on the other side. I don't actually have time to get into all the reasons for it, but one set of reasons is however you design it, someone's going to abuse it, and here is an articulation from the court case that struck down one attempt to have proxy access. There is good reason to believe that institutional investors with special interests will be able to use the rule, and as more than one commentator noted, public and union pension funds are the institutional investors most likely to make use of proxy access. And here's, I love this, here's another argument on proxy access, and we'll have some things to say about it. This is the letterhead. I've just copied the whole thing from the SEC's website. If you make a comment, it's publicly available. So, here's the guy's letterhead, Don's tractor repair and sales, and below it he's writing to Elizabeth Murphy, the relevant person at the SEC. And here's his argument. As a small business owner, I'm against any action that would give the federal government more authority over publicly traded companies or smaller businesses. The current administration has forgotten what this country was built on. It was the little guy starting businesses which led to corporations. Our federal government should not intrude on publicly traded corporations and corporate state laws should remain intact. My father started this business 30 years ago, and I bought it 10 years ago. We've expanded over the years and have anticipated opening a fourth tractor repair service in the condition of our economy, and Americans tightening their belts. We may not have this option. If the companies I purchased parts from are caught up in expensive proxy contests, I'm afraid they will not be able to deliver the parts that I need at a reasonable cost and in a timely manner. Let's go back here. This guy is in... Well, actually I'll show you where he is. He's in Wakefield, Kansas. I'm sure he's sidling up at the bar making these remarks. Just put me right out of business if it becomes too costly for me to continue business as usual. My hope is to one day pass a thriving business to my children, but if the federal government continues to get involved where they are not needed, that might never happen. This is one of the greatest countries in the world, and we achieve this by working together not against each other. I will not support any effort to change the shareholder proxy access rule to my own best Tim Zumbra on a Don's tractor repair. I mean, I would wager that before the business round table came to him with a model letter. He never heard of proxy access, and even after they did, he probably doesn't know what it is, but he's, oh, I'll sign this, I'll send it in. That's my prior that this guy can't possibly have these kind of views. Maybe he does. And if he did, let's think about what would be motivating him. What is proxy access? Proxy access is the ability of some shareholders, not any old shareholder, somebody with a big stake in a company to suggest a name to be put on the proxy statement that shareholders get so that shareholders might potentially elect the person as a director of the corporation. So what I'm trying to persuade you of here is that all of this stuff, many of these views are driven by people's priors. Here are some relevant priors that you might have. For instance, you might think that the paradigmatic corporate officer or director is a good steward of corporate interests. If you think that's the case, then you like the idea of those people continuing in office. Or you might think, well, they really want a bigger desk, they want more money. And so what they need is someone else to come to account. They need someone who's interested in working with the company, but offering a critical perspective and that person is going to come via a shareholder-nominated director. Similarly, what do people think about so-called shareholder activists? Say, again, do you have such people? You must have people here. You have some of the Americans here. Pershing Square has made quite a splash, I gather, doing a variety of very strong things. I'm trying to find a good word for it. So we have these people, big shareholders, who have very, very emphatic views as to what ought to happen to companies and are going to do many active things to make those things happen. And so, again, you'll ask and what kind of people are they? Are these in general people who are smart, long-term oriented? Or are they short-term oriented and they somehow want to put the big bucks in their pocket and then leave the company in a wreck? And I write here an ego can lead to big mistakes. There are some accusations, again, about these kinds of people who attempt to exercise large quantities of power with respect to corporations that, well, they let their egos get the better of them and, therefore, they do really bad things against the companies. Finally, with respect to another kind of shareholder, notorious shareholder activist which is public pension funds or labor union types. Again, you might think, well, they're generally smart and motivated. That's what my students, smart and well-motivated, that's what my students usually think when they first hear about them. And then you might have a more cynical perspective. Well, they're motivated by politics. The leaders of these funds, sometimes they get re-elected by people to whom they have to make the case. And then they want to say, I've taken a pro-labor stance or something. Perhaps they get appointed by some governor and they need to demonstrate whatever it is that's going to help the governor get re-elected or maybe the member's self-interest or political views. The company is in whatever business it's in but the pension fund or the labor union would like them to be particularly solicitous to employees or maybe show concern for environmental things or something. All of which might not do wonders for the company's profits or maybe they want even a company that pays more money to employees. Again, not doing wonders for the company's profits. Whether or not these are good things, the question is, are these people appropriate voices to be speaking for and trying to influence the corporation? And your view on that question is going to enormously affect your view of what you think about proxy access. If you're going to think the corporate officers and directors are in general good stewards of corporate interest, you're going to think, who needs proxy access? You're going to think, let's leave things as they are. The kind of people who are going to be trying to get power are pests and nuisances or worse still, they're people who bomb us, who think they know better but they're trying to put a quick buck in their pocket. Proxy access is going to prevent poor Mr. Zumbrun from leaving his business to his children and all sorts of other bad things are going to happen. Returning to Mr. Zumbrun's priors, though. What does Mr. Zumbrun think about government? I mean, again I'm sort of hypothesizing that he never heard of proxy access until the business roundtable came to Wakefield, Kansas and handed him this letter and told him to type it on his letterhead. But I would bet, again, my prior that Mr. Zumbrun was receptive to this because he has view number two over here, paradigmatic actors, government actors are incompetent trying to keep power or help their friends or both, not that he thinks that people in government are smart and well intentioned. I would also suspect that he might think in particular that government likes to or is indifferent to increasing costs to entrepreneurs because, hey, that's a view of government and perhaps he has this. Lots of different views of government here that are possible if you think the SEC is smart and well intentioned. You might say, ah, let's leave proxy access in their hands. They'll probably come up with something good. Whereas if you think that they're trying to help their friends, you might have a different view. Here's another. This is the specifics of the 13D debate. Again, this takes my poor students have to listen to this stuff for two hours from me and I will luckily only give you a few minutes of it. But it's in broad brush the same issue a little bit more specifically. Here are people who may want to take over a company. They've acquired more than 5%. The question is what does the company get to know and when does the company get to know it? Assume it's true as sort of an empirical fact about the world that people who acquire more than 5% may be having acquisition on their mind. Then the question of whether you want to give management the ability to fight against that, to prepare for it turns on whether you think the same thing that we've just been talking about. Whether the management are the good stewards and the hedge fund guy let's say is short term oriented. If you think the hedge fund guy is short term oriented, youth and maybe he's got a big ego or whatever, then you think that let's give management the tool to fight that guy. If you think the opposite, then well it's pretty straightforward. So Marty Lipton, the guy who invented the poison pill, he thinks corporate managers are great stewards. Beb Chuck is a Harvard law professor who's made his living arguing that institutional investors know better and that management doesn't worry enough about doing right by shareholders and worries much more about the size of their desks and keeping their jobs. So naturally Lipton says we should require anybody buying big chunks of the company to disclose quickly, not buy anymore. And Lipton says the opposite. He says we shouldn't be letting companies prepare for the attack of the activist shareholder because the activist shareholder is doing good and management is just motivated by trying to keep its job. Beb Chuck in fact has made a whole project at the Harvard Law School trying to give shareholders more power in having anti-takeover devices removed. Recall that I had noted these debates. How easy should it be to take over a company? You will not be surprised to hear that Lipton, who I'm just using as a stand in for all people of this position, although for a guy in I think in his 80s he's out and about articulating the position a lot, thinks it should be very hard. Management's got the best interest at stake. Whereas Beb Chuck thinks it should be much easier because management is just trying to keep their jobs. So theme and variations Beb Chuck gets the Harvard Law School to start the shareholder rights project where he's got students working with institutional investors to get rid of these staggered boards that I mentioned to you earlier where there are three directors elected one year, three directors elected the second year and the three directors elected the third year so that in order to get six out of the nine it takes two years rather than being able to control by re-electing all nine in one year. So he's made this huge project of this. He's been again, I speak as though it's only Beb Chuck it might as well be he's everywhere saying this stuff but he's not this project at Harvard where he's got students working on this so it assists public pension funds and charitable organizations in improving corporate governance. To him this is unambiguously an improvement again because these the institutional shareholders are good guys and the management are just too comfortable and they have too many weapons to fight off people who might want to hold them to account. So improving corporate governance here's all our clients the proposals with a staggered board which allow them to replace only a few directors to place all board members up for elections such a move to annual elections is viewed by investors as a best practice by enabling shareholders to register their views more accountability to shareholders etc and then what is Lipton again he's my stand in but he really spends a lot of time talking about this while the activist block likes to tout annual elections as a best practice on their one size fits all corporate governance scorecards there's no persuasive evidence to declassifying board's enhanced shareholder value over the long term the argument that annual review is necessary for accountability precisely the argument that Bebchak made is as specious in the corporate setting as it is in the political arena in seeking to undermine board stewardship the you can see him sneering as he says this the shareholder rights project and its activist supporters are making an unsubstantiated value judgment in the corporate governance system which allows for greater incidence of intervention and control by fund managers on the belief etc so that's Lipton and then he continues the essential purpose of corporate governance is to create a system in which long term output societal benefit are maximized creating prosperity for the ultimate beneficiaries short term measurement again he's sneering he's thinking about activist hedge funds who are his arch enemies and compensation of investment managers is not necessarily consistent with these desired results he's saying here these fund managers they're trying to increase their short term returns that's not going to help the company or the shareholders long term therefore Lipton says I'm right Bebchak is wrong so the bottom line with respect to resolving this kind of debate I think is the following well which is better for the shareholders I mean we can talk about what's good for other constituencies like employees or the community or something but for right now we're confining the discussion to shareholders and here my I mean I've sort of articulated my views here first that the initial positions are strongly informed by priors and I've demonstrated I hope that's the case you'd like to have the policy informed by empirical evidence but not so easy the first thing is I go to these conferences this Gruder Institute where people talk about neuroscience and one can fantasize about putting all the hedge fund managers in functional magnetic resonance imaging machines to try to see whether they're good guys or bad guys and similarly with corporate managers you'd say oh this one really does want a bigger desk no this one wants what's good for the company and that would be very interesting but obviously the reason that you're giggling is because how are we going to do this the science isn't there or not clear people would go down this road so what you want to try to test is the results the results are of course going to be hard because no two companies are identical but for the fact that they have different governance things happen at different times different products different economic markets whatever so you can't run what I'm calling the perfect desert island test which is everything's the same except you just vary the one thing you want to vary as is now well known the interpretation of of imperfect empirical work is strongly influenced by priors there's been a massive amount of work done about this generally and in the context of gun control which I think probably Canadians think Americans are totally lunatic about this I think everyone other than Americans think they're totally lunatic about this but the point is that some people in the US love guns and some people hate them both cite massive empirics in support of why guns are a good or bad thing and the empirics never persuade anybody on the other side the empirics never persuade people who love guns that oh gee guns killed 27 cute little kids last week because the parents forgot the safety locks they never persuade the people who hate guns that gee guns are bad guys and therefore they didn't shoot or be able to do mischief the priors are just stronger than any form thus far that the evidence could take let me give you some other examples well first I have here a related example with a pedagogical payoff I kind of love doing this with my students because it's like one of these very rare moments where you can say a few things and they go oh and you feel like a big shot there are so few moments like that in teaching so when students first learn about we have so called derivative suits where shareholders you've got the same thing here right where shareholders get to bring a claim on behalf of the corporation and all the cases we read the shareholders always trying to bring the claim and the corporations always able to stop them by saying well our directors really thought hard about this and the students are always very suspicious and they will say well why isn't it much easier in a totally easy situation where the courts where we just say shareholder wouldn't be bringing this suit unless the management was a bad guy and they did bad things therefore the shareholders should be able to bring the suit readily and many of them think this and so I say well you're imagining the only kind of people who are going to bring these suits are like well motivated smart whatever and I say well here's some other possibility nuisance and crank and you know I say I myself personally know some shareholder some people who are apt to bring lawsuits of this type who are cranks and I have to I'm going to do something a little bit of a as I say cheap shot and I say okay you can say to your students well look there's you might take seriously the possibility that some shareholders are nuisances and cranks and maybe give them some evidence and here I can't resist this is a great picture this woman is not dead she has her gravestone you can't see all of it but let me read you part of what it says Evelyn White Davis she's a prominent shareholder active she goes to loads of shareholder meetings and here two divorces no children third divorce took place on such and such a year a fourth divorce took place in such and such as I say she keeps updating her tombstone defender of shareholder rights many stockholder meetings nationally recognize that White House press conferences by several presidents since 1976 power is greater than love and I did not get where I am by standing in line nor by being shy so this woman is a presence at shareholder meetings I mean as it happens she's not actually a crank this makes it look like she's a crank she's only a partial crank and I've actually seen her myself do good things calling corporate management to account but she might have been a crank this sure makes it look like she's a crank if there's a lot of people who are cranks like this and you give every one of them the right to sue corporate management because they think the management did something stupid and that the company is not going to sue them then the management would do nothing but defend against crank version of Evelyn White Davis here I have to give say actually it was a cheap shot she's done many good things and then I have over here the required permissions for Evelyn White Davis okay let me give you another example Kim how much longer do I have 10-15 minutes something like that we have until oh perfect perfect okay so thus far the priors that I've talked about have been sort of archetypes you know corporate executive good guy or wants the bigger desk or wants to keep in power or you know California pension fund activist the guy the person making the decision wants to keep his job and he wants to show what good things he's done for employees um priors aren't just about what sorts of people are in what sorts of roles they're much broader which is one of the things that makes this project so huge and one of the reasons I told you at the outset when you said when I asked what's a prior and said well it'll take me a long time to formulate that one critical prior for instance is the securities law prior that better information but it makes for better decisions no in some respect that that can't be wrong but the thing I'm going to try to demonstrate to you is it's not quite as right as the securities laws need it to be so here are some examples I'm fascinated by these uh subprimes this synthetic CDOs and I'm not going to go through lots of specifics I don't have time beyond the scope etc perhaps people have heard of abacus for which Goldman Sachs paid a $550 million uh we don't admit or deny we did anything bad here's $550 million um and one of the middle middle management guys involved in this arguably scapegoated the fabulous fab Fabrice Touré anyway this these are notorious characters in the states in any event so abacus and Timberwolf is another name of one other one of these deals many more and again I could I could talk at some length because it's fun but I will confine myself first to show you a picture of the fabulous fab I've managed to sell a few abacus bonds to widows and orphans that I ran into in the airport apparently those Belgians adore synthetic ABS CDO squared says the fabulous fab um it's just sort of a notorious quote of his and this is the middle management guy who was sued for civil fraud he lost um but my focus is actually not on this guy doing a bad thing quite the contrary it's about investors having been warned like crazy that these deals were maybe not in their interests Goldman Sachs shall not have a fiduciary relationship with any investor these are their marketing materials Goldman Sachs may by virtue of its underwriter of his status as an underwriter blah blah blah blah blah has not undertaken does not intend to disclose such and such accordingly this presentation may not contain all information that would be material to the evaluation of the merits and risks of purchasing the notes and in case you didn't get it may from time to time in the future be an active participant on both sides may have potential conflicts of interest you know if you're buying this stuff oh that fabulous fab he told me it was great he has you a piece of paper that says up to you to investigate we're not telling you anything you sign this and say you've investigated here's Timberwolf recently the and these are the 2007 deals when things were starting to go south recently the residential mortgage market has experienced a variety of difficulties delinquencies and losses with respect to residential mortgage loans generally have increased well that sounds pretty bad housing prices and appraisal values in many states have declined or stopped appreciating that doesn't sound so good either how about numerous residential mortgage loan originators that originate subprime mortgage loans have recently experienced serious financial difficulties and in some cases bankruptcy yeah so people are buying this stuff many other examples okay I mean many such things in the okay so here's two examples and I'll go through the one a little bit more in the other one not so much so dot com bubble lots of these companies we don't make any money we have no idea how we're going to make money people bought that anyway increased executive compensation disclosure the SEC said oh well executive compensation getting too high we just tell people more about it maybe then outrage will stem things well the best empirics again very hard to do the studies because there's confounding factors but I think most people certainly I believe that the main people who were influenced by this were CEOs who could run and say that's medley he's an idiot he's making more money than I am board if you want to send a signal you've got the top CEO you better give me dry cleaning for life too and that this is seems to have been what happened I mean ordinary mortals reading oh the CEO gets you know 40 million in these options and the other one gets 42 million of some other options they say this is all way more money than I can ever dream of these increments are ridiculously meaningless to me so here's from the dot com bubble I was looking for something good pets.com the 39 risk factor is not unusual and here's one this is February 2000 we only began selling our products a year ago which makes it difficult for investors to determine whether we will accomplish our objectives the success depends on attracting customers like we don't have any now we have no idea what we're able to do we have a history of losses we expect significant increases in our cost and expenses to result in continuing losses for at least the next four years we may not succeed in doing this we may we need more money because our operating expenses are fixed if we fail to do that we need more money we still need more money we may not get the more money if we don't get the more money we may go to put okay is it really a surprise that anything bad happens what else could you have told people you're an idiot for investing in this how could they not know that from this okay so what's going on here I've actually thought a lot about this and I've written a bunch of papers explaining the mechanisms by which people might choose to invest because it's not like they're saying no revenue that's the investment for me it's not like they're choosing for no revenue it's that somehow it doesn't matter and why doesn't it matter well their friends are doing it is the hot thing there's some kind of narrative they glom onto language is complicated people take aspirin even though if you read all the stuff and take seriously in the back of the aspirin bottle this one died the other one had a stroke it's all terrible people know ah it's okay everyone I know takes aspirin they're all fine my doctor says it's fine air go you sort of translate so the puzzle then and this is something else this is my paper that I was telling you about the limits of disclosure is it's not like anybody doesn't know what was in these abacus papers it's not like it's some big secret that I unearthed securities documents notoriously can contain all sorts of disclosures written by the lawyers attempting to do the CYA cover the backside thing and yet people are buying them you know part of the story may be well they can't tell the difference between real risks and stuff the lawyers told them to put in or something but what's certainly clear is that there's no straight forward line between telling people this thing is bad and them saying better not buy it so the question then is why is anybody wasting time after the crisis saying what the problem is people didn't understand these securities you don't have to understand them Goldman Sachs who does understand them tells him tells you they're on the other side shouldn't that be enough so the argument is priors here's the kind of the meta argument is that priors are dictating that we keep pushing on disclosure solutions even though everyone knows that people bought this stuff that announced it was terrible we can't sort of get away from better information somehow leads to better decisions we also so much and this is a US pathology have this obsession with the autonomy as versus paternalism and say oh it's so important that people make their own decisions even if they fall on their faces you combine those kind of priors and I would say the anti government anti paternalism thing is a prior with the inability to get consensus on anything else and the fact that everyone saying you got to do something you want to say you did something so you say oh we'll beef up the disclosure requirements we'll make them tell people just how bad the stuff was as opposed to what they did before so the result continuing emphasis on disclosure and perpetuation of prior some other examples I mean debates on freer access to the capital markets should one be able to get money from investors a little bit more cheaply and easily with less disclosure debates on what I'm calling equitable type exceptions the contract enforcement when say some consumer comes to court and says well I signed this but ability to wave protective provisions we have debates in my class as to whether or not somebody ought to be able to sign a contract that says the other guy to be let's say a partner in a partnership where the other guy says I have no fiduciary duties to anyone also similarly questions about whether people ought to be able to sign away their rights to go to court and bind themselves by arbitration some of the debates on Americans with disabilities act and I want to say yet again these are informed by these archetypes I've been talking about sort of what do you think paradigmatic high level business person is somebody he's got a dream he wants to cure cancer he just needs to raise some money and so well it's a good thing to give it to him or else maybe it's gee I want to tell people I've got a great business plan but I have no clue and what I really want to do is to go on vacation and can't afford to do it so I'm going to get money from people and they're going to lose their money similarly with respect to individuals getting into contracts again my example here equitable type exceptions ability to wave protective provisions is our paradigmatic person who signs one of these things someone who's chargeable with wow they ought to be looking after themselves and they can read this or are we going to say oh they're a cute little person and bad business person is out to take advantage of them and this example the paradigmatic claimant here I was inspired to think about this because also at this Guter conference I keep mentioning this is entrepreneur all he'd ever heard of in the context of the Americans with disabilities act is friends of his who had been sued by people who claimed that they didn't have enough handicapped access and so his idea was these people are out there doing great inventions and all that ever happens to them is they get sued by somebody who's in the business of going around with their wheelchair and saying they can't get into places they never wanted to go anyway this is their business plan so what he thinks is this and he thinks business people are they're entrepreneurs they're good they want to do good and they're just being bogged down by these guys and if you say to him well some business people maybe are up to no good you of course are up to only good but some are up to no good and some claimants are worthy folk who had bad luck I said this to him and he was like because he himself was a good guy businessman it hadn't occurred to him because all the people he knew he met who needed who were trying to use Americans with Disabilities Act were opportunists that's what he assumed they all were and he never thought about it so let me then get back and I think my timing is going to be perfect here I say related and belated point implicit identification again you know when I talk to my students when I have taught first year contracts we have I know that this is again lunacy in the U.S. we have employment at will I know Canada does not so in the U.S. you can hire fire people for any reason as long as it's not a bad reason you don't like that they wear pink outfits you don't like the acts body spray they use whatever it is it's all fine and that's clearly the law I mean you may think it's a bad law but that's clearly the law but my students whenever they hear about the fired employee they always want to have oh there must be a whistleblower exemption there must be some reason why the employer has to keep them around and I say well actually they sort of isn't that's just wrong and then you say to them well what if you're the employer and acts body spray drives you crazy you've always want to run a business and you just you know you go in there with a close pin on your nose all day it's just terrible you're really in orbit oh I hadn't thought of that so that's very gratifying to say you are looking at this through the perspective of the employee similarly with you know if there's some case where the tenant is evicted they screwed or they breached the provision of the lease and they always think oh well the contract should be interpreted to cut the tenant more slack why because they're the tenant and similarly disappointed buyer so the idea is here to join together what I've said before you've got representative archetypes but you also have a sense of who you are and that's going to be related to I am an employee employees are generally not trying to take advantage I am you know a tenant tenants are not trying to take advantage and landlords might be so I had to put in a political crack here so we've got this view as to what kind of people landlords are which is going to be a different view if we ourselves are landlords Romney perhaps lost the election based on being taped just talking about 47% of the people who never paid who didn't pay any federal income tax and no one thought for a moment that he was sort of dispassionately describing this it was like there are those people he was saying as a fact there's a class there's an archetype of those people who have these characteristics and those are them not me or us or anyone worthy tying it all together see I told you how well time this was so one's own construction of the world is one way to get at what priors are and one thing I want to emphasize which I didn't have a chance to really highlight here is that I'm not just talking about prior beliefs values are in the picture too I had a lawyer tell me once that there were cases where an executive clearly deserved because they had contracted for at some very high payoff say some salary or something and this lawyer said I advise this person to settle with the company when the company doesn't want to pay them because the jurors are just going to say no one deserves that kind of money and they're not going to award it because just as a matter of priors no one's worth 10 million or whatever it is and again he's of course saying there's some class of people who get those bucks not one of them and that's part of the picture so again the thesis the effect of priors vastly underappreciated because of a particularly pernicious prior that you don't have priors and there you are that one is viewing things neutrally and that one's views are well founded and often that the other guys aren't that part takes a bit more resonance in the political debates which is another area in which I've been applying all of this that is gun control or something well those people who love guns they're somehow ignoring all that evidence of the little kids getting shot there's some sense in which the other guy's position is not legitimate and not subject to evidence whereas one's own position is and as I say I think not so fast concluding with wild optimism I can succeed in this ridiculous endeavor applause