Bias Arbitrage

40 Pages·2007·4.07 MB·English

Bias Arbitrage
AmitaiAviram*
Abstract
Theproduction oflaw-includingthe choice ofa law's subjectmatter,
the timing ofits enactment and the manner in which it is publicized and
perceivedby thepublic-is significantlydriven by an extra-legalmarketin
whichpoliticiansandprivatepartiescompeteovertheopportunitytoengage
inbias arbitrage. Bias arbitrage isthe extractionofprivatebenefits through
actions that identifyandmitigatediscrepancies betweenactualrisks andthe
public'sperception ofthe same risks.
Politiciansarbitrage these discrepancies byenactinglaws thataddress
the misperceived risk and contain a ''placebo effect"-a counter-bias that
attempts to offset the pre-existing misperception. Ifsuccessful, politicians
are able to take creditfor the change inperceivedrisk, while socialwelfare
is enhanced by the elimination of deadweight loss caused by risk
misperception.
However, politiciansmustcompetewithprivatepartiessuch asinsurers
andthe media, who can engage in bias arbitrage using extra-legal means.
ThisArticleanalyzes methods inwhichpartiesengage inbias arbitrageand
the effect of interaction between potential bias arbitrageurs on the
production oflaw.
*
Associate Professor, University of Illinois College of Law. LL.B. (Tel-Aviv
University, 1995);LL.M. (UniversityofChicago,2000); J.S.D. (UniversityofChicago,2003).
I am grateful for invaluable comments I received from Tom Baker, Ehud Brosh, Robert
Ellickson, Ehud Guttel, David Hyman, RichardMcAdams,Troy Paredes, Jeffrey Rachlinski,
andtheparticipantsoftheMidwesternLaw& EconomicsAssociationAnnual Meetingandof
the conference on Behavioral & Experimental Law & Economics hostedjointlyby Hebrew
UniversityandtheUniversityofHaifa. IalsowishtothankPattyLiuandJohn Sholarfortheir
diligentresearch assistance.
789
790 64 WASH. & LEEL. REV. 789(2007)
Table ofContents
I. Introduction 790
II. Cognitive Biases Create Fertile Groundfor Bias Arbitrage 793
III. GovernmentEngages inBias Arbitrage 796
A. Law as aByproductofBias Arbitrage 796
B. StandingAbove the Biases? 802
C. Social Welfare Effects ofLaws with Placebo Effects 803
D. Bias Arbitrage and the Literature on Symbolic
Legislation 809
IV. Private Parties Engage in Bias Arbitrage 813
A. Private Legal Systems 813
B. Insurance Providers 815
C. The Media 817
V. The Marketfor Bias Arbitrage 821
A. CompetitionVersus Cooperation ofBias Arbitrageurs 821
B. Artificial Creation ofPerception Gaps 824
VI. Conclusion: The Future ofBias Arbitrage 826
1. Introduction
A significantportion oflegal scholarship examinesthe manner inwhich
law' directs behavior.' Law is usually seen as directing behavior by
manipulatingincentives--eitherbyimposingsanctionstodissuadefromcertain
behaviororbyofferingbenefits to encourage acertain behavior.'
1. Bias arbitrage uses as its vehicle not only legislated acts, but all types oflegal
actions-legislative,judicial,administrative,andexecutive. Forthesakeofsimplicity,Iusethe
term"law"throughouttheArticletorefertoanytypeoflegal action. Theimplementationofthe
legal actionwillbecalled"enactingthe law," andthe implementerwill becalleda"politician."
2. See Richard A. Posner, Values andConsequences: An Introduction to Economic
AnalysisofLaw, inCHICAGOLECTURESINLAW& ECONOMICS 189, 191 (EricA.Posner, ed.,
2000) ("The economic analysis of law. .. tries to explain and predict the behavior of
participantsinand personsregulatedbythe law.").
3. See,e.g.,PatriciaFunk, IsthereanExpressiveFunction ofLaw? AnEmpiricalAnalysis
ofVotingLawswith Symbolic Fines, 9AM.L.& ECON.REv.135,135-36(2007)("The classic
'Law&Economics'-approachfocusesondeterrence: [A]lawenforcedbysanctionsincreasesthe
expectedcosts oftheregulatedactivityandtherebyinducescompliance.").
BIASARBITRAGE 791
Laws certainlyaffect individuals' incentives,andthroughthemtheydirect
individuals' behavior. But laws also have an equally important impact on
individuals' behaviorthroughadifferentmechanism-themanipulationofthe
individuals' perceptions,particularlyperceptionsregardingtheprobabilityand
magnitude of risks." As a result of this effect on perceptions, a law may
increase social welfare withouthavinga"real" effect on incentives' simply by
causing individuals to think that it does have an effect.6 Because of the
4. A"risk," astheterm isused inthis Article, relates not onlytothe probabilityofan
eventbutalsotoitsmagnitude. Inotherwords,thedisutilitytoanindividualfromrisk(asthe
term isused here) may lienot only inthe uncertaintyitself, but also inthe occurrenceofthe
underlying event that is subject to uncertainty. The broad definition ofrisk is important
because, asIwill discuss, infra Part IV.B, bias arbitrage techniquesthat affectthe perceived
magnitude of the underlying event are alternatives to (and compete with) bias arbitrage
techniquesthataffecttheperceivedprobabilityoftheevent. Both types oftechniquescorrect
gapsbetween perceivedandactual risk.
5. Icallalaw'seffectsonincentives"real"because theyaffecttheobjectivepayoffsof
individuals, as opposedto effects on perceptions which affect subjective assessments. Both
effectscausea"real"(i.e.,objective)change inbehavioranda"real"impactonsocialwelfare.
6. Thiseffect(a"placeboeffect")shouldnotbeconfusedwithaphenomenonknownas
"psychic utility." Psychic utility is a benefit (or harm) that individuals reap from their
satisfaction (or dissatisfaction) with the existence of a law. See, e.g., Donald J.Boudreaux,
RogerE.Meiners & ToddJ.Zywicki, TalkisCheap: TheExistence ValueFallacy,29ENVTL.
L.765, 768 (1999) (describingexistencevalue asthe physiological benefitone experiences
from knowing something exists). Psychic utility is entirely subjective. It is caused by
manipulation of subjective perception and has purely subjective effects. Conversely, the
placebo effect discussed in this paper, though it is caused by manipulation of subjective
perception, has objectiveeffects (an increase ordecrease inactivity related to the riskthat is
addressed by the law). To illustrate the difference, a person may derive psychic disutility
knowingthat aracist lawrepugnantto her exists, even ifitisnot effective oreven enforced.
For example, acolonial Massachusettslawenacted in 1675prohibitsNative Americansfrom
enteringthecityofBoston. SeeYvonneAbraham, Menino Seeks toRepeal1675LawAgainst
Native Americans: SymbolicActSeen asStepForward,BOSTONGLOBE,Nov. 25,2004, atB4
(reportingthat Boston Mayor ThomasMenino called the legislatureto repeal anunenforced
colonial eralawprohibitingNative Americanswithin thecitylimits). The same lawdoes not
createaplacebo effectiftheperson knowsthatthelawisunconstitutionalandvoidbecauseshe
would know that the law would have no objective effect. Conversely, a law cannot create
psychic utilitytoanindividualwhodoesnotknowaboutthelaw,yetthesamelawcancausea
placebo effect,ormoreprecisely, asIwillexplain inPart III.C, ananti-placeboeffect.
792 64 WASH. & LEEL. REV 789(2007)
superficialsimilaritytothe placeboeffect inmedicine;'Icallthiseffectoflaws
on behavior(and on social welfare) the "placebo effect" ofthe law."
Placebo effects are created when lawsare presented inawaythat, due to
cognitive biases, cause many individuals to either over-estimate or under
estimate the impact ofthe law on a risk that the law addresses." Some such
biases can be created inadvertently, but often they are created deliberatelyby
politicians who reap personal benefits from the law's manipulation of
perceptions." This behavior is aform of"bias arbitrage"-identifying a risk
that iseither over- orunder-estimatedbyasegmentofthe publicandreapinga
private profitfrom an action thatmitigatesthe discrepancybetweenthe actual
and the perceivedrisk. Though bias arbitrage appeals tothe politician'sself
interest, even politicians who care for the interest oftheir constituents rather
than their self-interest may find themselves forced to bias arbitrage (by
consciously focusing in the short-term on addressing misperceived risks) in
order to politically survive long enoughto implement long-term policies.II
Enacting laws with placebo effects is only one way to engage in bias
arbitrage.V Politicians compete with others, such as the media and insurers,
whoengage inbiasarbitrageusing methodsthatdonotinvolveenactinglaws.':'
Politicians' behaviorinenactinglawsthat have placeboeffects (asmany laws
7. See Raul de la Fuente-Fernandez et al., Expectation and Dopamine Release:
Mechanism ofthe Placebo Effect in Parkinson's Disease, 293 SCIENCE 1164, 1164(2001)
(describingthe medicalplaceboeffectintreatmentofParkinson'sDisease). Thisisnottosay
thattheprocessthroughwhichmedicalplacebosaffect healthissimilartotheprocessinwhich
legal placebosaffectsocialwelfare. Medicalplacebosseemtoinvolvephysiologicalprocesses.
Legal placebossimplyutilizecognitivebiasestomanipulatebehavior,asIwill explaininPart
IILe.
8. See Arnitai Aviram, The Placebo Effect ofLaw: Law's Role in Manipulating
Expectations, 75 GEO. WASH. L. REv.54, 55 (2006) [hereinafter Aviram, Placebo Effects]
(arguingthat laws have aneffectongeneralwelfarebychangingthe riskexpectationsofthose
subjecttothelaw);seealsoArnitai Aviram,InDefenseofImperfectCompliancePrograms,32
FLA. ST.U.L.REv.763,773-78(2005)(applyingthe placeboeffectconceptto criminal law
leniencypoliciestowardscorporationsthatimplementcomplianceprograms).
9. SeeAviram,PlaceboEffects,supranote 8,at62-68(defininganddescribingplacebo
effectsofthe law).
10. Seeide at77-79(liThepeoplewho enactlaws(i.e.,politicians)harnessthesebiasesby
shaping both the issues that laws address and the manner in which laws are drafted and
presentedtothe public.").
11. Seeinfra PartlILA(elaboratingontheincentivesofthehonestpoliticiantoengagein
bias arbitrage).
12. See infra PartIII(discussinghow governmentengagesinbias arbitrage).
13. See infra PartIV (exploringhow nongovernmententitiesengageinbias arbitrage);
infra Part IV.A (describing how government and nongovernment entities compete over
engaginginbias arbitrage).
BIASARBITRAGE 793
do) is better understood in the competitive context in which it operates
alongside private players, all ofwhom struggle to extract private gains from
eliminatingbiases."
In Part II of this Article, I survey the forces that create discrepancies
between actual and perceived risks which create the opportunity for bias
arbitrage. In Part III, I explain how politicians use laws to engage in bias
arbitrage. Part IVwill examinehow nonlegal actors engage inbias arbitrage.
Inconclusion,PartVwilldiscuss themarket that forms from competition(and
cooperation) between public and private bias arbitrageurs.
II Cognitive Biases Create Fertile Ground/orBias Arbitrage
After HurricaneKatrinabatteredthe GulfCoast inlate August2005 and
subsequent levee failures resulted in the flooding oflow lying areas in New
Orleans, reports from the city and its surroundings portrayed mayhem, best
described as surreal." Police officers in Westwego, Louisianawere told that
400 to 500 armed looters were advancing on their town." In the city's
ConventionCenter, SWATteams weredeployedtocapturegroupsofmenwho
were said to have taken over some ofthe halls." Media reports included
"roving bands ofarmed gang members attacking the helpless, and dozens of
bodies being shovedintoafreezer atthe ConventionCenter."18 New Orleans'
police chief appeared on television and reported that "little babies [were]
getting raped" atthe Superdome."
The reports above, like numerous others, were unfounded. In all of
Louisiana, only four ofthe 841 recordedhurricane-related deaths were dueto
gunshotwounds.r" HurricaneKatrinacausedatremendous amountofsuffering
14. See infra Part V.A (explaining the competition between government and
nongovernmententities inexploitingbiases).
15. See,e.g.,Howard Witt& MichaelMartinez,Thousands FearedDeadinLawlessCity,
CHI.TRIB., Sept. 1,2005, at 1(describingreports ofcrimelootingandvirtual anarchy).
16. SeeJimDwyer& ChristopherDrew,Fear ExceededCrime'sRealityinNewOrleans,
N.Y.TIMES, Sept.29,2005,atAl (explainingtheeffectofrumorsontheabilityandwillingness
ofpolice toact).
17. See id. (noting several examples of official response to reports of crime in New
Orleans following HurricaneKatrina).
18. Susannah Rosenblatt& James Rainey, Rita'sAftermath: Katrina Takes a Toll on
Truth, News Accuracy,L.A.TIMEs, Sept. 27,2005, atA16.
19. Id.
20. See id. (contrasting the actual violent crime in the convention center with the
exaggeratedmediareports).
794 64 WASH. & LEEL. REV. 789 (2007)
in New Orleans, but the tidal wave ofviolent crime that was reported in its
wake was grossly exaggerated."
Severe misperceptionsofriskarenot limitedtotraumaticsituations. They
areaninevitableresult ofthehumanmind'suseofheuristics-mentalshortcuts
that manifest themselves as "gut feelings." Heuristics facilitate immediate
analysis ofcomplexinformation,but likeanyanalytical mechanism,heuristics
sometimesfail. Failuresthat occurinpredictablepatternsarecalled cognitive
biases.r'
Through observation and experimentation, scholars have identified a
number of cognitive biases." For example, a cognitive bias known as the
illusion of control is a pattern of over-optimism regarding events whose
outcome depends partially on an individual's skill and partially on other
circumstances." As a result ofsuch a bias an individual may under-estimate
the risk to herselffrom a car accident because ofoptimism about her driving
skills, even though a car accident may occur despite her best efforts due to
another's poor driving.
The availabilitybias isanothercognitivepattern bywhich people "assess
the frequency ofaclass or the probability ofan event by the ease with which
instances or occurrence can be brought to mind.,,25 In other words, if we
recently encountered,read about, orheardfromothersofacertainevent,weare
likely to over-estimate the frequency or probability of that event. The
availability bias can be exacerbated by another bias-social amplification,
which isthe tendencyofone's perceptionofariskto be influencedbyothers'
perceptions." Asaresult ofthese two biases, ahighly-publicizedeventsuchas
the hijacking of a plane may cause over-estimation of the probability of
hijacking. Suchevents receive significantmediacoverage, which bringstothe
21. See id. (noting several instances ofunverified rumors repeated by various news
sourcesthat turnedout to befalse orexaggerated).
22. See John E. Montgomery, Cognitive Biases andHeuristics in Tort Litigation: A
ProposaltoLimitTheir Effects Without Changingthe World, 85NEB. L.REv.15, 16(2006)
(describingcognitivebiasesand heuristicsand theireffects on decisionmaking).
23. For discussions ofresearch demonstrating various cognitive biases, see generally,
COGNITIVEILLUSIONS(RudigerF.Pohl, ed., 2004).
24. See, e.g., Ellen 1.Langer, The Illusion ofControl, 32 1.PERSONALITY & SOC.
PSYCHOL. 311, 313 (1975)("An illusionofcontrol isdefined as an expectancyofapersonal
successprobabilityhigherthanthe objectiveprobabilitywouldwarrant.").
25. AmosTversky& DanielKahneman,Judgment Under Uncertainty: Heuristicsand
Biases, 185 SCIENCE 1124,1127(1974).
26. SeeCassR.Sunstein,TheLaws ofFear, 115HARV.L.REv. 1119,1130(2002)(book
review)(usingtheThreeMile Islandincidentasanexampleofaneventforwhich,althoughno
one was injured,the costs were amplifieddue todistrustofan industry).
BIASARBITRAGE 795
mind ofeach individual an instance ofa hijacking (an event that, but for the
media, hewould probablynotbeaware of). The "availability" ofsuchanevent
triggers the availability bias and is likely to cause an increase in the risk
perceivedbyeach individual. Inaddition,because the samemediacoverage is
observed by many individuals, the increase in perceived risk would be
exacerbatedthrough social amplification, asone person'sheightenedconcern
about airplane hijackingwould causeanincreaseinthesameconcernbyothers.
The study ofcognitive biases isstill in its infancy. Cognitive biases are
constantly being identified and refined as more subtle patterns emerge from
experiments." At this time, a wide range of observed misperceptions is
unexplained,orisexplainedexpost asa"just so"storythat isnotuseful forex
ante predictions." Nonetheless, our understanding of cognitive biases is
improving. This Article does not make acontributiontothe understandingof
cognitivebiases,butratherilluminatesaprocess-biasarbitrage-thatbecomes
more feasible (and therefore, presumably, more frequently employed) as
cognitive biases are better understood.
How does the study ofcognitivebiases affect bias arbitrage? Inaddition
toexplainingwhyactual andperceivedrisksdiverge, the researchoncognitive
biases facilitates bias arbitrage intwo ways. First, asour knowledgeofbiases
improves, itiseasier to predictwhen acertain group misperceives arisk." It
also provides amore accurateestimateofthe magnitudeofthe misperception.
This allows potentialarbitrageursto identifytheriskthattheywanttoarbitrage.
Second, improved understanding ofbiases can be used (or abused) to take
actions that bias people more effectively. As I will explain in the next Part,
politicians engage in bias arbitrage by enacting laws that counter-bias the
public. Advances inthe study ofbiases maymake such counter-biasingmore
effective and, therefore, increase politicians' desire to engaging in bias
arbitrage.
27. See generally ADVANCES INBEHAVIORALECONOMICS (Colin F. Camerer, George
Loewenstein& MatthewRabin, eds.,2004) (describingtheresults ofnumerousexperimentsin
behavioraleconomics).
28. C.!MarthaChamallas,DeepeningtheLegalUnderstandingofBias: OnDevaluation
andBiasedPrototypes,74S.CAL.L.REv.,747,772-77(2001)(describingthecognitivebiasof
devaluation inthe context ofdiscrimination based on genderand race without providing an
explanation ofwhat creates the bias); Gregory Mandel, Patently Non-Obvious: Empirical
DemonstrationsthattheHindsightBiasRenders PatentDecisionsIrrational,67OHIOST.L.J.
1391, 1411-20(2006)(discussinghindsightbiasinthecontextofpatentlawbutnotexplaining
whydifferentactors have hindsightbias).
29. See William M. Sage, Joshua Graff Zivin, & Nathaniel B. Chase, Bridging the
RelationalRegulatoryGap: APragmaticInformationPolicyfor PatientSafetyandMedical
Malpractice, 59VAND. L.REv. 1263, 1295 ("Individualsoften respondto informationabout
risks such asmedical error inpredictableways, based onwell-establishedcognitivebiases.").
796 64 WASH. & LEEL. REV. 789(2007)
The discrepancies between aperceivedriskandthe actual riskcaused by
cognitive biases create opportunities for extracting private benefits through
arbitrage." Inthe next section, Iwill describe how governmentuses lawasa
vehicle to engage in bias arbitrage. Then, in the following section, I will
describe how private parties compete with government through their own,
extra-legal means ofbias arbitrage.
III. GovernmentEngages inBias Arbitrage
A. Law as a ByproductofBias Arbitrage
The enactment, presentation, and enforcementoflawaffect individuals'
perceptions, includingtheir perceptionofrisks. Lawssignaltoindividualsthe
values oftheir government and society, knowledge ofwhich may modify the
individuals' own values." In addition, laws affect individuals' expectations
about government's behavior. For example, a lawthat criminalizes speeding
creates an expectation that government will attempt to detect and punish
speeders, while a law that organizes an airport security agency creates an
expectation oflower likelihoodthat airplanes will be hijacked. Note that the
law modifies expectations not only for those parties to whom the law applies
(e.g., drivers in the case ofthe speeding law), but also for parties who are
affected by the behavior of those to whom the law applies (e.g., airline
passengers, whoareaffected bytheriskofhijackingcaused byterroristswhich
the airport security law aims to deter).32
30. Cf., e.g., Jon D. Hanson& DouglasA. Kysar, TakingBehaviorismSeriously: The
Problem ofMarket Manipulation, 74 N.Y.U. L. REV.630, 745-49 (1999) (arguing that
manufacturers have an incentive to exploit the cognitive biases of consumers); Leandra
Lederman& WarrenB.Hrung,DoAttorney'sDo TheirClientsJustice? AnEmpiricalStudyof
Lawyers'Effectson TaxCourtOutcomes,41 WAKEFORESTL.REv.1235,1251 (2006)("It is
also possiblethatattorneys could exploitclients' cognitivebiases for their own ends, which
wouldalso be aform ofagencycost.").
31. See MatthewD. Adler, Expressive Theories ofLaw: ASkepticalOverview, 148U.
PA.L.REv.1363, 1364 (2000)(contendingthatexpressivetheoriesoflaw, inwhichsymbolic
laws are meaningful, are not persuasive); Elizabeth S. Anderson & Richard H. Pildes,
Expressive Theories ofLaw: A GeneralRestatement, 148 U.PA.L.REv.1503, 1504 (2000)
(claimingthatmuch"ofourexistingpracticesofmoral andlegalevaluationarebestunderstood
throughexpressivistperspectives").
32. This analysis holds true not only for the enactment ofnew laws, but also for the
enforcementofexistinglaws. Law enforcementaffectsperceptions,not only ofthosesubject
(orpotentiallysubject)toenforcement,butalsoperceptionsofthegeneralpublic. Forexample,
a Chinese court recently sentenced to death the former head ofthe Chinese food and drug
regulatorfortakingbribestoapprovemedicines. GeoffDyer, FormerBeijingRegulatorGiven
DeathSentence, FIN.TIMES,May 30, 2007,at3. An analystofChinesepoliticssaid that"the
BIASARBITRAGE 797
Inaworldwithout information asymmetries orcognitivebiases,thechange
caused byalawtothe perceptionofarisk itaddresses would be identicaltothe
change intheactualrisk. Inotherwords, ifalawreduces agivenriskby10%,it
would cause a reduction of 100/0 in the perceived risk. However, both
information asymmetries andcognitivebiasesfrequentlycausemisperceptionsof
the effects ofalaw.
Somemisperceptionsarecoincidental, occurring forthe same largevariety
ofreasons that cause the public to misperceive risks (as discussed in Part II,
above). But other misperceptions are the result ofmanipulation ofcognitive
biases bythe politicians who sponsor the laws.33 The politician receives credit
(and votes) by creating the perception that the law she sponsored significantly
addressed a risk that concerned her constituents. A politician who is better at
manipulating public perceptions to over-estimate the benefits ofthe laws she
sponsors will be more successful than her rivals, allthings being equal. Such
manipulations take many forms, including but not limited to, the way a law is
named." the way it is presented to the public (e.g., facilitating a tax cut by
sentencewasaimed ... atthedomestic audience. ... 'Theyaretrying totellpeople thatthe
situationisundercontrol andsignalingtoelements ofthebureaucracytogetinline.'" ld. The
dramaticenforcementofthelaw(deathsentence)haddualbutseparateeffectsontheperception
ofpotentialperpetrators,"signaling...thebureaucracytogetinline"and"tell[ing]peoplethat
the situation isunder control." ld.
33. Biases may be in some respects more attractive for a politician to exploit than
informationasymmetries because itmaybehardertoprovethatonepresentedinformationina
mannerthatinducedabiasthantoprovethatoneprovidedfalseinformationorfailedtoprovide
information. Such difficultiesindetectionhinder theabilitytoprohibitorpunish intentional
exploitationofbiases, comparedtothe exploitationofinformationasymmetries.
34. In an example that does not seem to involve bias arbitrage, in November 2003,
President Bush signed into law an act that changed the name of a swamp from "Congaree
Swamp National Monument" to "CongareeNational Park." See Pub. L.No. 108-108, tit. I,
§135,117Stat. 1241("Upon enactmentofthisAct,theCongareeSwampNationalMonument
shall bedesignatedCongareeNationalPark."). Within four months ofthename change, and
apparentlydueto it,the numberofmonthly visitors morethan doubled. See Andrew Jacobs,
ParkisStill aSwamp, but Please Don'tTell the Tourists, N.Y.TIMES, Apr. 5,2004, atA14
(reportingthat attendanceatthe park doubled following thename change).
798 64 WASH. & LEEL. REV. 789(2007)
sendingchecks totaxpayersj." orsimplybytheuseofthe mediatocreate social
amplificationofthe politician'smessage."
Forexample,supposethattheprobabilityofhijackinganairplaneis0.001%
(l-in-l00,000),butfollowing thetragiceventsofSeptember11,2001,thepublic
misperceivestherisktobe 10/0. Ata1%probabilityofhijacking,fewpeople fly.
Sensing a risk misperception that creates an opportunity for bias arbitrage, a
politician sponsors a law to institute airport security. Suppose that the
implementationofthis lawhasthe effect ofreducingthe likelihoodofhijacking
by 50% (to l-in-200,000). Suppose also that the politician is modest and
"undersells" the law, sothat the public perceives the lawto have no effect. The
result isthe public still believing that the probability ofhijacking is 1% and a
continued pattern offew people flying, thus significantly reducing the actual
benefits ofthelaw. Insuchacase,thepolitician herselfreceivesnocreditforher
work.
Ifthe politician were not modest, but merely honest, and persuaded the
public that the lawwould reduce hijackingby 50% (as itindeed does), then the
public would perceive the probabilityas0.5%, stillalethalriskthat would deter
most airtravelers. The politician would receive some credit forher efforts, but
because mosttravelers arestilldeterredfrom flying,the credit duethe politician
would be as limited asthe act'seffect inincreasingairtravel.
Suppose,instead,thatthepoliticianpersuasively overstatestheeffectsofthe
law, convincing her constituents that the law she sponsored reduces the
probability ofhijacking by 99%. To a public that expects (prior to the law's
implementation) a hijacking probability of 10/0, the law's effect would be to
reduce the perceived probability to l-in-l0,000. While the public would still
over-estimate the likelihood of hijacking by a full order of magnitude, this
reduced probability would likely result in a significant increase in air travel.
Individualswho areskeptical ofthe politician'sclaims (and stillbelieve thatthe
probability is 1%) may refrain from flying, but asthey observe others fly,they
would notice that far less than 1% of airplanes are hijacked, supporting the
35. TheEconomicGrowth andTaxReliefReconciliationActof2001,Pub.L.No. 107
16, 115Stat. 38 (codifiedasamendedinscatteredsections of26U.S.C.), signed into lawon
June7,2001, entitledtaxpayerstoarebate ofbetween $300-$600. Tomakethetaxcuteven
morevivid, the DepartmentofTreasurywas instructedto mail acheckforthisrebate toeach
taxpayer. Press Release, U.S. Dep't ofTreasury, The Check is inthe Mail (July 20,2001),
availableathttp://www.treas.gov/press/releases/p0495.htm(lastvisitedAug.26,2007)(onfile
withtheWashingtonandLeeLawReview). Suchvivid,tangiblepresentationmayhavemade
the tax cut's effect on individual taxpayers' finances seem greater than a discussion of
aggregate, non-tangiblefigures.
36. SeeAviram, PlaceboEffects, supra note8,at76(notingthatmediacancausesocial
amplificationandthereforethe public overestimatesarisk).