NYU professors Geoffrey Miller and Gerald Rosenfeld have written an article on "intellectual hazard." Their basic point is that organizations are subject to various biases in the way they process information (what the legal scholars call "heuristic biases.") Miller and Rosenfeld are standing on the shoulders of a lot of previous scholars in this article (including Office of Information and Regulatory Affairs Administrator Cass Sunstein and Chicago professor Richard Thaler), but their article is worth pointing out for two reasons: first, it provides one of the most current attempts to classify various biases; and second, they do a good job of applying those biases to help explain the roots of the 2008 financial crisis. According to Miller and Rosenfeld, these biases can be divided into three main categories:
- Complexity bias, which stems from the human brain’s need to absorb information in manageable chunks. Examples of complexity bias include oversimplification bias (the tendency to oversimplify complicated ideas or sets of facts, losing important information in the process) and authoritative bias (the tendency to accept information from experts or superiors without examining it critically).
- Incentive bias, which stems from humans’ tendency to serve their own self-interest. Examples of incentive bias include herding behavior ("Everyone else at my company can’t be wrong …"), cognitive dissonance (the ability to compartmentalize conflicting information rather than resolve the conflict), and loss aversion (the tendency to spend disproportionate effort avoiding or "making up" losses).
- Asymmetry bias, which gives unequal weight to pre-formed conclusions. Examples of asymmetry bias include status quo bias (the tendency to prefer the current state of affairs), the ostrich effect (the tendency to ignore negative information), and regret aversion (the tendency to put off difficult decisions that may result in regret).
Miller and Rosenfeld’s taxonomy isn’t perfect. For example, their definitions of loss aversion and regret aversion seem to overlap, which may stem in part from the fact that their definition of loss aversion differs subtly from others’ definitions.
Nonetheless, Miller and Rosenfeld do an excellent job of explaining why these biases will exist in large organizations, and illustrating how those biases can result in a disastrous outcome. And this is where their work becomes important to class-action defense lawyers. Because class actions tend to address large, complex legal and factual issues, heuristic biases are prevalent, both in the client defendant and the plaintiffs’ bar. Both the client defendant and the plaintiffs’ lawyer tend to represent organizations that have committed to a course of action (bet-the-company litigation) with large risk and heavy uncertainty, meaning that these biases will come into play as they evaluate new information about the litigation. In particular, these biases can come into play as each side evaluates possible settlements. As a result, it is important for the defense attorney to identify which biases may be at play, and either counsel her client accordingly, or decide on a strategy that will overcome her adversary’s bias.