Identifying Criminals’ Risk Preferences

There is a 250-year-old presumption in the criminology and law enforcement literature that people are deterred more by increases in the certainty rather than increases in the severity of legal sanctions. We call this presumption the Certainty Aversion Presumption (CAP). Simple criminal decision-making models suggest that criminals must be risk seeking if they behave consistently with CAP. This implication leads to disturbing interpretations, such as criminals being categorically different from law-abiding people, who often display risk-averse behavior while making financial decisions. Moreover, policy discussions that incorrectly rely on criminals’ risk attitudes implied by CAP are ill informed, and may therefore have unintended negative consequences. In this Article, we first demonstrate, contrary to most of the existing literature, that CAP-consistent behavior does not imply risk-seeking behavior. A host of considerations that are unrelated to risk attitudes can generate behavior that is consistent with CAP, including stigmatization, discounting, judgment proofness, the forfeitability of illegal gains, and the possibility of being punished for unsuccessful criminal attempts. Next, we discuss empirical methods that can be employed to gain a better understanding of criminals’ risk attitudes and responsiveness to various punishment schemes. These methods focus on the various non-risk-related-considerations that may be responsible for CAP-consistent behavior. Finally, we discuss the importance of gaining a better understanding of criminals’ attitudes for purposes of designing optimal law enforcement methods, punishment schemes for repeat offenders, plea bargaining procedures, and standards of proof

Identifying Criminals’ Risk Preferences

There is a 250 year old presumption in the criminology and law enforcement literature that people are deterred more by increases in the certainty rather than increases in the severity of legal sanctions. We call this presumption the Certainty Aversion Presumption (CAP). Simple criminal decision making models suggest that criminals must be risk-seeking if they behave consistently with CAP. This implication leads to disturbing interpretations, such as criminals being categorically different than law abiding people, who often display risk-averse behavior while making financial decisions. Moreover, policy discussions that incorrectly rely on criminals’ risk attitudes implied by CAP are ill-informed, and may therefore have unintended negative consequences. In this article, we first demonstrate, contrary to most of the existing literature, that CAP consistent behavior does not imply risk-seeking behavior. A host of considerations that are unrelated to risk-attitudes can generate behavior that is consistent with CAP, including stigmatization; discounting; judgment proofness; the forfeitability of illegal gains; and the possibility of being punished for unsuccessful criminal attempts. Next, we discuss empirical methods that can be employed to gain a better understanding of criminals’ risk-attitudes and responsiveness to various punishment schemes. These methods focus on the various non-risk-related-considerations that may be responsible for CAP consistent behavior. Finally, we discuss the importance of gaining a better understanding of criminals’ attitudes for purposes of designing optimal law enforcement methods, punishment schemes for repeat offenders, plea bargaining procedures and standards of proof

Knowledge and reasonableness

The notion of relevance plays a role in many accounts of knowledge and knowledge ascription. Although use of the notion is well-motivated, theorists struggle to codify relevance. A reasonable person standard of relevance addresses this codification problem, and provides an objective and flexible standard of relevance; however, treating relevance as reasonableness seems to allow practical factors to determine whether one has knowledge or not—so-called “pragmatic encroachment.” I argue that a fuller understanding of reasonableness and of the role of practical factors in the acquisition of knowledge lets us avoid pragmatic encroachment

The Innocence Effect

Nearly all felony convictions—about 95 percent—follow guilty pleas, suggesting that plea offers are very attractive to defendants compared to trials. Some scholars argue that plea bargains are too attractive and should be curtailed because they facilitate the wrongful conviction of innocents. Others contend that plea bargains only benefit innocent defendants, providing an alternative to the risk of a harsher sentence at trial. Hence, even while heatedly disputing their desirability, both camps in the debate believe that plea bargains commonly lead innocents to plead guilty. This Article shows, however, that the belief that innocents routinely plead guilty is overstated. We provide varied empirical evidence for the hitherto neglected innocence effect, revealing that innocents are significantly less likely to accept plea offers that appear attractive to similarly situated guilty defendants. The Article further explores the psychological causes of the innocence effect and examines its implications for plea bargaining. Positively, we identify the striking cost of innocence, wherein innocents suffer harsher average sanctions than similarly situated guilty defendants. Yet our findings also show that the innocence effect directly causes an overrepresentation of the guilty among plea bargainers and an overrepresentation of the innocent among those who choose trial. In this way, the innocence effect beneficially reduces the rate of wrongful convictions—including accepted plea bargains—even when compared to a system that does not allow plea bargaining. Normatively, our analysis finds that both detractors and supporters of plea bargaining should reevaluate, if not completely reverse, their long-held positions to account for the causes and consequences of the innocence effect. The Article concludes by outlining two proposals for minimizing false convictions, better protecting the innocent, and improving the plea bargaining process altogether by accounting for the innocence effect

Gender differences in firm’s leadership and risk preferences

This thesis is composed of two studies related to gender issues in economics. The first one explores whether companies experience benefits when the firm’s CEO and owner are both women. It employs data from the 2009-2014 World Bank Enterprise Surveys (WBES) to measure firms’ performance through growth in sales and productivity. Potential endogeneity was corrected by using the UN Gender Development Index and the average fertility rate as they comply with the exclusion restrictions. The paper uses the Control Function method with a Probit first stage estimation and an OLS main equation. The findings suggest that a female owner strengthens the female CEO’s business skills and leads to better firm performance than when the CEO is a woman and the owner is a man. The second study analyzes if there are gender differences in the socioeconomic characteristics that impact the risk aversion of a person. Gender differences in risk aversion may explain the gaps between men and women in the professional or labor field. If this situation is to be modified, it is important to understand how actors behave when facing risky situations and which variables could influence this change. In this sense, the paper draws from laboratory experiments associated with risky and uncertain decisions, representative of six cities in Latin America, through two empirical strategies: regression analysis with interactions and Blinder-Oaxaca decomposition. We conclude that women are more risk averse than men, and that the main variables associated with this behavior are education, age, and whether or not the person is part of the labor marketTesi

Private Information and its Effect on Market Equilibrium: New Evidence from Long-Term Care Insurance

This paper examines the standard test for asymmetric information in insurance markets: that its presence will result in a positive correlation between insurance coverage and risk occurrence. We show empirically that while there is no evidence of this positive correlation in the long-term care insurance market, asymmetric information still exists. We use individuals' subjective assessments of the chance they will enter a nursing home, together with the insurance companies' own assessment, to show that individuals do have private information about their risk type. Moreover, this private information is positively correlated with insurance coverage. We reconcile this direct evidence of asymmetric information with the lack of a positive correlation between insurance coverage and risk occurrence by demonstrating the existence of other unobserved characteristics that are positively related to coverage and negatively related to risk occurrence. Specifically, we find that more cautious individuals are both more likely to have long-term care insurance and less likely to enter a nursing home. Our results demonstrate that insurance markets may suffer from asymmetric information, and its negative efficiency consequences, even if those with more insurance are not higher risk. The results also suggest an alternative approach to testing for asymmetric information in insurance markets.

De Finetti on the insurance of risks and uncertainties

In the insurance literature, it is often argued that private markets can provide insurance against ‘risks’ but not against ‘uncertainties’ in the sense of Knight ([1921]) or Keynes ([1921]). This claim is at odds with the standard economic model of risk exchange which, in assuming that decision-makers are always guided by point-valued subjective probabilities, predicts that all uncertainties can, in theory, be insured. Supporters of the standard model argue that the insuring of highly idiosyncratic risks by Lloyd's of London proves that this is so even in practice. The purpose of this article is to show that Bruno de Finetti, famous as one of the three founding fathers of the subjective approach to probability assumed by the standard model, actually made a theoretical case for uncertainty within the subjectivist approach. We draw on empirical evidence from the practice of underwriters to show how this case may help explain the reluctance of insurers to cover highly uncertain contingencies

Why the Law Hates Speculators: Regulation and Private Ordering in the Market for OTC Derivatives

A wide variety of statutory and common law doctrines in American law evidence hostility towards speculation. Conventional economic theory, however, generally views speculation as an efficient form of trading that shifts risk to those who can bear it most easily and improves the accuracy of market prices. This Article reconciles the apparent conflict between legal tradition and economic theory by explaining why some forms of speculative trading may be inefficient. It presents a heterogeneous expectations model of speculative trading that offers important insights into antispeculation laws in general, and the ongoing debate concerning over-the-counter (OTC) derivatives in particular. Although trading in OTC derivatives is presently largely unregulated, the Commodity Futures Trading Commission recently announced its intention to consider substantively regulating OTC derivatives under the Commodity Exchange Act (CEA). Because the CEA is at heart an antispeculation law, the heterogeneous expectations model of speculation offers policy support for the CFTC\u27s claim of regulatory jurisdiction. This model also, however, suggests an alternative to the apparently binary choice now available to lawmakers (i. e., either regulate OTC derivatives under the CEA, or exempt them). That alternative would be to regulate OTC derivatives in the same manner that the common law traditionally regulated speculative contracts: as permitted, but legally unenforceable, agreements. By requiring derivatives traders to rely on private ordering to ensure the performance of their agreements, this strategy may offer significant advantages in discouraging welfare-reducing speculation based on heterogeneous expectations while protecting more beneficial forms of derivatives trading