False Consensus Bias in Contract Interpretation

Abstract:     
Psychologists call the propensity to believe that one's views are the normal views even when they are not false consensus bias. In the interpretation of contracts, false consensus bias should be of special concern when a dispute arises over whether an event fits within contractual language. For psychologists have also found that consensus about category membership dissipates when people are presented with non-paradigmatic cases. We all agree that a table is a piece of furniture, but people hold different views about the status of, say, lamps.

In this article, we report experimental studies conducted with lay people and judges that present a problem for the law of contracts. When lay individuals are presented with scenarios relevant to the language of insurance contracts that have led to differences of opinion among the courts, they do not understand contractual language uniformly, and because they are subject to false consensus bias, believe that their interpretation is the normal interpretation, even when it is not. This is true whatever the scenario, whatever the interpretation, and whichever party will be assisted by one interpretation or the other. When judges were presented with the same scenarios, they also exhibited a form of false consensus bias. The solution lies in judges taking far more seriously the disagreement of other judges in determining whether language is clear, or whether it is subject to multiple interpretations. Otherwise, litigants may be subjected to a form of lottery in which they are subject to the particular idiosyncratic interpretation of the judge assigned to their case. Concern about the reasonable expectations of the parties should also be taken into account.

Keywords: contracts, interpretation, insurance, bias, consensus

JEL Classifications: K12

Accepted Paper Series