Designing Arbitration: Biological Substrates and Asymmetry in Risk and Reward

Abstract:     
What constitutes a rational decision? Much of our thinking about rational decision-making depends on traditional economic theories of maximized expected value. While these theories have demonstrated normative and even prescriptive value in general microeconomic contexts, they have spectacularly failed descriptively; they do a poor job of explaining how we make everyday decisions. Relatively new multidisciplinary efforts at the intersection of biology, behavioral economics, and evolutionary psychology have suggested predictable deviations from the standards of rational expectations based on decision rules that may have been adaptive, in the sense of conferring fitness advantages, in the environmental context in which our cognitive capacities evolved. While this predictability may offer hope of a descriptively accurate and prescriptively useful framework for examining human decision making, we argue that the human brain, rather than being a single decision making device, is a collection of such devices, each with different operating characteristics, and each highly domain specific, in the sense that their influence depends on adaptively relevant features of the current environment. Specifically, as regards decision making about agreements to arbitration, it is easy to imagine many such domain specific devices that may influence expected value and related preferences. Here, we concentrate on loss aversion and risk aversion, providing evidence that these mechanisms have separate biological substrates, and demonstrating that in plausible contexts of arbitration agreement decision-making, they may operate counter to one another. Divergent influence, along with domain specificity, produces an arbitration agreement decision-making system so complex as to challenge the prescriptive utility of behavioral theories, at least at current levels of scientific rigor.

Number of Pages in PDF File: 14

Keywords: arbitration, ADR, alternative dispute resolution, decision-making, rationality, arbitration agreement

Accepted Paper Series