Funding Irrationality

Abstract:     
This Article challenges the conventional wisdom that claimants in class action settlement funds and other settlement funds make independent and rational settlement decisions. Cognitive psychologists and behavioral economists have long examined the way people make judgments and choices. Such studies show that decision-makers routinely change their minds based on their view of the status quo, the timing of the decision, and the presence of seemingly irrelevant choices. Because of these cognitive biases, people will buy things they do not want, save too little for retirement, and make risky choices about their health and well-being based on the timing, context, and framing of the decision.

Applying findings from cognitive psychology, I argue that people will make the same kinds of irrational decisions about their settlement options in a large settlement fund. As a result, cognitive biases threaten to undermine many of the stated purposes of large settlement funds - to provide claimants with access, efficiency, and equity superior to what they could obtain in traditional litigation.

Accordingly, "fund designers" - judges, lawmakers, and special masters - should adjust settlement procedures to account for cognitive bias. I call this process "funding irrationality" - identifying and, in some cases, capitalizing on people’s cognitive biases in large settlement funds by altering the context, timing, and sequence of their settlement options. Fund designers, however, should avoid reforms that unduly eliminate settlement options, or that impose excessive administrative costs. Rather, the benefits of any reform - preventing avoidable harm to irrational claimants - must outweigh the potential costs, including the value of client autonomy, the chance of error, and the burden on the courts and public administrators.

Number of Pages in PDF File: 72

Accepted Paper Series