Cognitive Biases, Letters of Credit and Letters of Indemnity: The Case Study of the Erin Schulte

Abstract

This working paper analyses the facts and decisions that led to the dispute in The Erin Schulte in order to identify the kinds of cognitive biases that may affect decision-making in complex situations affecting the performance of letter of credit and carriage contracts. It identifies various cognitive biases that may be at work in these situations, including loss aversion, the ambiguity effect, status quo bias and optimism bias. It proposes ways in which these biases may be countered in order to ensure better decision-making in these contexts, including making use of cautionary tales in the process of giving legal advice and using electronic alternatives to transport documents.

Keywords: cognitive biases, letters of credit, letters of indemnity, bounded rationality, loss aversion, optimism bias