Revisiting the Debate Over Attorneys' Contingent Fees: A Behavioral Analysis

Abstract

Building on Kahneman and Tversky's Prospect Theory, this paper presents a series of experiments designed to reveal people's preferences regarding attorneys' fees. Contrary to common economic wisdom, it demonstrates that loss aversion (rather than risk aversion or incentivizing the lawyer to win the case) plays a major role in clients' preferences for contingent fee arrangements. Facing a choice between a mixed "gamble" and a pure positive one, plaintiffs prefer contingent fee (framed as a pure positive gamble) even if it yields an expected fee that is two or three times higher than a non-contingent one (framed as a mixed gamble). At the same time, defendants, who face a choice between two pure negative gambles, are typically risk seeking and prefer fixed fees. Our findings indicate that information problems and lack of alternative fee arrangements probably do not loom large on clients' choice of fee arrangement. We discuss the policy implications of our findings.

Keywords: contingent fees, loss aversion, prospect theory, litigation, behavioral law and economics, experimental law and economicsted

JEL Classification: K4, K41, D8, D81