The Psychology of Contract Precautions
University of Chicago Law Review, Vol. 80, P. 395, 2013
U of Penn, Inst for Law & Econ Research Paper No. 12-10
Temple University Legal Studies Research Paper No. 2012-09
43 Pages Posted: 7 Feb 2012 Last revised: 9 Sep 2014
Date Written: 2013
This research tests the intuition that parties to a contract approach each other differently before the contract is formed than they do once it is finalized. We argue that one of the most important determinants of self-protective behavior is whether the promisee considers herself to be in negotiations or already in an ongoing contract relationship. That shift affects precaution-taking even when it has no practical bearing on the costs and benefits of self-protection: the moment of contracting is a reference point that frames the costs and benefits of taking precautions. We present the results of three questionnaire studies in which respondents indicate that they would be more likely to protect their own interests — by requesting a liquidated damages clause, by purchasing a warranty, or by shopping around to ensure the best deal — when the contract is not yet finalized than they would when they understand the agreement to be finalized. We discuss competing explanations for this phenomenon, including both prospect theory and cognitive dissonance. Finally, we explore some doctrinal implications for work on disclosure, modification, and promissory estoppel.
Keywords: contracts, precautions, psychology, reference point, reference transaction, prospect theory
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