A Cognitive Theory of Fiduciary Relationships

Abstract

Law-and-economics scholars have argued that there is nothing unique about fiduciary relationships. These scholars make two claims. First, they argue that, analytically, fiduciary relationships are simply contractual arrangements with unusually high transaction costs. Second, they contend that courts in fact apply the same analysis to fiduciary relationships as they do to non-fiduciary contractual relationships. This paper addresses the second, behavioral claims. Accepting for the sake of argument the analytical claim, the paper contends that cognitive biases lead courts to apply a different mode of analysis to fiduciary relationships than they do to contractual relationships. In cases involving alleged breaches of fiduciary duties, courts apply a "top-down" mode of cognitive analysis, in contrast with the "bottom-up," data-driven cognitive mode that characterizes judicial analysis of breach of contract claims. The essay's hypothesis is that fiduciaries are more apt to be found liable of breach of fiduciary duties than are contract parties who are alleged to have violated some contractual duty.

JEL Classification: K29