Shame, Regret, and Contract Design
54 Pages Posted: 9 Apr 2013 Last revised: 18 Apr 2015
Date Written: April 17, 2015
This Article examines whether contract design can influence the post-formation behavior of the non-drafting party. If it can, contract preparers may be able to obtain significant transactional advantages. This Article suggests that several contractual features can be explained in terms of their ability to exploit the cognitive biases of, and to induce particular “advantageous” emotions from, the non-drafting party after the contract has been executed. These features may include arbitration provisions, disclosures in capital letter or bold face type, “reliance” language, and language framing possible losses in particular ways. Contracts can encourage individuals to feel shame, to blame themselves, to believe that contracts are sacred promises that should be specifically performed, to utilize faulty judgment heuristics when determining contract costs, and to rely on misperceived social norms with respect to challenging or breaching contracts. This may influence them not to breach or challenge an otherwise uneconomical, unconscionable, or illegal contract. Consequently, contract preparers may be able to enjoy the benefits of promises that often would not be realized if the non-drafting party were profit-maximizing like the contract preparer.
Keywords: shame, regret, contract, moral promise, contract design, regret theory, cognitive bias, judgment heuristic, strategic default, efficient breach, arbitration
Suggested Citation: Suggested Citation