Loss Aversion Bias or the Fear of Missing Out: A Behavioural Economics Analysis of Compensation in Investor-State Dispute Settlement
Journal of International Dispute Settlement, Forthcoming
27 Pages Posted: 25 Apr 2016 Last revised: 7 Sep 2016
Date Written: April 23, 2016
This article considers the application of the behavioural economics theory of loss aversion bias as an explanation for observed approaches to monetary compensation in Investor-State Dispute Settlement (ISDS). Beginning with a critique of the assessment that damages for breach of contract (both the reliance and expectation measures) embody the ethos of loss aversion bias, this article suggests that the dominant approach to compensation in ISDS is primarily forward-looking and profit-focused. Instances of loss-based compensation may be explained by rational means rather than through the heuristic of loss aversion bias. Compensation tied to loss may more accurately reflect full market value and often denote a lower quantum justified on the basis of lawfulness (as in expropriation). Most notably compensation based on actual losses serves the objective of certainty. The article concludes by suggesting that the dominant tendency of ISDS tribunals to award profit-oriented compensation may itself have a basis in a heuristic bias, namely the human tendency to seek to avoid missing out on future opportunities.
Keywords: international investment law, investment arbitration, law and economics, behavioural economics
JEL Classification: K12, K33, D70, D80
Suggested Citation: Suggested Citation