Hindsight-biased Courts and the Efficiency of the Legal System

Abstract

This paper examines the implications of a cognitive deficiency called “hindsight bias” on two legal standards: negligence and probable cause. This focus illustrates the implications of hindsight bias depending on whether a court intervenes following a failure vs. success in risk management (respectively). When the court applies the negligence standard, I find that hindsight bias discourages (encourages) preventive measures that reduce the likelihood (severity) of an accident. When the court applies the probable cause standard, I show that hindsight bias discourages aggressive searches that increase the likelihood of police seizures. I also study the effectiveness of counterfactual thinking as a remedy for hindsight bias, and find that it is only unambiguously effective under the probable cause standard.

Keywords: hindsight bias, law and economics, negligence, probable cause

JEL Classification: D03, K13, K14