Ask Dr. Paola: Behavioral Economics is Gaining Recognition & Can Have Great Implications for the Legal Profession

Topics: Client Relations, Data Analytics, Efficiency, Harvard Law School, Law Firms, Leadership, Legal Innovation, Talent Development

Thaler

The Legal Executive Institute blog is honored to be working with Dr. Paola Cecchi-Dimeglio, a behavioral economist and senior research fellow for Harvard Law School’s Center on the Legal Profession and the Harvard Kennedy School, on a monthly column that will discuss how law firms and legal service firms can navigate a dramatically changing legal environment by using data analytics and behavioral science to create incentives for law firms and their lawyers to change their behavior in positive ways. (You can follow Paola on Twitter at @HLSPaola.)

This month, in place of our usual “Ask Dr. Paola column”, Dr. Paola Cecchi-Dimeglio would like to recognize Richard Thaler, considered one of the fathers of behavioral economics, who was awarded the 2017 Nobel Prize in Economics earlier this month and whose work is relevant for the legal profession as well.

Dr. Thaler pioneered the use of data to predict how real people behave in the real world. As The Atlantic wrote after the Nobel Prize was awarded: “…Thaler’s career has been a lifelong war on Homo economicus, that mythical species of purely rational hominids who dwell exclusively in the models of classical economic theory. In studies that borrowed from psychology, sociology, and plain-old curiosity, Thaler demonstrated that mankind was afflicted by emotion and irrationality, which influences their decision-making on everything from retirement savings, to health-care policy, to professional sports. But Thaler didn’t contend that humans were randomly irrational. More importantly, he observed that people are predictably irrational…”

Predictably irrational? No wonder the Nobel committee took notice.

Dr. Cecchi-Dimeglio: As we see that Richard Thaler won the Nobel Prize in Economics for his work in behavioral economics this year — which is 15 years after Daniel Kahneman shared the 2002 Nobel Prize in economics for his part in developing the field of behavioral economics. So, we are starting to see wide recognition of the role behavioral economics and science plays in the overall economic analysis. But also, more broadly, we are beginning to recognize the impact of how behavioral science can potentially reshape behavior and see its rich implications for everything around us, including the legal profession.

Dr. Paola Cecchi-Dimeglio

From Dr. Thaler, we learned that people don’t make decisions rationally — they make mistakes, or pursue decisions based on emotion or misunderstanding. And one of the primary contributions of Dr. Thaler is that he introduced a theory of predictable ways that people make errors, or at least we’ve been able to accept the kind of modeling where we see that there are variations in deviation in the way people think and behave.

To better illustrate Dr. Thaler’s theories, let’s look at two famous examples — the cafeteria and the pension plan. In the first example of the cafeteria, we observe that the order in which the food is offered to you will influence what you buy and, indeed, play a part in each choice you make.

In the example related to a company-offered pension plan, we have Company A, where employees can sign-up voluntarily now or later for a plan managed by the company; and Company B that automatically enrolls new employees in the plan, and then allows employees to opt out if they wish. What Dr. Thaler found is the impact of allowing employees to opt-in, or enrolling them and allowing them to opt-out. It left Company B with more employees participating in saving for their retirement.

So, how does that relate to the legal profession?

Thaler

Dr. Richard Thaler

I think one of the main takeaways with Dr. Thaler’s work is applied inertia. He explained that we need to create choices for people and incentivize the choices we want them to make, or dis-incentivize the bad choice. However, it’s important to emphasize that in all cases, we are still giving people a choice, and not making their choices for them. Rather, it’s the way we’re going to present those choices so that the preferred way of acting is somehow aligned to what the team wants. But in the end, everyone still has their free choice.

Just like in the cafeteria example where the set-up influences your choices, behavioral scientists can create architectural choices for people to either optimize their behavior, such as the way they’re going to render services to their clients, or the way they’re going to perform within a team.

And this is exactly what I do, and what other behavioral scientists are doing.

I think then, when you look at that and then add to the mix the data science and technology available, we now have tremendous opportunity to improve decision-making. From machine-learning, or back-end recognition and other predictive analysis that we have, you have a source that if well used results in a competitive advantage in trying to nudge people toward the most positive behaviors.

In a sense, you’re creating a new capability to achieve a significant business impact overall within your law firm. And that can have immense influence on the success or failure of what you are trying to achieve as a firm.

Next time, we can discuss more concretely how all of this, can improve decision-making and client service within your firm.