Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Random Justice

Voltaire wrote that “His Sacred Majesty Chance Decides Everything”. Neustadter comes to a similar conclusion in a fascinating paper entitled “Randomly Distributed Trial Court Justice: A Case Study and Siren from the Consumer Bankruptcy World” (h/t Credit Slips):

Between February 24, 2010 and April 23, 2012, Heritage Pacific Financial, L.L.C. (‘Heritage’), a debt buyer, mass produced and filed 218 essentially identical adversary proceedings in California bankruptcy courts against makers of promissory notes who had filed Chapter 7 or Chapter 13 bankruptcy petitions. Each complaint alleged Heritage’s acquisition of the notes in the secondary market and alleged the outstanding obligations on the notes to be nondischargeable under the Bankruptcy Code’s fraud exception to the bankruptcy discharge. …

Because the proceedings were essentially identical, they offer a rare laboratory for testing the extent to which our entry-level justice system measures up to our aspirations for ‘Equal Justice Under Law.’ …

The results in the Heritage adversary proceedings evidence a stunning and unacceptable level of randomly distributed justice at the trial court level, generated as much by the idiosyncratic behaviors of judges, lawyers, and parties as by even handed application of law …

Neustadter summarizes the outcome of these proceedings as follows (Table 1, page 20):

Recovery by Heritage Filed Settlement Agreements Heritage Requests Dismissal Dismissal for Other Reasons Default Judgments Summary Judgments Trials
Zero 49 26 12 N/A 4 3
Positive 103 ($1m) N/A N/A 10 ($0.9m) 1 ($0.06m) 2 ($0.2m)

I remember reading Max Weber’s Economy and Society decades ago and being fascinated by his argument that legal rights only increase the probability of certain outcomes (incidentally, Weber obtained a doctorate in law before becoming an economist and sociologist). Weber believed that the function of law in a modern economy was to make things more predictable, but by this also he only meant that probabilities could be attached to outcomes. I resisted Weber’s argument at that time, but over the course of time, I have come around to accepting them. In fact, I now think that it is only the conceit of false knowledge that leads to a belief that certainty is possible.

A greater degree of acceptance of randomness would make litigation a lot more efficient. In my view of things, a judge should be required to set a time limit for the amount of time to be devoted to a particular dispute (depending on the importance of the dispute). When that time has been spent, the judge should be able to say that he thinks there is say a 40% probability that the plaintiff is right and a 60% chance that the defendant is right. He should then draw a random number between 0 and 1; if the number that is drawn is less than 0.4, he should rule for the plaintiff, otherwise for the defendant. All litigation could be resolved in a time bound manner by this method. Even greater efficiency is possible by the use of the concepts of Expected Value of Perfect Information and Expected Value of Sample Information to decide when to terminate the hearings and proceed to drawing the random numbers. If an appeal process is desired, then of course the draw of the random number could be postponed until the appeal process is exhausted and the final value of the probability determined. In a blog post a couple of months ago, I have discussed cryptographic techniques to draw the random number in a completely transparent and non manipulable manner.

In my experience, there is enormous resistance to deciding anything by a draw of lots or other randomization technique though I believe that it is the most rational way of decision making. Instead society creates very complex mechanisms that lead effectively to a process of randomization based on which judge gets to hear the matter and what procedural or substantive legal provisions the judge or the lawyer is aware of. In fact, one way of making sense of the bewildering complexity of modern law is that it is just a very costly way of achieving randomization – if the law is too complex to be remembered by any individual, then what provision is remembered and applied is a matter of chance. That is how I interpret Neustadter’s findings.

In case you are wondering why I am discussing all this in a finance blog, let me remind you that the litigation in question was about recovery of defaulted debt and that is definitely a finance topic.


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