Number range CHAPTER© 2006 Thomson/West. No Claim to Orig. U.S. Govt.
Works.

65 UCHILR 571

65 U. Chi. L. Rev. 571

**(Cite as: 65 U. Chi. L. Rev. 571)**

\<KeyCite Citations\>

University of Chicago Law Review

Spring 1998

**\*571** A POSITIVE PSYCHOLOGICAL THEORY OF JUDGING IN HINDSIGHT

Jeffrey J. Rachlinski \[FNd1\]

Copyright © 1998 University of Chicago; Jeffrey J. Rachlinski

Nothing is so easy as to be wise after the event. \[FN1\]

Everyone is familiar with the feeling that they \"knew-it-all-along.\"
Events, especially tragedies, often feel as if they were predictable.
Folk wisdom admonishes us to distrust this sensation. We all know that
hindsight vision is \"20/20\" and that \"Monday morning quarterbacking\"
exaggerates one\'s ability to know the future. Learning how the story
ends makes the outcome seem inevitable and predictable, thereby
distorting our perception of what could have been predicted. Despite
this well-known obstacle to assessing the predictability of events
accurately, the law constantly requires courts to make such assessments.
Numerous legal judgments, from determining whether a tort defendant
failed to take reasonable care to whether a corporate officer committed
securities fraud by knowingly making false statements, require that a
judge or jury ignore what they have learned in hindsight. If the folk
wisdom is correct, these judgments should be distrusted. Our legal
system apparently relies on faulty judgments.

Research by cognitive psychologists supports the folk admonition against
trusting judgments made in hindsight. Beginning with the work of Baruch
Fischhoff, psychologists have demonstrated repeatedly that people
overstate the predictability of past events \[FN2\]\--a phenomenon that
psychologists have termed the \"hindsight bias.\" Fischhoff described
the bias as follows:

**\*572** In hindsight, people consistently exaggerate what could have
been anticipated in foresight. They not only tend to view what has
happened as having been inevitable but also to view it as having
appeared \'relatively inevitable\' before it happened. People believe
that others should have been able to anticipate events much better than
was actually the case. \[FN3\]

The hindsight bias clearly has implications for the legal system.
Consider, for example, the dilemma of a defendant who, despite taking
reasonable care, has caused an accident and has been sued. The
defendant\'s level of care will be reviewed by a judge or jury who
already knows that it proved inadequate to avoid the plaintiff\'s
injury. Consequently, the defendant\'s level of care will seem less
reasonable in hindsight than it did in foresight. \[FN4\] Reasonableness
must be determined from the perspective of the defendant at the time
that the precautions were taken, but the hindsight bias ensures that
subsequent events will influence that determination. The law relies on a
process that assigns liability in a biased manner.

So why does the law tolerate the presence of the hindsight bias? The
hindsight bias is well-understood, and the courts encounter it on a
daily basis. Is it possible that the legal system deliberately relies
upon faulty judgments? The potential consequences of the hindsight bias
make this question even more troublesome. The bias, in general, makes
defendants appear more culpable than they really are. \[FN5\] The bias
can cause judges and juries to find liable even those defendants who
attempted to avoid negligence by undertaking all reasonable precautions
in foresight. Not only does this seem unjust, but it also might have
adverse economic consequences. Any potential defendant who is aware of
the implications of the hindsight bias might try to avoid liability by
taking an excess of precautions. The hindsight bias thus suggests a
problem with the law and economics of negligence. **\*573** If, as many
law and economics scholars posit, the common law evolves towards
efficiency, \[FN6\] then why does it tolerate biased judgments that
create inefficiency? The puzzle goes beyond economics, however.
Liability judged in hindsight penalizes people who endeavor to comply
with what the law requires of them. The law seems to have settled upon a
method of determining liability that is neither efficient nor fair.

In fact, the law is not blind to the influence of the hindsight bias.
Many judicial opinions explicitly recognize the prejudicial aspects of
judging in hindsight, \[FN7\] but the influence of the hindsight bias is
difficult to avoid. The bias is caused by a deeply ingrained cognitive
process, as well as significant motivational forces. Consequently,
attempts to restructure decisions made in hindsight so as to avoid the
bias have all failed to eliminate its influence. This conclusion
suggests that a generic, one-size-fits-all remedy for 20/20 judgment in
hindsight is unlikely to be available to the legal system. Even though
courts recognize the presence of the bias, a solution to it might remain
elusive.

Furthermore, there might not be an overwhelming need to correct for the
hindsight bias. The impact of the bias on both efficiency and fairness
is less destructive than it seems at first glance. If the bias induces
judges and juries to hold liable defendants who actually took reasonable
care, then it converts a negligence rule into a rule of strict
liability. The situation is slightly more complicated than this, as
defendants can probably still avoid liability altogether by taking far
more precautions than reasonable care requires, but the resemblance is
close. Although strict liability and negligence do have different
economic consequences, strict liability does not create incentives for
potential defendants to undertake an excess of precautions. Thus, the
hindsight bias does not necessarily have adverse economic consequences.
As to fairness, although adopting a negligence rule that nevertheless
holds people strictly liable seems unjust, the injustice is hard to spot
in an individual case. The judge, jury, plaintiff, and even the
defendant view the events after the fact, and so holding a defendant
liable may seem like the right result. In fact, a correction for the
hindsight bias might seem unfair to the plaintiff, **\*574** because
everyone in the courtroom believes that the defendant was actually
negligent.

Despite calls for reforms to eliminate the influence of the hindsight
bias, \[FN8\] courts have already done a remarkable job of adapting to
the limitations of human judgment in hindsight. They have avoided
adopting generic solutions that psychological research predicts would be
unsuccessful. Instead, the courts have developed rules that take
advantage of specific opportunities to avoid the bias. For example, when
a reliable ex ante assessment of reasonable care is available, such as
custom in medical malpractice, courts rely on it rather than their own
independent assessment of reasonable care. Rules that avoid the more
pernicious aspects of the bias have also developed: rules such as the
inadmissibility of subsequent remedial measures as evidence of
negligence. \[FN9\]

In many circumstances, however, no mechanism to avoid or reduce the
influence of the hindsight bias is available and the law must pursue
some second-best course of action. It must tolerate biased assessments
of liability or create some form of immunity for potential defendants.
For example, in corporate law, the business judgment rule protects
corporate officers and directors from liability for negligent business
decisions because, in part, of the tendency for adverse outcomes to seem
inevitable. There is no such immunity for ordinary defendants in
negligence, who must tolerate biased assessments of liability. Both
rules are second best to using accurate assessments of negligence in
hindsight. The business judgment rule leaves shareholders subject to the
negligence of corporate managers. The tort system leaves defendants
subject to the overattributions of fault that hindsight produces,
leading to unfairness and possibly creating inefficient incentives. The
differences between the two areas of law can be explained by the
underlying differences in the activities combined with an understanding
of the hindsight bias. \[FN10\] Because the bias converts negligence
into a kind of strict liability, liability for negligence would
exacerbate corporate managers\' tendency to be more cautious than
shareholders want. The analysis in this Article shows that this biased
assessment of liability does not have such a pernicious impact on the
behavior of other types of professionals.

**\*575** Judicial opinions display a terrific understanding of the
implications of a biased assessment of liability. Rules have evolved
that reduce the bias\'s impact, and when its influence cannot be purged,
sensible second-best rules have emerged. The law has adapted well to the
fallibility of human judgment. As a consequence, understanding the
hindsight bias is also critical to understanding the law.

This thesis represents a perspective on the nature of cognitive biases
in law that differs markedly both from the law and economics and from
the law and psychology traditions. Law and economics theorists tend to
regard cognitive biases as phenomena that are either overstated or are
weeded out by market forces. \[FN11\] Law and psychology has a tradition
of criticizing the legal system for ignoring the findings of modern
psychology. \[FN12\] In the case of the hindsight bias, neither
perspective is accurate. Every piece of evidence suggests that the bias
has an important effect on judgments of liability in the legal system,
\[FN13\] and a careful analysis suggests that the legal system already
incorporates an understanding of the bias\'s implications.

This Article develops the thesis that the law reflects an understanding
of the hindsight bias. In Part I, it describes the psychological
research on judging in hindsight, with special attention to the sources
and explanations for the hindsight bias. Part II discusses the
application of the hindsight bias to judgments of liability and fault in
the legal system and concludes that the bias has a big impact on
judgments of liability. Part III analyzes the consequences of this
phenomenon for the legal system. Part IV **\*576** documents the
adaptations that the legal system has developed to accommodate the
hindsight bias, and Part V states conclusions.

I. Psychological Research on Judging in Hindsight

A. What Is the Hindsight Bias?

Research by cognitive psychologists has shown that the folk wisdom on
hindsight is correct\--past events seem more predictable than they
really were. Baruch Fischhoff provided the first systematic
demonstration of this phenomenon. \[FN14\] In his study, Fischhoff gave
undergraduate subjects a description of an unfamiliar, nineteenth
century war between the British and the Nepalese Gurkhas. \[FN15\] His
materials consisted of a 150-word description of the conflict, including
the strengths and weaknesses of each army. This description listed four
possible outcomes of the conflict (British victory, Gurkha victory,
stalemate with no peace settlement, and stalemate with a peace
settlement). The remainder of Fischhoff\'s materials split into five
different conditions. The materials either stated that one of the four
possible outcomes had actually occurred or provided no information about
the actual outcome. Subjects read the materials and then answered the
following question: \"In light of the information appearing in the
passage, what was the probability of occurrence of each of the four
possible outcomes . . . (?)\" \[FN16\] Subjects who were told that one
of the outcomes had occurred made inflated estimates of the ex ante
likelihood of that outcome (as compared with subjects who were given no
information about the outcome). In fact, the mean probabilities that
subjects assigned to the supposed outcome of the conflict summed to 170
percent, whereas they would have summed to approximately 100 percent if
knowing the outcome had not influenced the subjects. In this study, and
in the replications that Fischhoff ran with other scenarios, providing
subjects with an outcome increased their estimates of the likelihood of
that outcome by between 6.3 and 44.0 percentage points. \[FN17\]

It is important to distinguish between the hindsight bias and the more
ordinary process of learning from experience. In most **\*577**
circumstances, learning an outcome should cause people to update their
estimates of an event\'s likelihood. \[FN18\] If Fischhoff had asked his
subjects to estimate the probabilities of the possible outcomes of a
future conflict between the British and the Gurkhas, it would have been
appropriate for the subjects to suppose that history might repeat
itself. Fischhoff did not ask his subjects to predict a future event,
however; he asked them to judge the predictability of past events as if
they were ignorant of the known outcome. His subjects behaved as if they
were supposed to learn from the outcome, even though that was not their
chore.

Determining the predictability of once-future events is a somewhat
unnatural undertaking, \[FN19\] but Fischhoff\'s findings are not merely
the product of his subjects\' confusion. Using comparable materials,
Fischhoff provided subjects with an outcome and then asked them to
estimate the probability that other subjects, who were not informed of
the outcome, would have assigned to each possible outcome. \[FN20\] This
explicitly required the subjects to try to see the world through the
eyes of those who did not know how the events unfolded; however, they
were unable to do so. These subjects provided the same biased
assessments of what was predictable as did subjects in Fischhoff\'s
first study. \[FN21\]

Furthermore, other studies have demonstrated not only that people claim
that they would have known it all along, but also that they maintain
that they did, in fact, know it all along. \[FN22\] Researchers asked
subjects to estimate the likelihood of the outcome of some imminent
event (such as an election) and then, some time after the event, asked
the same subjects to remember their estimates. Although subjects in
these studies often correctly recalled their initial estimates, when
they erred, they tended to believe that they had assigned higher
estimates to the actual outcomes than they originally did. Dozens of
researchers have replicated Fischhoff\'s findings using both the \"I
would have predicted it\" **\*578** and the \"I did predict it\"
methods. The hindsight bias is not the unique product of an unusual
research methodology. \[FN23\]

Researchers also have used a wide range of different materials to
document the hindsight bias. Many studies in addition to Fischhoff\'s
original work have replicated his results with historic events,
including everything from Nixon\'s visit to China in 1972 to the riots
that followed the verdict in the first Rodney King case. \[FN24\] In
other studies, researchers have found that subjects also rate the
outcome of more ordinary events, such as whether a business would be
successful, as more predictable than they are. \[FN25\] Still other
studies have demonstrated that the hindsight bias makes significant
personal events, especially tragedies, seem predictable. \[FN26\]

The bias is not limited to specific populations of subjects, either.
Although most of the hindsight studies have relied on college
undergraduates in the United States, several have used students in other
countries, \[FN27\] and a few have used populations other than
undergraduates. \[FN28\] Studies even have demonstrated that the bias
influences the judgments of experts in several different **\*580**
fields. \[FN29\] Two studies have shown that even state and federal
judges are susceptible to the bias. \[FN30\]

Virtually every study on judging in hindsight has concluded that events
seem more predictable than they actually are. \[FN31\] The research on
judging in hindsight, taken as a whole, strongly supports Fischhoff\'s
conclusion that \"(f)inding out that an outcome has occurred increases
its perceived likelihood.\" \[FN32\] \"The overwhelming verdict . . . is
that the hindsight bias is a robust phenomenon that is not easily
eliminated or even moderated.\" \[FN33\] Thus, across a wide variety of
tasks, materials, and populations, a sizeable \[FN34\] and consistent
bias clouds judgments made in hindsight.

The hindsight bias also is related closely to a phenomenon known as the
\"outcome bias.\" \[FN35\] This refers to the tendency to base
assessments of a decision\'s quality on its consequences. \[FN36\]
Because the hindsight bias increases the perceived likelihood of a known
outcome, it makes decisionmakers appear as if they used inappropriate
probability estimates. The outcome, however, also has a direct influence
on the perceived quality of a decision, even apart from the outcome\'s
impact on perceived probabilities\--which is evidence of an outcome bias
independent of the hindsight bias. When decisions turn out badly, people
assume that decisionmakers made poor choices. \[FN37\]

**\*582** B. Causes of the Hindsight Bias

Why is a known outcome so difficult to ignore? Psychologists have
proposed three principal theories to explain the hindsight bias. Two
theories are motivational, meaning that they attribute the bias to
people\'s needs or desires, and the third theory is cognitive, meaning
that it attributes the bias to the mental strategies that people rely
upon when making judgments in hindsight. First, people want to see the
world as stable and predictable, and the hindsight bias is simply part
of more global coping mechanisms. Second, most people want others to
think of them as intelligent and perceptive, and so they exaggerate
their ability to predict outcomes. Finally, the cognitive theory
proposes that learning an outcome alters what people believe about the
world in ways that make the known outcome seem inevitable. Other
explanations have been proposed as well, but they have been rejected,
\[FN38\] leaving these three theories as the principal explanations for
the bias. Of the three, the cognitive theory provides the best account
of the hindsight bias, although motivational factors probably also
influence judgments made in hindsight.

1\. Theory one: the just world theory.

\"One undoubtedly feels more secure if the world seems like an orderly
and predictable place.\" \[FN39\] This desire manifests itself in a
belief called the \"just world theory.\" \[FN40\] Individuals who
subscribe to the just world theory believe that \"people usually get
what they deserve.\" \[FN41\] People differ in their tendency to believe
in a just world, but most subscribe to this belief to some degree. The
hindsight **\*583** bias seems closely related to the belief in a just
world. If a tragedy was foreseeable, then logically, its victims can be
blamed for failing to avoid it. \[FN42\] Attributing the hindsight bias
to the need to believe in a just world would also explain why the bias
seems especially pronounced for adverse events, \[FN43\] because people
presumably have a greater need to control adversity than good fortune.
\[FN44\] Even though some research shows that there is a positive
correlation between the hindsight bias and the belief in a just world,
this correlation is weak. \[FN45\] The need to see the world as stable
and orderly fails to completely account for the hindsight bias.

2\. Theory two: impression management.

Subjects in psychology experiments, as in most social settings, try to
avoid looking foolish\--a phenomenon known as \"impression management.\"
\[FN46\] Consequently, subjects in the hindsight studies might be
asserting that they could have predicted outcomes even if others could
not as part of an effort to show the experimenter (or other subjects or
themselves) that they are intelligent. Several findings, however, are
inconsistent with the impression management theory. Even when subjects
know that their responses are anonymous, they still exhibit a hindsight
bias. \[FN47\] Also, there is no correlation between the importance of
the materials to the subjects and the magnitude of the bias. \[FN48\]
Presumably, **\*584** the more significant that the materials are to
one\'s self-esteem, the more critical it would be to have accurately
predicted the outcome. Furthermore, increasing subjects\' motivation to
make accurate estimates reduces, but does not eliminate, the hindsight
bias. \[FN49\] Finally, in studies in which subjects had to recall the
estimates that they provided before they knew the outcome\--even though
the subjects were aware that the experimenter had recorded their
original estimates and that reporting biased recollections would only
make them look foolish\--they still exhibited a hindsight bias. \[FN50\]
Although impression management affects the size of the hindsight bias,
like the belief in a just world, it does not explain all of the data.
Overall, \"motivational factors do not appear to play a large role\" in
explaining the hindsight bias. \[FN51\]

3\. Theory three: cognitive explanations.

Motivational explanations thus being inadequate, the hindsight bias must
be the product of the thought process that people use to make judgments
in hindsight. Fischhoff\'s phrase, \"creeping determinism,\" itself
describes the cognitive theory that best explains the hindsight bias.
\[FN52\] According to this theory, people naturally integrate an outcome
and the events that preceded it into a coherent story. \[FN53\] In so
doing, they attribute the outcome to some of the precipitating
circumstances, making these circumstances seem more significant than
they appeared in foresight. \[FN54\] People also downplay the importance
of other antecedents that would have been likely to lead to alternative
outcomes. \[FN55\] For example, **\*585** in Fischhoff\'s original study
using the British-Gurkha conflict, subjects told that the British had
won rated the British advantages (better weapons and training) as more
relevant to the outcome than the Nepalese advantages (better motivation
and familiarity with the terrain). \[FN56\] These subjects probably also
concluded that training and weapons are more important to a military
victory under these circumstances than motivation and familiarity with
the terrain, and perhaps are more significant in warfare generally.
\[FN57\] These subjects naturally relied upon these inferences to judge
the likely outcome of the conflict. Even if people can suppress specific
knowledge of the outcome, they are unable to forget the insights
inferred from that outcome. \[FN58\] Consequently, the actual outcome
seems more likely after it is known than beforehand.

The creeping determinism theory has other support in the literature.
Materials that directly attribute the outcome to an occurrence unrelated
to any of the antecedents do not produce a hindsight bias. \[FN59\] For
example, subjects reading the British-Gurkha conflict who were told that
the Nepalese won due to a freak snow storm did not rate a Nepalese
victory as more likely than subjects who were not told the outcome of
the conflict. \[FN60\] Creeping determinism also explains why adding
more information increases the size of the bias; \[FN61\] the more
antecedent facts that can be integrated into an explanation for the
outcome, the more inevitable it will seem. This theory also accounts for
the finding that materials describing the occurrence of an event produce
**\*586** a larger hindsight bias than materials stating that an event
did not occur; \[FN62\] occurrences are generally easier to explain than
nonoccurrences. More so than any of the motivational theories,
Fischhoff\'s original hypothesis seems to account for the pattern of
data in the literature on the hindsight bias.

Other cognitive factors also may be at work. Some researchers have
attributed at least part of the hindsight bias to selective memory for
those antecedent events that would make the known outcome seem more
likely. \[FN63\] Although Fischhoff found no evidence to support this
hypothesis, \[FN64\] the results of one other study did support it.
\[FN65\] Selective memory and attention to various antecedent events may
also be a cognitive cause of the hindsight bias, but this has yet to be
sufficiently tested.

C. Debiasing

Fischhoff\'s demonstration of the hindsight bias was followed by a
series of efforts to find a successful debiasing strategy\--a way of
evaluating the predictability of past events accurately. These efforts
have been unsuccessful. Because motivational factors only partly account
for the bias, attempts to increase people\'s incentives to make accurate
judgments, such as paying subjects for correct estimates \[FN66\] or
urging them to \"try harder,\" \[FN67\] reduce the bias only slightly.
The bias is primarily a product of cognitive processes, and only
procedures that alter the mental strategies used to make judgments in
hindsight have any chance of producing unbiased evaluations.

Psychologists have tried a number of different cognitive strategies to
avoid the hindsight bias. Simple remedies, such as informing people
about the bias \[FN68\] and giving subjects repeated attempts to make
judgments with feedback, \[FN69\] have no effect. Several studies have
reliably reduced the bias by restructuring the decisionmaking task so as
to force people to \"unlearn\" what the outcome has taught them about
the antecedent events. Slovic and **\*587** Fischhoff asked subjects to
determine whether they would be able to explain the alternative outcome
if it had occurred. \[FN70\] Fischhoff and his colleagues had subjects
draw out a \"fault tree\" for all possible outcomes before assigning
probabilities to these outcomes. \[FN71\] Davies had subjects, in
foresight, make notes on their efforts to generate the likelihood of the
various outcomes and then had the subjects review these notes before
trying to recall these likelihood estimates in hindsight. \[FN72\] In
one study, researchers had subjects generate their own descriptions of
the possible outcomes. \[FN73\] Finally, several researchers have tried
asking subjects to provide reasons for their probability assessments.
\[FN74\] All of these methods forced the subjects to rethink the
inferences that they made upon learning the outcome and demonstrated to
them that other inferences remained plausible. Nevertheless, the
subjects, judging in hindsight, still knew that there was but a single
reality. Inevitably, they assigned more weight to that reality and the
inferences that it inspired. As a result, these techniques reduced the
size of the hindsight bias but did not produce completely unbiased
judgments. \[FN75\] Complete elimination of the bias has eluded
psychologists.

Thus, the psychological research demonstrates that the hindsight bias is
an extremely robust phenomenon. It influences judgments made in many
different settings by many different types of people. The bias is also
large enough to have an important impact on the legal system and has
been shown to affect the two kinds of decisionmakers upon which the
legal system relies\-- groups (juries) \[FN76\] and experienced
decisionmakers (judges). \[FN77\] The **\*588** bias is a product of the
normal process of integrating feedback into our understanding of the
world and updating our beliefs. As such, it resists efforts to avoid it.
No matter how a judgment made in hindsight is restructured, the feeling
that an outcome was both inevitable and predictable is impossible to
avoid. Because courts primarily judge in hindsight, the bias might exert
tremendous influence on judgments in the legal system.

II\. The Hindsight Bias in Legal Decisions

A. Studies of the Hindsight Bias and Legal Culpability

The research on the hindsight bias shows that people blame others for
failing to have predicted adverse outcomes that could not have been
predicted. \[FN78\] Two studies, one by Susan and Gary LaBine \[FN79\]
and another by Kim Kamin and me, \[FN80\] demonstrate explicitly that
the bias even causes people to hold decisionmakers legally liable for
outcomes that they could not have predicted. In **\*589** their study,
the LaBines presented subjects with six case histories of mentally ill
patients, each of which suggested some probability of violent behavior.
In each case, a psychotherapist treating the patient took a precaution
against violence (for example, alerting police or warning potential
victims) that had been endorsed by a majority of professional
psychotherapists in a previous survey. The patient either did or did not
commit violence. Subjects who read that the patient later committed a
violent act were more likely to conclude that: the therapist had failed
to take reasonable precautions; the therapist should have done more to
prevent possible violence; they themselves would have been able to
predict the violence (even though the subjects were not mental health
professionals); and the violent act was foreseeable. \[FN81\] Most
importantly, nearly one in four of these subjects concluded that the
therapist was legally negligent for failing to prevent the violence.
Because of the scenario\'s outcome, one-quarter of the subjects judged
therapists who had followed a widely approved standard of treatment as
negligent. \[FN82\]

In the study that Kamin and I conducted, subjects were randomly assigned
either to make a decision in foresight as to whether a municipality
should take a precaution against flooding or to judge in hindsight
whether a decision not to take the same precaution was negligent.
\[FN83\] In foresight, the subjects listened to an audio-taped debate of
a municipal planning meeting that described the circumstances of the
decision. The materials instructed subjects that they were to listen to
the evidence and to decide whether the precaution should be taken based
on a cost-benefit analysis akin to Judge Learned Hand\'s formula for
negligence. \[FN84\] The subjects were provided with the costs of the
flood and the precaution (\$1,000,000 and \$100,000, respectively), as
well as meteorological and anecdotal data. The subjects were then asked
to estimate the annual probability of a flood without the precaution.
\[FN85\] The materials instructed the subjects that, if they found
**\*590** that the probability of a flood was greater than 10 percent,
they should decide in favor of taking the precaution; otherwise, they
should decide against taking it.

The hindsight materials provided similar information, except that they
described a jury trial, rather than a planning meeting, and all of the
events had already occurred. The materials stated that the defendant had
decided not to take the precautions, which had then resulted in \$1
million in flood damage to the property of the plaintiff, an upstream
landowner. The instructions stated that if, given the information
available to the defendant before the flood, the likelihood of a flood
each year was greater than 10 percent, then they should find the
defendant liable; otherwise, the subjects should find the defendant not
liable. The hindsight condition was identical to the foresight condition
in almost all other respects. The two conditions produced markedly
different results, however. In foresight only 24 percent of the subjects
decided that the potential for harm merited taking the precaution; in
hindsight, however, 57 percent of the subjects found a decision not to
take the precaution negligent. \[FN86\] Just as in the LaBines\' study,
in hindsight people deemed as negligent a response that they would have
endorsed in foresight.

B. What Types of Judgments Does the Hindsight Bias Affect?

Courts\' ex post judgments of ex ante decisions fall into three
categories: (1) judgments under objective (\"should have known\")
standards; (2) judgments under subjective (\"did know\") standards; and
(3) judgments of what was foreseeable. The hindsight bias probably
influences all three of these, albeit in slightly different ways. Courts
also make many judgments in hindsight that do not require an evaluation
of ex ante decisions and are therefore not subject to the influence of
the hindsight bias. \[FN87\]

**\*591** 1. Objective standards.

Of these three types of judgments, research on the hindsight bias most
directly implicates objective standards. When a court must determine
what someone \"knew or should have known,\" it is especially likely to
fall prey to the hindsight bias. Consider the assessment of negligence
in a tort action as an example. A defendant\'s conduct was negligent if
it created an \"unreasonable risk of harm\" to others, \[FN88\] \"which
the actor should recognize at the time of his action or inaction.\"
\[FN89\] The determination of whether a defendant\'s conduct was
unreasonable is necessarily made after the consequences of an actor\'s
conduct are known, but this knowledge is not supposed to influence the
determination of reasonableness. As Prosser and Keeton explain:

The actor\'s conduct must be judged in the light of the possibilities
apparent to him at the time, and not by looking backward \'with wisdom
born of the event.\' The standard is one of conduct, rather than of
consequences. It is not enough that everyone can see now that the risk
(of harm) was great, if it was not apparent when the conduct occurred.
\[FN90\]

Unfortunately, people always judge conduct on its consequences. \[FN91\]
The legal formulation of negligence requires a trier of fact to do
something that people cannot do\--see the world through the eyes of the
defendant before the adverse outcome occurred. Judgments made under
objective standards, such as a determination of negligence in tort,
invite the hindsight bias\'s influence.

**\*592** 2. Subjective standards.

The hindsight bias also might influence subjective evaluations. Judges
and juries might infer that because something was predictable, it was,
in fact, actually predicted. Consider the example of liability for fraud
under the federal securities laws. \[FN92\] A company that fails to meet
its quarterly earnings projection might find that its stock price drops
when this news is announced, and the managers of such a company might be
sued. \[FN93\] The bias might make it easier for the plaintiff to prove
that the defendants knew the earnings projection was overly optimistic.
This is true even if the defendants did not, in fact, know the
projection was overly optimistic.

Empirical data documenting this tendency are lacking, however. Although
the hindsight bias induces people to blame others for misfortune, it is
not clear whether this occurs because people assume that the victims of
misfortune actually \"knew\" that they were facing potential adversity
and failed to avoid it, or merely \"should have known\" that they were
facing potential adversity. Fischhoff did demonstrate that the hindsight
bias influences people\'s estimates of the beliefs that others hold
about likely outcomes, \[FN94\] but no one has empirically linked this
phenomenon to mistaken attributions of intentional misconduct. Research
on the hindsight bias strongly suggests that people will impute
knowledge to others, but conclusive evidence is as yet unavailable. Even
if subjective standards invite biased judgments, the hindsight bias
probably has less influence on judgments made under subjective standards
than it does on judgments made under objective standards. In a case
judged under a subjective standard, evidence of a defendant\'s actual
state of mind may be available in the form of notes or comments that the
defendant made at the time the event occurred. The bias may color a
factfinder\'s view of this evidence, but probably not as easily as it
colors a judgment as to what a defendant should have known. \[FN95\]

**\*593** 3. Foreseeability.

Finally, many areas of law require courts to determine what was
\"foreseeable.\" As distinguished from the objective standard of
liability, foreseeability is qualitative. It refers to a range of
possible occurrences rather than to the likelihood that any of these
occurrences will come to pass. For example, in products liability, a
manufacturer can be liable for injuries to a plaintiff who engaged in
\"foreseeable misuse\" of a product. \[FN96\]

More generally in tort, a defendant is only liable for damages to
foreseeable plaintiffs. \[FN97\] Intuitively, it seems likely that once
the outcome is known, the hindsight bias will make the outcome appear
more foreseeable. Even more so than the subjective hindsight problems,
however, this theory lacks data. Studies on the hindsight bias have
documented its influence on probability estimates, not on what could
have been envisioned. No one has conducted a careful study of exactly
what makes an outcome seem \"foreseeable\" as opposed to
\"predictable.\" \[FN98\]

4\. Summary.

The remainder of this Article is devoted largely to the problem of the
hindsight bias\'s influence on objective standards within the law. Here
the analysis is reasonably clear. In the case of objective judgments,
the legal system asks judges and juries to make determinations that
closely resemble the questions that psychologists have used in their
materials. Good faith assessments of what constitutes a reasonable
course of action in foresight can easily be judged unreasonable in
hindsight. Although the hindsight bias also might affect judgments of
subjective knowledge or foreseeability, these theories lack empirical
support. Because it seems likely that the bias does affect these two
**\*594** types of judgments, however, this Article also includes an
application of the bias to an issue judged under a subjective standard
(in federal securities law) and to an issue of foreseeability (in patent
law).

C. Countervailing Influences

In some circumstances, the hindsight bias might not have as significant
an impact on the legal system as expected. The influence of the bias can
be blunted by other factors or it can affect both parties to a lawsuit.
For example, in tort cases, although the bias probably makes it easier
for plaintiffs to prevail, tort plaintiffs generally face fairly
significant hurdles to filing a lawsuit and building a case. \[FN99\] In
fact, few victims of negligence actually sue. \[FN100\] In addition,
tort plaintiffs also might face other psychological biases in the
courtroom that make it difficult for them to prevail. \[FN101\]

Furthermore, the availability of comparative negligence as a defense
might result in a process that is influenced by the bias, but that
nevertheless produces unbiased judgments. If the negligence of both
parties is at issue, then the defendant might benefit **\*595** from the
bias in roughly the same proportion as the plaintiff. A judge or jury
might condemn both litigants in a tort suit for failing to apprehend the
true probability of potential injury\-- thereby leading, on balance, to
an unbiased assignment of fault. Thus, in cases judged under a
comparative fault rule, the hindsight bias might not have much impact on
judgment or might even favor defendants. In these cases, the judgment
might be doubly biased, resulting in a final determination approximating
an accurate apportionment of fault. In a system in which the plaintiffs
who are found negligent may not recover (contributory negligence),
\[FN102\] the bias may put the plaintiff at a comparative disadvantage
to the defendant. \[FN103\] These effects are speculative, because no
research is available on whether the hindsight bias has more effect in
judgments of the plaintiffs\' or defendants\' actions. \[FN104\]

III\. The Consequences of Biased Judgments in Hindsight

Although direct evidence of the hindsight bias in actual cases is
unavailable, nothing about the transition from the laboratory to the
courtroom suggests that judgments in actual cases are free from the
influence of the hindsight bias. \[FN105\] The bias is large enough to
be of concern to the legal system. Furthermore, there is no evidence
that the use of groups (juries) or experienced decisionmakers (judges)
helps avert the bias. Even in circumstances in which the bias affects
both sides of a lawsuit, it is still a powerful force in litigation.
Legal judgments made under objective standards are, therefore, probably
tainted by the hindsight bias, thereby resulting in incorrect judgments
of liability.

**\*596** Mistakes are doubtlessly common in the legal system and
probably do not have significant adverse consequences on the system as a
whole. \[FN106\] Systematic errors, however, are more worrisome. They
can prejudice a particular group or class and can undermine the law\'s
ability to induce potential defendants to take reasonable precautions
against injuring others. \[FN107\] The hindsight bias is a systematic
error with the capacity to distort the legal system in undesirable ways.

A. The Economic Consequences of the Hindsight Bias

Intuitively, treating parties as if they were negligent even though they
took reasonable precautions seems likely to have adverse economic
consequences. Holding defendants who were not negligent liable, however,
is nothing more pernicious than a system of strict liability. In effect,
the hindsight bias converts the negligence standard into a de facto
system of strict liability. Negligence judgments influenced by the
hindsight bias should therefore have economic consequences similar to
those of a system of strict liability.

Strict liability does not create incentives for potential defendants to
take an excess of precautions. \[FN108\] Under both negligence and
strict liability, potential defendants minimize their costs by taking
all socially efficient precautions. Both systems would appear to create
adequate incentives to take efficient precautions. There are, however,
two caveats. First, the possibility that the defendant or the ultimate
trier of fact will make errors in determining due care might, in a
negligence system, cause potential defendants to undertake an
inefficient excess of precautions. Defendants experience a sharp benefit
from increasing their precautions from just below reasonable care to
just above it. Therefore, if there is any uncertainty about what
constitutes reasonable care, defendants should err in favor of an excess
of precautions. \[FN109\] Second, because strict liability forces
potential defendants to pay **\*597** for all of the injuries that
result from an activity, as opposed to only those that result from
negligence, an activity is more expensive under strict liability than
under negligence. \[FN110\] With the exception of these two issues,
however, classic law and economics models of liability suggest that a
system of strict liability would closely resemble a system of
negligence.

The hindsight bias changes the economic comparison between negligence
and strict liability. A system of negligence judged with the hindsight
bias is similar to, but not the same as, a system of strict liability;
it is essentially a \"quasi-strict\" liability rule. The bias causes
courts to hold defendants who took reasonable care liable, much as they
would under a strict liability rule. But, because even a biased
assessment of reasonable care can result in a finding that the defendant
was not negligent, the two systems differ somewhat. Defendants who have
taken precautions that are far greater than reasonableness requires (as
determined in foresight) probably still will be free from liability, in
spite of the bias. Defendants who have taken precautions that are barely
adequate probably will be found negligent because of the hindsight bias.
The amount that potential defendants will have to spend beyond the
socially efficient level of care to be free from liability depends upon
the size of the bias, the costs of the excess precautions, and the
impact of these precautions on the probability of an adverse outcome. If
the savings that potential defendants realize from taking enough
precautions to be immune from \"quasi-strict\" liability exceed the
costs of these precautions, then defendants will take this socially
excessive level of precautions.

A negligence rule judged in hindsight will not necessarily produce a
socially inefficient result, however. When the costs of the excess
precautions are greater than the savings from being found not liable,
potential defendants will minimize their costs at the socially efficient
level of precautions, even though they will have to pay for the damages
that the plaintiffs suffer. \[FN111\]

**\*598** Figure 1 depicts this by graphing the costs that the liability
system, judged in hindsight, will likely impose on potential defendants.
The X axis represents the level of precautions the defendant may take
and the Y axis indicates the cost of accidents and precautions.
Defendants who are judged non-negligent pay only for the cost of the
precautions, while defendants who are judged negligent pay for the cost
of the precautions plus the damages caused to the plaintiffs. Total
social costs (the cost of the accident plus the cost of the precautions)
are at their lowest at point P on the graph. Under the conventional
economic analysis, defendants are not negligent if they take a level of
care of at least that marked by point P. They minimize their costs at
point P under either a negligence or strict liability rule\--the only
difference being that under a negligence rule, their costs are Q1 while
under a strict liability regime their costs are Q3 .

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE

The hindsight bias increases the level of care at which courts judge
defendants not negligent. Therefore, if the bias moves this point to H1,
defendants who only take the socially efficient level of care (P) will
have to pay for both the cost of the precautions and the cost of the
accident (Q3) just as defendants do in strict liability. However, if the
defendants take the higher level of care (H1), they will be required to
pay only for the cost of the precautions (Q2). Thus, because their
overall costs will be less, the defendants will take the higher level of
care (H1). The private savings that these defendants realize from taking
an excess of precautions **\*599** outweigh the private costs of these
precautions, leading to incentives for defendants to be inefficient. If
the effect of the hindsight bias is larger than this, however, and
courts exonerate only defendants who take a level of care of at least
that marked by point H2, defendants will now minimize their costs at the
efficient level of P. This is because, at H2, defendants pay Q4 in costs
for precautions, which exceeds Q3 .

Thus, the presence of the hindsight bias in the negligence system has an
indeterminate effect on incentives to take adequate precautions. If the
consequences of the bias are so severe as to make negligence resemble
strict liability, it might produce incentives to be efficient. Under
different conditions, however, it also might create incentives to take
an excess of care. Neither common law judges nor legislators are likely
to have the capacity to distinguish which of these two situations any
class of cases follows. It would take a wealth of econometric data on
the cost of accidents and precautions, along with a precise
quantification of the hindsight bias and its relationship to these
precautions, in order to determine whether judging negligence in
hindsight creates incentives to take an excess of precautions in any
given context. It would be difficult, if not impossible, for a court to
determine whether negligence judged in hindsight creates inefficient
incentives. \[FN112\] Therefore, retaining a negligence system, despite
its biases in judgment, might be the optimum, albeit imperfect,
alternative for courts to pursue.

The hindsight bias might have another unintended economic effect. As
noted above, conventional economic analysis concludes that strict
liability imposes higher costs on potential defendants than negligence
does. \[FN113\] Incorporating the hindsight bias into the analysis,
however, either reduces or eliminates this difference. If the
relationship between accidents, precautions, and the hindsight bias
induces defendants to take an excess of precautions, potential
defendants will face somewhat higher costs than an analysis without the
hindsight bias predicts. Specifically, they will have to pay for the
excess of precautions needed in order to avoid liability.

**\*600** If the relationship between accidents, precautions, and the
hindsight bias induces defendants to take the efficient level of
precautions, however, then both negligence and strict liability impose
the same costs on defendants. Under these circumstances, regardless of
the rule, defendants will take only reasonable care and incur liability
for the costs of the accidents that their activity causes. If the cost
of the excess precautions exceeds the savings in liability that
defendants realize, then the choice between negligence and strict
liability has no effect on the social cost of the underlying activity.
\[FN114\]

A system that produced unbiased judgments would, therefore, avoid one of
two adverse economic consequences of the hindsight bias. \[FN115\]
First, unbiased judgments would avoid the possibility that the hindsight
bias would create incentives to undertake an excess of precautions.
Second, in those circumstances in which judging negligence in hindsight
produces the same incentives as strict liability, the costs of de facto
strict liability might make the underlying activity undesirably
expensive. Regardless of whether the cost of excess precautions exceeds
the savings in liability to the defendant, judging negligence in
hindsight is second best to an unbiased system.

B. Fairness and the Hindsight Bias

Economics aside, the hindsight bias might simply make judging liability
in hindsight unfair. The bias seems to produce unjust results; it
ensures that potential defendants cannot rely on the legal standard to
avoid liability. Hindsight, in effect, raises the bar after an accident.
Shifting legal standards have long been identified as inequitable. As a
seventeenth century court put it: \"a law which a man cannot obey, nor
act according to it, is void and no law.\" \[FN116\] Subjecting parties
to standards that increase after the fact resembles ex post facto laws.
In the criminal context, the United States Constitution expressly
forbids ex post facto laws \[FN117\] because the \"(f)ramers sought to
assure that legislative acts give fair warning of their effect and
permit individuals to rely on their meaning until explicitly changed.\"
\[FN118\] The bias converts an announced negligence rule into a strict
liability rule in application. An incongruence \"between the rules as
announced and their actual administration\" such as this smacks of
injustice. \[FN119\]

Liability judged in hindsight, however, is less unjust in practice than
this analysis suggests. No court has access to the kind of information
that would indicate that its judgment is biased by hindsight. A
demonstration of the hindsight bias requires comparing the probability
estimates of people who learn that a decision turned out badly with the
estimates of those who do not know the consequences of that decision. In
contrast, judges and juries know only their own probability estimates,
made in hindsight. With only half of the picture, a court might be
unaware of the influence that the hindsight bias has on its assessment
of a party\'s ex ante actions. Although people generally are aware of
the bias, at the same time they believe that they have assessed the
predictability of the events correctly. \[FN120\] Any single case will
appear to have been correctly and fairly adjudicated. In fact, a
correction might seem less fair than an uncorrected, biased judgment.

Imagine a case in which a defendant has taken slightly more precautions
than reasonable care, as judged in foresight, requires. Suppose that the
hindsight bias causes people judging in hindsight to exaggerate the ex
ante probability of the adverse outcome, and as a result, the jury finds
the defendant negligent. A correction for the hindsight bias would
require that this defendant be exonerated, despite the fact that the
judge, jury, plaintiff, and maybe the defendant now believe that the
defendant was negligent. Rather than the biased hindsight judgment
seeming unfair, a judgment corrected for the hindsight bias would seem
unfair, especially if the case involves a severely injured tort
plaintiff.

Furthermore, potential defendants should understand that, if their
actions injure another, a court necessarily will judge them in
hindsight. Potential defendants can either adjust their level of care to
avoid liability by taking a slight excess of precautions, or they can
act as if they will be judged under a standard of strict liability.
**\*602** Although the hindsight bias creates an incongruence between
the law as announced and the law as applied, it is neither an
unpredictable nor an unexpected incongruence. Biased assessments in
hindsight are well-understood, and it is therefore not necessarily
unfair to subject potential defendants to them.

Nevertheless, an unbiased judgment clearly would be superior to a biased
one. Over time, repeat players might notice the tendency of biased
judgments to raise standards after the fact, as might judges. This could
undermine the perceived fairness of the system of civil liability.
Furthermore, the choice of a negligence system rather than a strict
liability system might reflect a careful balancing of the liberty
interests of the injurers against the security interests of the victims
\[FN121\]\--a balance that the hindsight bias disrupts. In addition to
economic superiority, a stable standard probably would be more fair,
even if correcting for the hindsight bias would make individual
applications seem unfair.

IV\. Adaptations in the Legal System

Long before empirical studies proved its existence, the hindsight bias
has been part of folk wisdom. Therefore, it seems likely that the legal
system has developed adaptations to the bias\'s influence. Avoiding the
influence of the hindsight bias altogether, however, is probably
impossible. Because the bias is so deeply ingrained into the human
judgment process, psychologists have been unable to develop a way to
induce people to make unbiased ex post judgments of ex ante
probabilities. Even if courts understand that judging liability in
hindsight generates biased results, they might be powerless to do
anything about it. Although general procedures that avoid the bias in
all cases are unlikely to be available, in some specific circumstances,
the courts have opportunities to reduce the bias\'s influence. In most
cases, however, because the bias makes accurate judgments unavailable,
the courts must struggle to develop a second-best method of assigning
liability.

A. General Procedures to Avoid Biased Judgments

Judicial instructions, suppression of evidence, and the standard of
persuasion are the usual \"quality control\" mechanisms for judgment in
the courtroom. To aid a jury in reaching a rational decision, the judge
structures the trial and provides instructions **\*603** on how to
decide the case. Judges also suppress misleading evidence. \[FN122\] The
standard of persuasion also is set so as to advance rational functioning
of the legal system. None of these methods, however, can be used to
ameliorate the hindsight bias satisfactorily.

Psychologists have uncovered no way to instruct people on how to
evaluate decisions in hindsight in a way that completely avoids the
hindsight bias. Judicial instructions are unlikely to include a
mechanism that would fare any better. The study that Kamin and I
conducted shows how difficult it would be to use judicial instructions
that even partially debias judgments made in hindsight. \[FN123\] In
addition to measuring the influence of hindsight on judgments of
negligence, this study tested a debiasing strategy using judicial
instructions. The materials in this study warned half of the subjects in
the trial that \"a fair determination of probability may be difficult\"
because \"hindsight vision is always 20/20.\" \[FN124\] The materials
instructed the subjects to \"take a moment to think of all the ways in
which the event in question may have happened differently or not at
all.\" \[FN125\] This debiasing procedure had no effect. \[FN126\]

Passive debiasing instructions, such as those used by Kamin and me, are
insufficiently intrusive to counteract the hindsight bias. The effective
strategies that psychologists have used to reduce the bias all require
much more invasive procedures, such as drafting a fault tree \[FN127\]
or considering and explaining alternative outcomes. Because they are so
intrusive, these procedures may not be suitable for the courtroom. The
debiasing procedures that psychologists have found to be partly
successful surpass the traditional techniques that courts use to control
jury decisionmaking. Furthermore, even if a debiasing technique could be
successfully shoe-horned into the trial context, it would still only
partly reduce the effect. No strategy has been found for completely
avoiding the bias.

In fact, courts do not attempt to use judicial instructions as a means
of debiasing jurors. Instructions typically ask for unbiased ex post
judgments of ex ante probabilities without suggesting how to accomplish
this complex cognitive task. For example, the California Bar Association
Jury Instructions (\"BAJI\") simply require **\*604** juries in
negligence cases to evaluate whether \"a person of ordinary prudence . .
. in the same situation and possessed of the same knowledge . . . would
have foreseen or anticipated that someone might have been injured by . .
. his action or inaction.\" \[FN128\] The BAJI do not even recommend
that a court give so much as a warning to the jury as to the difficulty
of making this assessment, much less include a debiasing instruction.
Other jurisdictions follow similar patterns. \[FN129\] Jury instruction
manuals lack general instructions on how to avoid the hindsight bias,
even though they include instructions that require juries to make
judgments that will almost certainly be biased. \[FN130\]

Another procedure, which is somewhat more invasive than judicial
instructions, is also available to the courts\--special verdict forms.
\[FN131\] Special verdict forms break down the facts needed to support a
cause of action or a defense into separate findings for a jury.
\[FN132\] Even this procedure is far less invasive than the
psychologists\' debiasing strategies, however. Special verdict forms
merely require yes or no responses; they do not demand detailed
explanations and do not ask juries explicitly to consider alternative
accounts or \"fault trees.\" In fact, courts do not use special verdict
forms as a debiasing technique. Instead, they use them to ensure that
the jury understands the separate elements of the cause of action and to
narrow the issues for a retrial in the event of a successful appeal.
\[FN133\] Modifying special verdict forms to incorporate debiasing would
be a significant departure from past practices. Such modifications would
unduly intrude on the deliberative process of the jury and possibly run
afoul of the Seventh Amendment guarantee of the right to a civil jury.
\[FN134\] Furthermore, the empirical **\*605** evidence on special
verdict forms suggests that they have little effect on jury
decisionmaking. \[FN135\]

Another common legal mechanism for avoiding bias and
prejudice\--suppressing evidence\--probably cannot cure the hindsight
bias. To avoid the influence of the bias, the evidence that needs to be
suppressed is the very fact that some adverse event led to a lawsuit.
Courts have used juries to make findings of fact in the absence of both
the injured parties and descriptions of their injuries. \[FN136\] This
kind of bifurcation of a trial does seem to affect jury decisionmaking;
\[FN137\] thus, some have advocated using bifurcation procedures to
eliminate the influence of the hindsight bias. \[FN138\] Even in these
bifurcated trials, however, juries cannot remain completely unaware of
the existence of injured plaintiffs. \[FN139\] In some circumstances,
courts do suppress evidence that would exacerbate the impact of the
hindsight bias on judgment; \[FN140\] evidence that would create the
conditions for biased judgment, however, cannot be eliminated from the
trial process. Hiding the extent of injuries will not eliminate the
hindsight bias, because the severity of the outcome does not alter the
bias\'s influence on assessments of responsibility. \[FN141\] The mere
fact of an adverse outcome creates a biased judgment, and this fact
cannot be suppressed from evidence or eliminated from the jury\'s
knowledge by a special procedure.

Allocating the burden of persuasion against the party likely to benefit
from the hindsight bias could compensate for its influence. **\*606** In
most civil cases, the plaintiff is, in fact, both the primary
beneficiary of the influence of the hindsight bias and the party that
must carry the burden of persuasion. The most common standard of
persuasion, however, \"preponderance of the evidence,\" is probably too
low to compensate for the bias. As applied to a determination of
negligence, for example, the plaintiff must show that it is more likely
than not that the defendant failed to exercise reasonable care. This
requirement makes it slightly more difficult for the plaintiff to win
the case, but the hindsight bias easily dwarfs the effect that this
standard has on the judgment. The bias gives an average of a 15 percent
\"boost\" to the assessed probability in foresight \[FN142\]\--easily
enough to enable the plaintiff to surmount the 50 percent threshold
needed to establish liability in a close case. \[FN143\]

Raising the standard of persuasion, by requiring \"clear and convincing
evidence\" for findings that the bias is likely to affect, might undo
its impact on the judgment. Increasing the standard of persuasion is
rare in civil cases, but courts allow it in instances where \"there is
thought to be special danger of deception, or where the court considers
that the particular type of claim should be disfavored on public policy
grounds.\" \[FN144\] This description implies that the standard should
be used to eliminate bias, but increasing the standard of persuasion
would be an inappropriate response to the hindsight bias. As a
preliminary matter, it is not entirely clear that the standard of
persuasion actually influences the outcome of cases. \[FN145\] Even if
raising the standard would make it more difficult for a party relying on
the hindsight bias to win a case, this reform would treat the symptom
and not the disease. The effect of increasing the standard would be
unlikely to match the effect of the hindsight bias perfectly. It might
overcompensate **\*607** for the bias. Raising the standard of
persuasion to \"clear and convincing evidence\" might make it too
difficult for plaintiffs to win against defendants who were in fact
negligent. \[FN146\]

For example, imagine a negligence case in which the costs and benefits
of precautions and accidents are such that a defendant should be found
liable if the probability of an accident is 20 percent or greater.
Suppose that the defendant determines in foresight (in good faith) that
the probability of an accident is only 10 percent. If the hindsight bias
makes an ex ante probability estimate of 10 percent look like it should
have been 25 percent, in the event of an accident this defendant is
likely to be improperly judged negligent under the preponderance of the
evidence standard. Suppose further that raising the standard of
liability to \"clear and convincing evidence\" makes the jury more
skeptical; so much so that they now demand a showing that the actual
probability of an accident was 50 percent in order to find the defendant
negligent. The defendant in this example will now properly be
exonerated, but the standard is so high that any defendant who faced
potential accidents with ex ante likelihoods of between 20 percent and
35 percent would be incorrectly found not liable. If many more potential
defendants in similar circumstances face accidents with likelihoods of
between 20 percent and 35 percent than face accidents with likelihoods
of between 5 percent and 20 percent, then elevating the standard of
proof to require \"clear and convincing evidence\" will increase the
number of incorrect results. Raising the standard creates the potential
for more errors in judgment than the hindsight bias caused. It is
perhaps not surprising then that courts do not manipulate the standard
of persuasion as a means of avoiding the hindsight bias.

B. Remedies for the Hindsight Bias in Specific Circumstances

The usual methods for promoting rational decisionmaking in the courtroom
are unlikely to eliminate the influence of the hindsight bias on
judgments. Courts do not even attempt to issue instructions that might
reduce the bias; they could not suppress enough evidence to avoid the
bias; and increasing the burden of proof risks increasing the likelihood
of error. This is not to say that the courts are ignorant of the
hindsight bias or completely impotent to respond to it. In certain
circumstances the courts can, and do, use techniques to avoid rendering
biased judgments or to reduce the effect of the hindsight bias. Several
examples support **\*608** the theory that courts do understand the
hindsight bias and correct for it when it is possible to do so.

1\. Compliance with ex ante norms.

A reliable judgment of reasonable care that was made before an accident
has occurred is sometimes available. Many customary practices within an
industry or a profession are attempts to identify precautions that
constitute a reasonable level of care. So are many government safety
regulations. In such cases, rather than conducting an open-ended inquiry
into whether a defendant took reasonable precautions, a court could
assess whether the defendant complied with the relevant custom or
regulation. Under this rule, only a determination that the defendant had
not complied with the ex ante norm could support a conclusion that the
defendant was negligent. \[FN147\] This decision rule would avoid the
need to determine ex post an ex ante probability, which an assessment of
reasonableness otherwise demands, thereby eliminating much of the
hindsight bias\'s influence on the judgment. \[FN148\]

Despite this advantage, the law does not recognize compliance with
either custom or regulation as a complete defense to liability.
\[FN149\] Courts treat compliance with a custom or regulation as
evidence that a tort defendant\'s actions were not negligent, but
**\*609** courts independently assess the reasonableness of the
defendant\'s actions. \[FN150\] Merely introducing evidence that conduct
complied with custom or regulation might reduce the impact of the
hindsight bias, but, because the judge or jury still assesses the ex
ante probability of the adverse event, the bias will still influence the
judgment. But if the courts are aware of the influence of the hindsight
bias, why is compliance with custom or regulation not a complete defense
to liability? The reasons differ for custom and regulatory compliance,
but both have features that have led the courts to reject them as
substitutes for case-by-case determinations of reasonableness.

Problems with the regulatory compliance defense arise principally from
the fact that federal agencies are the usual sources of safety
regulations. Although many federal statutes require an ex ante judgment
of what constitutes a reasonable level of safety, \[FN151\] they might
promote practices that do not constitute reasonable care. An agency
might be \"captured\" by an industry and produce regulations that are
overly sympathetic to the industry. \[FN152\] Even if they are not
captured, agencies are subject to intense political pressures that often
lead them to develop safety standards that reflect political compromise,
rather than a careful assessment of safety. \[FN153\] Agencies also
frequently lack the resources necessary to set safety standards
properly. \[FN154\] Even if they can set appropriate standards
initially, regulatory agencies, subject to political pressures and tight
budgets, may be unable or unwilling to update regulations as new
technologies make more efficient precautions available at lower cost. By
contrast, \"reasonableness\" automatically changes as better technology
becomes available. The political **\*610** and economic realities of
agency functions mean that a strong regulatory compliance defense risks
freezing safety at potentially inadequate levels of precautions, which
become increasingly inadequate as technology improves. \[FN155\]

Federalism also cautions against widespread use of the regulatory
compliance defense. Federal law is the source of many safety
regulations, whereas state law governs common law tort liability.
\[FN156\] The violation of a safety regulation constitutes negligence
per se, \[FN157\] but state courts are free to find a defendant who has
complied with federal safety regulations negligent. Thus, the effect of
the federal regulation is to set a floor on safety\--state laws may
require a defendant to undertake even more precautions in order to avoid
liability. If regulatory compliance determines liability, however, then
federal law would completely usurp state tort law. Consequently, the
decision as to whether compliance with a safety regulation should be a
complete defense to a state tort action requires attention to the
appropriate balance between the state and federal governments, \[FN158\]
rather than to the advantages of an ex ante norm as opposed to an ex
post judgment.

Compliance with custom is also a problematic defense. Customary
practices do not necessarily incorporate a reasonable level of care.
\[FN159\] They simply might reflect a habit or even result \"from the
kind of inadvertence, carelessness, indifference, cost-paring and corner
cutting that is normally associated with negligence.\" \[FN160\] In some
situations, however, an industry or profession faces strong incentives
to develop customs that represent an accurate ex ante assessment of
reasonable care. For example, even without tort liability, manufacturers
are likely to build safety precautions into their products, because
\"(c)ustomers should be willing to pay higher prices for the industry\'s
product or service up to the point where the last dollar spent buys just
one dollar in accident cost reduction.\" \[FN161\] Treating compliance
with custom as a complete defense to liability would avoid the hindsight
bias. The courts, however, want to avoid inefficient customs. In the
famous case of The **\*611** T.J. Hooper, \[FN162\] Judge Learned Hand
held that a tug company\'s failure to carry a radio on board could have
been negligent, even though, by custom, tugs at the time did not carry
radios. \[FN163\] Judge Hand worried that \"a whole calling may have
unduly lagged in the adoption of new and available devices.\" \[FN164\]
Judge Hand ruled that although an industry custom is relevant to a
determination as to whether a defendant was negligent, a court could
find that a defendant who complied with a custom was nevertheless
negligent. \[FN165\] This holding and its eventual success in the common
law \[FN166\] suggest that, at least as to custom, the courts have
failed to recognize the limitations of second-guessing an ex ante norm
after an adverse event occurs.

Judicial skepticism of industry custom, however, probably results from
the limits of custom, rather than from ignorance of the hindsight bias.
Judge Posner\'s assertion that customers will pressure manufacturers to
offer products with efficient levels of safety precautions depends upon
a number of assumptions. An efficient custom is only likely to develop
if the transaction costs between the entity that provides the product or
service and everyone who may be injured by the product or service are
low. \[FN167\] Even if transaction costs are low, an efficient custom
also requires that customers have the same bargaining power, ability to
identify efficient precautions, and risk preferences as the entity
providing the good or service. \[FN168\] Few transactions have such
characteristics and these transactions will be rare and hard to
identify. Consequently, the cautious approach to custom that the courts
have followed makes economic sense. Furthermore, economic consequences
aside, courts may simply be unwilling to allow the apparent **\*612**
negligence of everyone in a profession to absolve a single member of
fault. \[FN169\]

In one class of cases\--medical malpractice\--courts have acknowledged
that the profession\'s ex ante custom is probably superior to their ex
post judgment. \[FN170\] Doctors who have followed customary medical
procedure are not to be considered negligent. \[FN171\] The courts
believe that the conditions necessary for the development of efficient
customs exist in the medical profession. \[FN172\] This exception to the
general rule shows that the courts do distrust the value of
second-guessing ex ante decisions. However, there are reasons other than
the hindsight bias to treat a medical custom as reasonable per se. The
medical profession has more expertise than the courts at determining
appropriate treatments \[FN173\] and has sufficient economic incentives
to develop customs that reflect due care. \[FN174\] The inaccuracy of
judging in hindsight is yet another strike against the institutional
competence of the courts.

The refusal to rely more heavily on either regulatory compliance or
custom presents a lost opportunity to avoid a biased assessment
**\*613** of liability, especially in the case of custom. \[FN175\]
Professor Epstein and Judge Posner have argued that, in circumstances in
which custom is likely to reflect reasonable care, allowing courts to
make their own judgments can only lead to wasteful mistakes. \[FN176\]
Analysis of the hindsight bias shows that the situation is even worse
than that; a defendant who has followed industry custom is likely to be
found liable, especially because customs probably do not incorporate an
excess of care. \[FN177\] There are, however, good reasons to suppose
that regulations and customs might not actually reflect an appropriate
analysis of reasonable precautions. Where there is strong reason to
believe that the ex ante norm is identical to reasonable care, as in the
case of medical malpractice, the courts have relied on it as a gauge of
negligence that is superior to their ex post judgments. Furthermore,
treating compliance with regulation or custom as relevant evidence of
reasonable care might mitigate some of the hindsight bias\'s impact on
the negligence determination. In effect, the common law does the best
that it can in response to the fallibility of judging in hindsight and
the inadequacy of custom and regulation as substitutes for ex ante
assessments of reasonable care.

2\. Good evidence of an ex ante assessment: the case of patent law.

Hindsight problems are not restricted to the common law. The federal
courts, for example, have long struggled with the problem of judging the
validity of patents in hindsight and have worked to develop a sensible
resolution to the hindsight bias. For a device or technique to merit
patent protection, it must not only be novel and useful, it must
actually be an invention\--it must be a \"nonobvious\" advance in an
art. \[FN178\] A patent requires more \"skill and ingenuity\" than that
possessed by an \"ordinary mechanic acquainted with the business.\"
\[FN179\] Congress codified this requirement in 1952:

**\*614** A patent may not be obtained . . . if the differences between
the subject matter sought to be patented and the prior art are such that
the subject matter as a whole would have been obvious at the time the
invention was made to a person having ordinary skill in the art to which
said subject matter pertains. \[FN180\]

According to the Supreme Court, to determine nonobviousness, \"the scope
and content of the prior art are to be determined; differences between
the prior art and the claims at issue are to be ascertained; and the
level of ordinary skill in the pertinent art resolved.\" \[FN181\] In
short, nonobviousness depends upon whether the \"invention\" represents
a technological advance \"beyond the skill of the calling.\" \[FN182\]

The determination of nonobviousness is likely to be affected by the
hindsight bias, although this has not been tested empirically. \[FN183\]
Even a truly novel idea might seem obvious after it has been revealed.
The law requires that nonobviousness be determined \"at the time the
invention was made,\" \[FN184\] although \"hindsight is often difficult
to avoid in determining obviousness of inventions.\" \[FN185\] Courts
have recognized the problem of hindsight and have expressed concern that
they \"must be continually on guard against the natural tendency to
treat as obvious something which appears simple in the light of
hindsight, but which may not actually have been so at the time of the
invention.\" \[FN186\]

Partly in response to the influence of hindsight, the Supreme Court
added \"secondary considerations\" to the test for nonobviousness. In
addition to the inquiry into the technical aspects of the invention, the
Court also requires lower courts to analyze **\*615** \"such secondary
considerations as commercial success, long felt but unsolved need,
failure of others, etc., (that) might be utilized to give light to the
circumstances surrounding the origin of the subject matter sought to be
patented.\" \[FN187\] The Court observed that determining nonobviousness
by reference to these secondary considerations helps courts avoid
conducting a technical inquiry that they might be incompetent to
undertake, and \"guard(s) against slipping into the use of hindsight.\"
\[FN188\] The mere fact of an invention will not color a court\'s
evaluation of the evidence of the invention\'s commercial success or its
resolution of a long-felt unresolved need, whereas the mere fact of the
invention might make the inventor\'s technical achievements seem
obvious. Secondary characteristics have grown in importance since the
Court first introduced them into the test for nonobviousness. The
Federal Circuit ultimately held that an inquiry into secondary
characteristics may, by itself, support the conclusion that an invention
was not obvious. \[FN189\] Thus, rather than make a technical evaluation
of how the inventor arrived at his or her alleged innovation, courts
determining nonobviousness may look to considerations that are not as
susceptible to the hindsight bias. \[FN190\]

The situation here resembles medical malpractice. Part of the reason
that courts rely on custom in medical malpractice and secondary evidence
of nonobviousness in patent law is a recognition of their limited
ability to understand technical or scientific subject matters raised by
such cases, but the courts also recognize that judgments made in
hindsight are biased. \[FN191\] The law, in both cases, represents an
attempt to find reliable ex ante evidence of an appropriate judgment, so
that trial courts need not rely on judgments made in hindsight that are
influenced by outcome knowledge.

3\. No \"liability by hindsight.\"

Although no general remedy for the hindsight bias is available, courts
have used the burden of production to blunt the benefit **\*616** that
the hindsight bias confers upon plaintiffs in negligence cases. Because
of the bias, a plaintiff could rely exclusively on the mere fact of an
adverse outcome to convince a judge or jury that the defendant\'s
actions were negligent. To prevent this possibility, courts require more
evidence than the mere fact of injury. \[FN192\] As the Oregon Supreme
Court described this doctrine: \"With hindsight\'s 20/20 vision, it is
easy to see that (the defendant) should have foreseen . . . a risk to
the public at large. (But, p)roof aided by hindsight . . . is
insufficient to establish negligence.\" \[FN193\] As a general matter,
\"(t)he mere fact that an accident or an injury has occurred, with
nothing more, is not evidence of negligence on the part of anyone.\"
\[FN194\]

The federal courts have adopted a particularly vigorous prohibition
against liability based solely on hindsight in cases alleging violations
of the federal securities laws. \[FN195\] To win a federal securities
case, a plaintiff must allege and prove that a defendant has
intentionally misrepresented material facts about a publicly traded
company in an effort to defraud investors. \[FN196\] As in all fraud
cases, in order to survive a motion to dismiss brought under Rule 9(b),
plaintiffs must make additional allegations of specific instances of
intended fraud. \[FN197\] Courts have held that, in a case of alleged
securities fraud, this heightened pleading requirement means that a
plaintiff must do more than merely allege that some **\*617** prediction
made by the defendant ultimately failed to come true. \[FN198\] \"There
is no \'fraud by hindsight.\"\' \[FN199\] However, plaintiffs who can
allege specific circumstances of fraud in addition to the defendants\'
failed predictions still benefit from the courts\' judging in hindsight.
\[FN200\] The \"fraud by hindsight\" doctrine guards only against a
severe abuse of the hindsight bias; it does not entirely purge the
system of the bias\'s influence.

4\. Subsequent remedial measures.

Although suppressing evidence is not generally a useful way to avoid the
influence of the hindsight bias, courts can sometimes suppress evidence
that would, if admitted, exacerbate the bias\'s impact on the judgment.
For example, the rule that a defendant\'s post-accident remedial
measures are not admissible to prove negligence \[FN201\] can be traced
to the hindsight bias. Injurers often update their safety precautions
after an accident, and wisely so. An accident can teach an injurer much
about how to avoid causing future harm. Nevertheless, such subsequent
remedial measures are almost irrelevant to a determination as to whether
the defendant was negligent with respect to the initial accident.
\[FN202\] These measures only reveal insights gleaned from the adverse
outcome itself and do not speak to what was predictable beforehand.

The liberal rules of relevance in contemporary evidence law, however,
probably support admitting evidence that a defendant has taken
subsequent remedial measures. \[FN203\] Defendants should, **\*618** in
principle, have no fear of this evidence. If the evidence that the
defendant took subsequent remedial measures is virtually irrelevant,
then a rational factfinder should give it no weight. The evidence should
have no effect on the outcome.

Nevertheless, courts have worried that evidence that the defendant has
taken subsequent remedial measures will have a dramatic effect on a
jury. \[FN204\] They worry that juries will mistakenly assume that
\"because the world gets wiser as it gets older, therefore it was
foolish before.\" \[FN205\] This is essentially an assertion that
juries\' assessments of defendants\' adoption of subsequent remedial
measures will be influenced by the hindsight bias. If juries do
overreact to the defendant taking subsequent remedial measures, then
defendants will be loath to undertake them. The increased probability of
paying for the accident that already occurred might overwhelm the
benefits to the defendant of reducing the prospects of future liability,
at least until the trial is over. Courts worry that admitting evidence
of subsequent remedial measures would induce juries to hold defendants
liable when they actually took reasonable care. This would discourage
defendants from taking subsequent remedial measures. To avoid this
problem, courts have deemed such evidence inadmissible. \[FN206\]

In cases involving subsequent remedial measures, the courts suppress
evidence that would magnify the hindsight bias\'s influence on the
judgment, thereby averting an unwanted incentive structure. Admitting
such evidence would not only leave the defendant subject to the ordinary
version of the hindsight bias\--the accident occurred, so the
defendant\'s actions appear less reasonable than they would in
foresight\--but it also would tempt the jury with more detailed evidence
of the consequences of the defendant\'s initial decision. The fact of
the accident cannot realistically be suppressed, but evidence that would
aggravate the bias can be. Courts\' response to the problem of
subsequent remedial measures reveals a good understanding of the
hindsight bias and the judicial ability to respond to it.

**\*619** C. Adopting a \"No Liability\" Rule

The courts have thus proven remarkably adept at pursuing opportunities
to avoid or reduce the impact of the hindsight bias on judgments of
liability. These opportunities are restricted to isolated circumstances,
however, and the lack of a generally applicable remedy leaves a great
many cases subject to the bias\'s influence. In some circumstances, the
adverse consequences of biased judgments are both unavoidable and
intolerable. In these situations, rather than subject defendants to
biased judgments of liability, the best option might be to refuse to
hold defendants liable\--even if their actions seem negligent in
hindsight. A rule of \"no liability\" might have fewer adverse
consequences than a rule of negligence judged in hindsight. Indeed, in
certain situations, courts have adopted just such a rule.

The best example of such a situation is probably the business judgment
rule in corporate law. The business judgment rule refers to the standard
for judicial review of decisions by corporate officers and directors.
\[FN207\] The rule varies across jurisdictions \[FN208\] and is
difficult to state precisely, \[FN209\] but an officer or director who
is informed about a transaction being undertaken by the corporation, and
is not an interested party in the transaction, \"fulfills his duty (of
care to the shareholders) if . . . he rationally believes that his
business judgment is in the best interests of the corporation.\"
\[FN210\] Officer and directors who satisfy the elements of the rule
\[FN211\] are **\*620** not liable to the shareholders for decisions
that turn out badly\--even if these decisions seem negligent in
hindsight. \[FN212\] \"Whereas automobile drivers who make a mistake in
judgment . . . will likely be called upon to respond in damages, a
corporate officer who makes a mistake in judgment . . . will rarely, if
ever, be found liable for damages suffered by the corporation.\"
\[FN213\] Under the business judgment rule, \"director liability is
predicated upon concepts of gross negligence.\" \[FN214\] Even \"gross
negligence\" is a somewhat more stringent standard of review than courts
commonly use to scrutinize business decisions; \[FN215\] many courts
have adopted standards that are even more deferential to the decisions
of corporate managers. \[FN216\]

But is judicial deference to business decisions attributable to the
hindsight bias? There are several justifications for the rule, but the
principal ones boil down to the relative institutional competence of
corporate managers as compared to the courts. \[FN217\] Corporate
managers have much more expertise than courts at making business
decisions \[FN218\]\--a justification that has nothing to do **\*621**
with the hindsight bias. Expertise, however, is not a sufficient account
of the business judgment rule; the courts have no problem holding other
experts, such as lawyers and accountants, liable for negligent
decisions. \[FN219\] Courts evaluating business decisions also mistrust
their perspective:

(C)ourts recognize that after-the-fact litigation is a most imperfect
device to evaluate corporate business decisions. The circumstances
surrounding a corporate decision are not easily reconstructed in a
courtroom years later . . . . (A) reasoned decision at the time made may
seem a wild hunch viewed years later against a background of perfect
knowledge. \[FN220\]

The business judgment rule arises from the concern that even a good
decision can produce an undesirable result and can be judged unfairly in
hindsight. \"Courts recognize that even disinterested, well-intentioned,
informed directors can make decisions that, in hindsight, were
improvident.\" \[FN221\]

This rationale, however, also applies to potential tort defendants,
especially in cases of professional liability. \[FN222\] Indeed, the
similarities between corporate managers and other professionals are
striking. \[FN223\] All professionals could merit deference from
judicial second-guessing of their decisions, particularly as this
second-guessing is done in hindsight. Nevertheless, both equitable and
economic factors provide grounds for distinguishing the business
judgment context from other professional liability. Immunizing
professionals from liability for negligence would create a greater
injustice for potential plaintiffs than the business judgment rule
inflicts upon shareholders. Shareholders can fire incompetent managers
either directly through a shareholder vote, or indirectly by selling
their holdings in the corporation. \[FN224\] Although **\*622** patients
and clients can fire incompetent lawyers or accountants, the harm that
is inflicted in the meantime may be more personally significant.
\[FN225\] Incompetent managers will only cost shareholders their money,
after all. To be sure, this distinction is a slight
over-generalization\--the loss of a personal investment in a business
could exceed the financial loss from legal or accounting malpractice.
\[FN226\] Shareholders, however, can diversify their risk of loss in a
manner that is not possible in the professional service context.
\[FN227\] The likely nature of the damages in each context distinguishes
corporate liability from the liability of other professionals.

Economic grounds provide a better explanation for the different
liability standards in corporate governance as opposed to other
professions. The bias converts the negligence standard into a
quasi-strict liability rule, which if applied to corporate managers
would either induce them to take an excess of precautions or to act as
if they operated under a system of strict liability. If it mimicked
strict liability, then fewer people would be willing to become corporate
managers than if they were subject to an unbiased negligence system.
\[FN228\] This concern might account for the business judgment rule, and
it does run through the early business judgment cases in the nineteenth
century. \[FN229\]

Furthermore, the possibility that quasi-strict liability would create
incentives to take an excess of precautions would undermine the basic
functioning of corporate managers more severely than other
professionals. Investors want corporate managers to make risk-neutral
business decisions, because investors already control their overall
investment risk through diversification. \[FN230\] Ensuring that
managers effectively represent this concern and do not avoid business
decisions that have a high expected payoff but also carry a high degree
of risk is a central problem of corporate governance. \[FN231\]
Liability for negligence judged in hindsight would **\*623** only
exacerbate this problem. Investors do not need the security of being
able to hold their managers strictly liable, and they certainly do not
want them taking an excess of precautions against losses. As the court
in Joy v North \[FN232\] put it: \"(I)t is very much in the interests of
shareholders that the law not create incentives for overly cautious
corporate decisions.\" We might want lawyers or accountants to guarantee
their work with a system of de facto strict liability, or take an
occasional excess of precautions, but corporate managers operating under
such a regime will be apt to betray the real interests of their
shareholders.

Without the hindsight bias, it is difficult to explain why corporate
managers are immune from liability for negligence and other
professionals are not. Arguably, all professionals have sufficient
incentives to avoid negligent conduct\--they need to do so in order to
retain their patients or clients. Therefore, all professionals could
argue that they should be immune from liability for negligent conduct.
Alternatively, professionals have much more information than their
clients, patients, and shareholders, and are in the best position to
reduce the social costs of their actions. Therefore, all professionals
(corporate managers included) should be subject to liability. When
negligence judged in hindsight is revealed to be a system of
quasi-strict liability, however, the distinction becomes clear. Strict
liability is a perfectly defensible, even laudable, form of
liability\--it creates incentives to be efficient and spreads the risk
of injury, reducing the possibility that a single individual will
experience a catastrophic loss. But adopting a system of strict
liability raises the costs of any activity, which might create some
unwanted consequences. The consequences of a system of strict liability
are particularly undesirable to shareholders in a corporation.
Shareholders already spread their risks through diversification and,
even without a system of quasi-strict liability, they must worry that
their managers make risk-averse decisions. With decades of experience in
the matter and a basic understanding of the foibles of judging in
hindsight, courts seem to have realized this, and carved out the
business judgment rule for corporate managers alone among professionals.

D. Summary of Adaptations

Remedies for the hindsight bias are situation specific, but some
generalizations can be made. The four specific instances identified in
this Article in which courts have developed procedures **\*624** to
mitigate the impact of the hindsight bias on judgment, along with the
development of the business judgment rule, reveal two basic patterns.
First, the courts try to keep information that could not have been known
ex ante out of the process of ex post judgment. In negligence cases,
they suppress evidence of subsequent remedial measures because it
reflects the defendant\'s understanding after an accident, not before.
In patent cases, they refrain from reanalyzing the patent\'s advances
and look only to ex ante circumstances such as whether the patent
fulfilled a long-felt unresolved need. Second, the law tends to enforce
the ex ante understanding between the parties, if there is one. In the
case of medical malpractice, the doctor is not a guarantor of recovery.
A patient does not purchase a promise of good health, but purchases the
\"customary\" medical treatment. Doctors who fail to deliver the
customary treatment have not fulfilled their end of the bargain, and
hence are subject to liability. Likewise, investment in a corporation
does not guarantee a positive return; it is a gamble on the abilities of
the officers and directors of the corporation. The ex ante bargain is
only that the management will remain informed and not engage in
self-dealing.

The legal system is, in some ways, trapped in a second best world.
Judgments tainted by the hindsight bias have costs. They can induce an
excess of precautions and smack of unfairness. But the courts have
responded to these concerns. They have developed two basic
responses\--suppressing post-event information and enforcing ex ante
arrangements\--that are remarkably elegant methods of blunting the
impact of the hindsight bias. Although the legal system must tolerate
biased judgments, the courts occasionally mitigate their adverse
consequences.

Conclusion: Liability in a System of Second-Best Judgments

The legal system has a good understanding of the hindsight bias and its
effects on judging liability after the fact. Generic debiasing
strategies are unlikely to be available and the courts do not attempt to
use them. Instead they have developed mechanisms for taking advantage of
specific circumstances that allow them to reduce the influence of the
hindsight bias. In those cases in which the bias cannot be avoided, the
courts have pursued sensible second-best strategies that are sensitive
to the consequences of biased judgments for both economics and justice.

The story of the hindsight bias in legal judgments has lessons for legal
policymakers. It holds a warning about developing a new area of law that
demands a judgment in hindsight. Any **\*625** new area will have to
make some accommodation for the bias. For example, in 1983, Rule 11 of
the Federal Rules of Civil Procedure was amended to require sanctioning
of those who file frivolous lawsuits or motions within a lawsuit.
\[FN233\] Frivolousness is difficult to define, \[FN234\] and the 1983
version of the rule couched its definition in terms of reasonableness.
\[FN235\] Of course, reasonableness can be determined only after a
lawsuit has failed or is dismissed, making it difficult to judge what
was reasonable beforehand. It is not clear how the courts have resolved
the problems associated with judging litigation in hindsight for
frivolousness, but it is safe to say that there has been some
dissatisfaction with the 1983 amendments\--some of which led to
substantial revisions in 1993. \[FN236\] Ultimately, if the federal
courts want to sanction frivolous litigation, they will have to devise
some means of addressing the problem of judging in hindsight, as they
have in many other areas of law.

The development of rules on judging liability in hindsight speaks to two
different schools of legal theory\--law and economics and law and
psychology. To the law and economics community, especially those
developing positive theories of law, it shows not only that a cognitive
bias can persist in the system, but that the system itself can recognize
the bias and adapt to it. In fact, a legal academic armed with an
understanding of the limits of human judgment is in a better position to
explain the pattern of case law than one without such an understanding.
The business judgment rule and subsequent remedial measures rules, for
example, make a great deal of sense as a response to hindsight bias.
\[FN237\] As for the law and psychology tradition, a close look at the
legal system\'s response to the bias suggests that the law is
well-equipped to address the cognitive limitations of judges and juries.
Although an understanding of cognitive biases may reveal patterns in the
case law, not every bias needs a new reform. The law might have figured
it out all on its own.

\[FNd1\]. Associate Professor, Cornell Law School. B.A., The Johns
Hopkins University, 1988; M.A. (Psychology), The Johns Hopkins
University, 1988; J.D., Stanford University, 1993; Ph.D. (Psychology),
Stanford University, 1994. I thank the participants in workshops at the
University of Illinois School of Law, Cornell Law School, and the
Conference on Organizational Design, Behavioral Economics, and Law at
Stanford Law School, for their input and comments on the ideas presented
in this Article. I also thank Kevin Clermont, Neal Feigenson, Chris
Guthrie, Reid Hastie, Jim Henderson, Mark Kelman, Russell Korobkin, Dale
Nance, Phil Peters, Stewart Schwab, John Siliciano, and Thomas Ulen for
additional comments. Discussions with several students, especially Ana
Acena, David Eddy, Matt Kelman, Haeryung Shin, Donald Stepka, Margaret
Wang, and Conrad Wolan, also added valuable insights.

\[FN1\]. Cornman v The Eastern Counties Railway Co, 157 Eng Rep 1050,
1052 (Exch 1859).

\[FN2\]. See Baruch Fischhoff, Hindsight not= Foresight: The Effect of
Outcome Knowledge on Judgment Under Uncertainty, 1 J Exp Psych 288
(1975) (first describing the effect). For reviews of research on the
hindsight bias, see Jay J.J. Christensen-Szalanski and Cynthia Fobian
Willham, The Hindsight Bias: A Meta-analysis, 48 Org Beh & Human
Decision Processes 147, 147-48 (1991); Scott A. Hawkins and Reid Hastie,
Hindsight: Biased Judgments of Past Events After the Outcomes Are Known,
107 Psych Bull 311, 312 (1990).

\[FN3\]. Baruch Fischhoff, For Those Condemned to Study the Past:
Heuristics and Biases in Hindsight, in Daniel Kahneman, Paul Slovic, and
Amos Tversky, eds, Judgment under uncertainty: Heuristics and biases
335, 341 (Cambridge 1982) (offering a thorough analysis of potential
causes of the bias).

\[FN4\]. See Kim A. Kamin and Jeffrey J. Rachlinski, Ex Post not= Ex
Ante: Determining Liability in Hindsight, 19 L & Human Beh 89, 101
(1995) (studying what effect the bias has on a \"courtroom\" liability
determination).

\[FN5\]. The bias also might affect a factfinder\'s judgment of a
plaintiff\'s actions. See Part II.C.

\[FN6\]. See Richard A. Posner, Economic Analysis of Law 559-60 (Little,
Brown 4th ed 1992); John C. Goodman, An Economic Theory of the Evolution
of Common Law, 7 J Legal Stud 393, 394 (1978); George L. Priest, The
Common Law Process and the Selection of Efficient Rules, 6 J Legal Stud
65, 65 (1977); Paul H. Rubin, Why is the Common Law Efficient? 6 J Legal
Stud 51, 53 (1977). See generally Jack Hirshleifer, ed, Evolutionary
Models in Economics and Law, 4 Research in L & Econ 1 (1982).

\[FN7\]. See Part IV.B.3.

\[FN8\]. See, for example, Hal R. Arkes and Cindy A. Schipani, Medical
Malpractice v. the Business Judgment Rule: Differences in Hindsight
Bias, 73 Or L Rev 587, 630 (1994) (arguing for a change in medical
malpractice rules in order to eliminate the hindsight bias).

\[FN9\]. See text accompanying notes 201-06.

\[FN10\]. See Arkes and Schipani, 73 Or L Rev at 621-29.

\[FN11\]. See, for example, Daniel S. Levy and David Friedman, The
Revenge of the Redwoods?: Reconsidering Property Rights and the Economic
Allocation of Natural Resources, 61 U Chi L Rev 493, 512-16 (1994)
(arguing that the challenge that a cognitive bias known as the endowment
effect poses to rational choice theory is overstated); Jonathan R.
Macey, Packaged Preferences and the Institutional Transformation of
Interests, 61 U Chi L Rev 1443, 1448-49 (1994) (arguing that market
forces pressure organizations to create mechanisms that avoid cognitive
biases).

\[FN12\]. See Shari Seidman Diamond, Foreword, in D.K. Kagehiro and W.S.
Laufer, Handbook of Psychology and Law v, vi-vii (Springer-Verlag 1992)
(\"In some . . . cases, the courts have ignored, distorted, or rejected
psychological findings.\"); Wallace D. Loh, In Quest of Brown\'s
Promise: Social Research and Social Values in School Desegregation, 58
Wash L Rev 129, 171 (1982) (book review) (comparing the way courts use
social science to \"the way a drunk uses a lamppost: for support rather
than illumination\"); John Monahan and Laurens Walker, Social Science
Research in Law: A New Paradigm, 43 Am Psych 465, 465 (1988)
(\"(Psychologists) repeatedly complain that their research is either
ignored or misconstrued.\"). See generally Michael J. Saks and Charles
H. Baron, eds, The Use/Nonuse/Misuse of Applied Social Research in the
Courts 28-56 (Abt 1980) (documenting courts\' abuse of legitimate
research methods).

\[FN13\]. See Part II.

\[FN14\]. Fischhoff, 1 J Exp Psych at 288 (cited in note 2). The
literature credits Fischhoff with first identifying the bias and coining
the term \"hindsight bias.\" See Stephen J. Hoch and George F.
Loewenstein, Outcome Feedback: Hindsight and Information, 15 J Exp
Psych: Learning, Memory, & Cognition 605, 605 (1989). But an earlier
article on a different subject also describes the same phenomenon. See
Elaine Walster, \'Second Guessing\' Important Events, 20 Human Rel 239,
244-49 (1967).

\[FN15\]. Fischhoff, 1 J Exp Psych at 289-90 (cited in note 2).

\[FN16\]. Id at 289.

\[FN17\]. Id at 291.

\[FN18\]. See Hoch and Loewenstein, 15 J Exp Psych at 605 (cited in note
14) (discussing patterns of learning from experience).

\[FN19\]. See Baruch Fischhoff, Debiasing, in Kahneman, Slovic, and
Tversky, eds, Judgment under uncertainty 422, 428-29 (cited in note 3).

\[FN20\]. Fischhoff, 1 J Exp Psych at 295-97 (cited in note 2).

\[FN21\]. Id at 296-97.

\[FN22\]. See Hawkins and Hastie, 107 Psych Bull at 314-15 (cited in
note 3). One recent article, however, has argued that the hindsight bias
observed in studies using this method results from a different process
than the hindsight bias observed in studies using Fischhoff\'s original
methodology. Ralph Hertwig, Gerd Gigerenzer, and Ulrich Hoffrage, The
Reiteration Effect in Hindsight Bias, 104 Psych Rev 194, 201 (1997).

\[FN23\]. See Christensen-Szalanski and Willham, 48 Org Beh & Human
Decision Processes at 150 (cited in note 2) (observing that, as of 1990,
there were 128 studies documenting the hindsight bias).

\[FN24\]. See Baruch Fischhoff and Ruth Beyth, \"I Knew It Would
Happen\": Remembered Probabilities of Once-Future Things, 13 Org Beh &
Human Performance 1, 3 (1975) (Nixon\'s 1972 diplomatic missions to
China and Russia); Lee J. Gilbertson, et al, A Study of Hindsight Bias:
The Rodney King Case in Retrospect, 74 Psych Rep 383, 384 (1994)
(consequences of verdict in the first Rodney King case); Fischhoff, 1 J
Exp Psych at 289 (cited in note 2) (near riot in Atlanta); Mark R.
Leary, The Distorted Nature of Hindsight, 115 J Soc Psych 25, 27 (1981)
(college football game); Donald C. Pennington, The British fireman\'s
strike of 1977/78: An investigation of judgments in foresight and
hindsight, 20 Brit J Soc Psych 89, 90-91 (1981) (a fireman\'s strike in
Great Britain); David Wasserman, Richard O. Lempert, and Reid Hastie,
Hindsight and Causality, 17 Personality & Soc Psych Bull 30, 32 (1991)
(the same British-Gurkha materials that Fischhoff used). Several studies
have used elections. Mark R. Leary, Hindsight Distortion and the 1980
Presidential Election, 8 Personality & Soc Psych Bull 257, 259-60 (1982)
(1980 presidential election); Donald C. Pennington, Being Wise after the
Event: an Investigation of Hindsight Bias, 1 Current Psych Res 271, 273
(1981) (British general election of 1979); Jack L. Powell, A Test of the
Knew-It-All-Along Effect in the 1984 Presidential and Statewide
Elections, 18 J Applied Soc Psych 760, 762-63 (1988) (1984 presidential
and Missouri state elections); Nicolaos E. Synodinos, Hindsight
Distortion: \"I knew-it-all along and I was sure about it\", 16 J
Applied Soc Psych 107, 109-14 (1986) (1982 Hawaiian gubernatorial
election).

\[FN25\]. See Clifton E. Brown and Ira Solomon, Effects of Outcome
Information on Evaluations of Managerial Decisions, 62 Acct Rev 564,
568-75 (1987) (likely success of a new business venture); Richard S.
Brown, Christopher W. Williams, and Paul R. Lees-Haley, The Effects of
Hindsight Bias and Causal Attribution on Human Response to Environmental
Events, 24 J Applied Soc Psych 661, 664-65 (1994) (outcome knowledge
effect on responses to hazardous waste disposal); Thomas A. Buchman, An
Effect of Hindsight on Predicting Bankruptcy with Accounting
Information, 10 Acct Org & Soc 267, 274 (1985) (predicting a
bankruptcy); Edward W. Bukszar and Terry Connolly, Hindsight Bias and
Strategic Choice: Some Problems in Learning from Experience, 31 Acad
Mgmt J 628, 630-31 (1988) (predicting the success or failure of a new
business); Colleen K. Cannon and Vernon L. Quinsey, The Likelihood of
Violent Behavior: Predictions, Postdictions, and Hindsight Bias, 27
Canadian J Beh Sci 92, 94-95 (1995) (the likelihood of a violent
offender recidivating); Terry Connolly and Edward W. Bukszar, Hindsight
Bias: Self-Flattery or Cognitive Error?, 3 J Beh Decision Making 205,
207 (1990) (predicting the success or failure of a new business);
Walster, 20 Human Rel at 240 (cited in note 14) (the consequences of
purchasing a house); Rami Zwick, Rik Pieters, and Hans Baumgartner, On
the Practical Significance of Hindsight Bias: The Case of
Expectancy-Disconfirmation Model of Consumer Satisfaction, 64 Org Beh &
Human Decision Processes 103, 105 (1995) (the expected quality of
consumer products). In several studies, subjects rated the
predictability of the outcome of social psychological experiments.
Martin F. Davies, Reduction of Hindsight Bias by Restoration of
Foresight Perspective: Effectiveness of Foresight-Encoding and
Hindsight-Retrieval Strategies, 40 Org Beh & Human Decision Processes
50, 53 (1987); Martin F. Davies, Field-Dependence and Hindsight Bias:
Output Interference in the Generation of Reasons, 27 J Res Personality
222, 278-80 (1993); Paul Slovic and Baruch Fischhoff, On the Psychology
of Experimental Surprises, 3 J Exp Psych: Human Perception & Performance
544, 545-46 (1977); Dagmar Stahlberg, et al, We Knew It All Along:
Hindsight Bias in Groups, 63 Org Beh & Human Decision Processes 46,
51-52 (1995).

\[FN26\]. See Robert P. Agans and Leigh S. Shaffer, The Hindsight Bias:
The Role of the Availability Heuristic and Perceived Risk, 15 Basic &
Applied Soc Psych 439, 444 (1994) (being the victim of a homicide or a
car accident); Linda L. Carli and Jean Brown Leonard, The Effect of
Hindsight on Victim Derogation, 8 J Soc & Clinical Psych 331, 334-35
(1989) (likelihood of becoming the victim of a rape); Fischhoff, 1 J Exp
Psych at 289 (cited in note 2) (outcome of treatment for psychiatric
patients); William C. Goggin and Lillian M. Range, The Disadvantages of
Hindsight in the Perception of Suicide, 3 J Soc & Clinical Psych 232,
233 (1985) (likelihood that another will commit suicide); Nick Haslam
and Nimali Jayasinghe, Negative Affect and Hindsight Bias, 8 J Beh
Decision Making 127, 129 (1995) (predicting own score on a midterm
exam); Melvin M. Mark and Steven Mellor, Effect of Self-Relevance of an
Event on Hindsight Bias: The Foreseeability of a Layoff, 76 J Applied
Psych 569, 570-71 (1991) (being laid off from work); Michelle R. Nario
and Nyla R. Branscombe, Comparison Processes in Hindsight and Causal
Attribution, 21 Personality & Soc Psych Bull 1244, 1246-47 (1995) (dying
in a plane crash); Donald C. Pennington, et al, Estimating the outcome
of a pregnancy test: Women\'s judgments in foresight and hindsight, 19
Brit J Soc & Clinical Psych 317, 318-19 (1980) (outcome of a pregnancy
test); Neal J. Roese and James M. Olson, Counterfactuals, Causal
Attributions, and the Hindsight Bias: A Conceptual Integration, 32 J Exp
Soc Psych 197, 204-05 (1996) (someone else\'s score on a midterm exam).

\[FN27\]. See Cannon and Quinsey, 27 Canadian J Beh Sci at 94 (cited in
note 25) (Canada); Davies, 40 Org Beh & Human Decision Processes at 53
(cited in note 25) (England); Davies, 27 J Res Personality at 224
(England); Fischhoff, 1 J Exp Psych at 289 (cited in note 2) (Israel);
Wolfgang Hell, et al, Hindsight Bias: An Interaction of Automatic and
Motivational Factors?, 16 Memory & Cognition 533, 535 (1988) (Germany);
Pennington, 1 Current Psych Res at 273 (cited in note 24) (England);
Rudiger F. Pohl and Wolfgang Hell, No Reduction in Hindsight Bias After
Complete Information and Repeated Testing, 67 Org Beh & Human Decision
Processes 49, 51 (1996) (Germany); Donald Sharpe and John G. Adair,
Reversibility of the Hindsight Bias: Manipulation of Experimental
Demands, 56 Org Beh & Human Decision Processes 233, 236-37 (1993)
(Canada); Stahlberg, et al, 63 Org Beh & Human Decision Processes at 51
(Germany).

\[FN28\]. See Mark and Mellor, 76 J Applied Pysch at 571 (cited in note
26) (union members in a Northeastern industrial area); Pennington, 1
Current Psych Res at 273 (cited in note 24) (active members of Tory and
Labour Parties in England); Pennington, et al, 19 Brit J Soc & Clinical
Psych at 319 (adult women in England).

\[FN29\]. See John C. Anderson, D. Jordan Lowe, and Philip M.J. Reckers,
Evaluation of auditor decisions: Hindsight bias effects and the
expectation gap, 14 J Econ Psych 711, 722 (1993) (professional auditors
and state and federal judges); Hal R. Arkes, et al, Eliminating the
Hindsight Bias, 73 J Applied Psych 305, 306 (1988) (neuropsychologists);
Hal R. Arkes, et al, Hindsight Bias Among Physicians Weighing the
Likelihood of Diagnoses, 66 J Applied Psych 252, 252-53 (1981) (medical
doctors); Don E. Detmer, et al, Heuristics and Biases in Medical
Decision-Making, 53 J Med Educ 682, 682 (1978) (university surgeons);
Raanon Lipshitz and Dalya Barak, Hindsight wisdom: Outcome knowledge and
the evaluation of decisions, 88 Acta Psychologica 105, 110 (1995)
(officers in the Israeli Defense Force); Terence R. Mitchell and Laura
S. Kalb, Effects of Outcome Knowledge and Outcome Valence on
Supervisors\' Evaluations, 66 J Applied Psych 604, 605 (1981) (graduate
nursing students). Several studies use advanced business school
students. Buchman, 10 Acct Org & Soc at 270 (cited in note 25); Bukszar
and Connolly, 31 Acad Mgmt J at 630 (cited in note 25); Connolly and
Bukszar, 3 J Beh Decision Making at 207 (cited in note 25); Hoch and
Loewenstein, 15 J Exp Psych at 610 (cited in note 14).

\[FN30\]. Anderson, Lowe, and Reckers, 14 J Econ Psych at 722-30;
Marianne M. Jennings, D. Jordan Lowe, and Philip M.J. Reckers, Outcome
Foreseeability and its Effects on Judicial Decisions (unpublished
manuscript on file with U Chi L Rev).

\[FN31\]. Two studies reported a \"reverse\" hindsight bias. David
Mazursky and Chezy Ofir, \"I Could Never Have Expected It to Happen\":
The Reversal of the Hindsight Bias, 46 Org Beh & Human Decision
Processes 20, 25-31 (1990) (People rating low-quality consumer products
mistakenly recall that their initial expectations were better than they
in fact were.); Bas Verplanken and Rik G.M. Pieters, Individual
Differences in Reverse Hindsight Bias: I Never Thought Something Like
Chernobyl Would Happen. Did I?, 1 J Beh Decision Making 131, 140-41
(1988) (Subjects made lower estimates of the likelihood that a nuclear
accident causing ten thousand or more casualties would occur in the next
ten years five months after the Chernobyl nuclear accident than they did
beforehand.). The interpretations of the data in these studies have been
criticized, however, and, in fact, both studies probably supported the
existence of the hindsight bias. See Hal R. Arkes, Commentary on the
Article by Verplanken and Pieters, 1 J Beh Decision Making 146, 146
(1988) (concluding that since Chernobyl did not produce more than ten
thousand casualties, Verplanken and Pieter\'s results actually support
the hindsight bias); Melvin M. Mark and Steven Mellor, \"We Don\'t
Expect it Happened\": On Mazursky and Ofir\'s (1990) Purported Reversal
of the Hindsight Bias, 57 Org Beh & Human Decision Processes 247, 249-51
(1994) (providing several alternative explanations for the results of
Mazursky and Ofir). But see Bas Verplanken and Rik Pieters, A second
look at hindsight, 1 J Beh Decision Making 147, 147 (1988) (defending
the results of their earlier study). Similarly, a few studies have also
reported conditions that elicited no statistically significant bias.
See, for example, Agans and Shaffer, 15 Basic & Applied Soc Psych at
445-46 (cited in note 26) (finding that the predicted likelihood of a
smoker contracting lung cancer was the same for both hindsight and
foresight subjects). But an occasional failure to find the bias should
be expected among such a large number of studies.

\[FN32\]. Fischhoff, 1 J Exp Psych at 297 (cited in note 2).

\[FN33\]. Hoch and Loewenstein, 15 J Exp Psych at 606 (cited in note
14).

\[FN34\]. One review estimated that in those studies that are the most
relevant to the legal system, which are studies using the \"would have
known\" methodology in unfamiliar contexts, the bias can cause as much
as 27 percent of a population to change its mind in a dichotomous
decision. Christensen-Szalanski and Willham, 48 Org Beh & Human Decision
Processes at 161 (cited in note 2). Factors that are relevant to a
determination of liability, but that were not incorporated into this
estimate, can increase the size of the effect even further. For example,
negative events, which would be more typical subjects of a legal dispute
than positive ones, result in a larger bias, see Brown, Williams, and
Lees-Haley, 24 J Applied Soc Psych at 665-72 (cited in note 25); Haslam
and Jayasinghe, 8 J Beh Decision Making at 129-36 (cited in note 26);
Lipshitz and Barak, 88 Acta Psychologica at 110-15, 122 (cited in note
29); Mitchell and Kalb, 66 J Applied Psych at 605-09 (cited in note 29);
David A. Schkade and Lynda M. Kilbourne, Expectation-Outcome Consistency
and Hindsight Bias, 49 Org Beh & Human Decision Processes 105, 111-19
(1991); Walster, 20 Human Rel at 240-48 (cited in note 14). More complex
material can also increase the size of the effect. See Nario and
Branscombe, 21 Personality & Soc Psych Bull at 1248-52 (cited in note
26); Pennington, 20 Brit J Soc Pysch at 93-95 (cited in note 24); Roese
and Olson, 32 J Exp Soc Psych at 205-18 (cited in note 26).

\[FN35\]. See Jonathan Baron and John C. Hershey, Outcome Bias in
Decision Evaluation, 54 J Personality & Soc Psych 569, 570 (1988)
(describing and documenting the outcome bias).

\[FN36\]. Many studies have found such a tendency. See, for example,
Carli and Leonard, 8 J Soc & Clinical Psych at 338 (cited in note 26)
(People blamed a rape victim for failing to have avoided a situation
that made her vulnerable to attack\--even though people in foresight
stated that the same situation seemed benign.); Goggin and Range, 3 J
Soc & Clinical Psych at 234-35 (cited in note 26) (People blame the
family members of a suicide victim for failing to have predicted the
tragedy.); Lipshitz and Barak, 88 Acta Psychologica at 110-15 (cited in
note 29) (The consequences of a threatened terrorist attack heavily
influenced Israeli Defense Force officer\'s evaluations of a military
commander\'s response to the threat.). A series of studies have
demonstrated the influence of the outcome and the hindsight biases on
evaluations of accountants\' decisions. Anderson, Lowe, and Reckers, 14
J Econ Psych at 725-27 (cited in note 29); D. Jordan Lowe and Philip
M.J. Reckers, The Effects of Hindsight Bias on Jurors\' Evaluations of
Auditor Decisions, 25 Decision Sci 401, 413-14 (1994); Jennings, Lowe,
and Reckers (unpublished manuscript) (cited in note 30).

\[FN37\]. See Dan Zakay, The Evaluation of Managerial Decisions\'
Quality by Managers, 56 Acta Psychologica 49, 52 (1984) (Professional
managers consider a decision\'s outcome to be the most important factor
in evaluating the quality of a decision.).

\[FN38\]. One early explanation for the bias was that the past seems
more certain and hence more predictable than the future, but Fischhoff
tested and rejected this hypothesis. See Baruch Fischhoff, The Effect of
Temporal Setting on Likelihood Estimates, 15 Org Beh & Human Decision
Processes 180, 192-93 (1976). See also Deborah J. Mitchell, J. Edward
Russo, and Nancy Pennington, Back to the Future: Temporal Perspective in
the Explanation of Events, 2 J Beh Decision Making 25, 35 (1989)
(discussing, testing, and rejecting this hypothesis). Another possible
cause of the bias is that people anchor their estimates of what they
would have known around certainty (100 percent probability) and adjust
downward\--insufficiently. Fischhoff, 1 J Exp Psych at 298 (cited in
note 2). This hypothesis, however, fails to account for findings that
indicate that the known outcome influences subjects\' interpretation of
the antecedent events. See Hawkins and Hastie, 107 Psych Bull at 321
(cited in note 2). The anchoring hypothesis also predicts that the size
of the effect would not vary depending upon whether the subject was told
an event did or did not occur; in fact, the effect is larger for
occurrences than nonoccurrences. Id.

\[FN39\]. Walster, 20 Human Rel at 239 (cited in note 14).

\[FN40\]. See generally Melvin J. Lerner and Dale T. Miller, Just World
Research and the Attribution Process: Looking Back and Ahead, 85 Psych
Bull 1030 (1978) (discussing the just world theory).

\[FN41\]. Id at 1030.

\[FN42\]. See Walster, 20 Human Rel at 239 (cited in note 14).

\[FN43\]. See Brown, Williams, and Lees-Haley, 24 J Applied Soc Psych at
665- 72 (cited in note 25); Haslam and Jayasinghe, 8 J Beh Decision
Making at 129- 34 (cited in note 26); Lipshitz and Barak, 88 Acta
Psychologica at 108, 117-23 (cited in note 29); Mitchell and Kalb, 66 J
Applied Psych at 605-09 (cited in note 29); Schkade and Kilbourne, 49
Org Beh & Human Decision Processes at 111- 19 (cited in note 34);
Walster, 20 Human Rel at 240-48 (cited in note 14).

\[FN44\]. See Walster, 20 Human Rel at 239 (cited in note 14).

\[FN45\]. See Jennifer D. Campbell and Abraham Tesser, Motivational
interpretations of hindsight bias: An individual difference analysis, 51
J Personality 605, 613-15 (1983) (finding a marginal correlation between
hindsight bias and \"just deserts\"); Carli and Leonard, 8 J Soc &
Clinical Psych at 335 (cited in note 26) (finding no appreciable
relationship between the bias and the \"just world theory\"); Walster,
20 Human Rel at 249 (cited in note 14). If the data from Verplanken and
Pieters, 1 J Beh Decision Making at 141 (cited in note 31), should be
reinterpreted as previously described, then this study also obtained
similar results.

\[FN46\]. See generally Barry R. Schlenker, Impression Management: The
Self-Concept, Social Identity, and Interpersonal Relations (Brooks/Cole
1980) (discussing the elaborate literature on impression management).

\[FN47\]. Connolly and Bukszar, 3 J Beh Decision Making at 208 (cited in
note 25).

\[FN48\]. Campbell and Tesser, 51 J Personality at 612-15; Leary, 115 J
Soc Psych at 28 (cited in note 24); Leary, 8 Personality & Soc Psych
Bull at 260- 61 (cited in note 24); Synodinos, 16 J Applied Soc Psych at
110-14 (cited in note 24). Only Mark and Mellor, 76 J Applied Psych at
569-75 (cited in note 26), found any relationship between the size of
the bias and the importance of the material to the subjects.

\[FN49\]. See Elizabeth Creyer and William T. Ross, Jr., Hindsight Bias
and Interference in Choice: The Mediating Effect of Cognitive Effort, 55
Org Beh and Human Decision Processes 61, 71-73 (1993) (finding that
hindsight bias was reduced when accuracy of prediction was important);
Davies, 27 J Res Personality at 225-32 (cited in note 25)
(\"(I)nstructions to work harder or to avoid hindsight bias have no
impact on the magnitude of the hindsight bias.\"); Baruch Fischhoff,
Perceived Informativeness of Facts, 3 J Exp Psych: Human Perception &
Performance 349, 354-56 (1977) (finding that hindsight bias is
unaffected by warnings about its effect); Hell, et al, 16 Memory &
Cognition at 537 (cited in note 27) (finding that incentive for correct
recall did not reduce hindsight bias); Sharpe and Adair, 56 Org Beh &
Human Decision Processes at 238-42 (cited in note 27) (instructing
students not to produce biased assessments had no impact on the
hindsight bias).

\[FN50\]. See Hawkins and Hastie, 107 Psych Bull at 312-14 (cited in
note 2).

\[FN51\]. Id at 317.

\[FN52\]. Fischhoff, 1 J Exp Psych at 288 (cited in note 2). See Hawkins
and Hastie, 107 Psych Bull at 322 (cited in note 2), for a full
description and elaboration of this theory.

\[FN53\]. See Fischhoff, 1 J Exp Psych at 297 (cited in note 2); Hawkins
and Hastie, 107 Psych Bull at 322 (cited in note 2) (arguing that the
process is not automatic).

\[FN54\]. See Hawkins and Hastie, 107 Psych Bull at 321-22 (cited in
note 2).

\[FN55\]. See id. Ignoring inconsistent information is a common problem
in judgment tasks. See Asher Koriat, Sarah Lichtenstein, and Baruch
Fischhoff, Reasons for Confidence, 6 J Exp Psych: Human Learning &
Memory 107, 108 (1980) (finding that subjects remain confident in their
decisions despite being confronted with conflicting information).

\[FN56\]. Fischhoff, 1 J Exp Psych at 291-92, 295-97 (cited in note 2).
This result has been replicated in other contexts. See Anderson, Lowe,
and Reckers, 14 J Econ Psych at 727-30 (cited in note 29) (Subjects who
learned that a company subsequently went bankrupt rated \"accounting red
flags\" as more important than subjects told that the company did
well.); Lowe and Reckers, 25 Decision Sci at 413 (cited in note 36)
(Subjects told that an investment went badly rated negative signs as
more important and positive signs as less important than subjects told
that the investment went well.).

\[FN57\]. See Hawkins and Hastie, 107 Psych Bull at 322 (cited in note
2).

\[FN58\]. See generally Marcia K. Johnson, Shahin Hashtroudi, and D.
Stephen Lindsay, Source Monitoring, 114 Psych Bull 3 (1993) (discussing
the difficulty of remembering when and how something was learned).

\[FN59\]. See Wasserman, Lempert, and Hastie, 17 Personality & Soc Psych
Bull at 34 (cited in note 24).

\[FN60\]. Id. See also Brown and Solomon, 62 Acct Rev at 568-75 (cited
in note 25) (finding less bias when bad outcome of a business was said
to have been caused by an unexpected change in copyright law).

\[FN61\]. See Nario and Branscombe, 21 Personality & Soc Psych Bull at
1252 (cited in note 26); Pennington, 20 Brit J Soc Psych at 93-95 (cited
in note 24); Roese and Olson, 32 J Exp Soc Psych at 205-18 (cited in
note 26).

\[FN62\]. See Christensen-Szalanski and Willham, 48 Org Beh & Human
Decision Processes at 155 (cited in note 2).

\[FN63\]. See Hawkins and Hastie, 107 Psych Bull at 320-21 (cited in
note 2).

\[FN64\]. Fischhoff, 1 J Exp Psych at 291-92, 295-97 (cited in note 2).

\[FN65\]. See Lynn Hasher, Mary S. Attig, and Joseph W. Alba, I Knew It
All Along: Or, Did I?, 20 J Verbal Learning & Verbal Beh 86, 88-94
(1981).

\[FN66\]. See Hell, et al, 16 Memory & Cognition at 535 (cited in note
27).

\[FN67\]. See Davies, 40 Org Beh & Human Decision Processes at 51-65
(cited in note 25); Fischhoff, 3 J Exp Psych at 354-56 (cited in note
49).

\[FN68\]. See Fischhoff, 3 J Exp Psych at 354-56 (cited in note 49).

\[FN69\]. See Pohl and Hell, 67 Org Beh & Human Decision Processes at
51-55 (cited in note 27).

\[FN70\]. Slovic and Fischhoff, 3 J Exp Psych at 548-49 (cited in note
25).

\[FN71\]. A \"fault tree\" consists of a diagram of all of the possible
outcomes and the possible consequences of these outcomes and an
assignment of a probability to each \"branch.\" Baruch Fischhoff, Paul
Slovic, and Sarah Lichtenstein, Fault Trees: Sensitivity of Estimated
Failure Probabilities to Problem Representation, 4 J Exp Psych: Human
Perception & Performance 330, 331 (1978).

\[FN72\]. Davies, 40 Org Beh & Human Decision Processes at 51-64 (cited
in note 25).

\[FN73\]. Lowe and Reckers, 25 Decision Sci at 412-15 (cited in note 36)
(asking subjects to provide alternative outcomes to the outcome given
them).

\[FN74\]. See Arkes, et al, 73 J Applied Psych at 306-07 (cited in note
29); Davies, 27 J Res Personality at 229-33 (cited in note 25); Hell, et
al, 16 Memory & Cognition at 535-36 (cited in note 27).

\[FN75\]. The most effective debiasing study only reduced the bias to
slightly more than one-half of the difference between the ordinary
hindsight and the foresight judgments. Lowe and Reckers, 25 Decision Sci
at 414 (cited in note 36).

\[FN76\]. The results of the research on groups is particularly
significant for the extension of the hindsight bias to legal judgments.
It might well be the case that group decisionmaking forces individuals
to discuss their reasoning in a way that facilitates debiasing.
Alternatively, research shows that groups seem to polarize toward more
extreme positions than individuals. See Roger Brown, Social Psychology:
The Second Edition 200-48 (Free Press 1986) (providing a full discussion
of the phenomenon). This might exacerbate the effect of the hindsight
bias. The data, however, support neither theory. Groups seem to show
slightly less bias than individuals, but are still affected by the bias.
Bukszar and Connolly, 31 Acad Mgmt J at 631 (cited in note 25) (groups
of three to five subjects); Stahlberg, et al, 63 Org Beh & Human
Decision Processes at 51-55 (cited in note 25) (groups of three to five
subjects).

\[FN77\]. Anderson, Lowe, and Reckers, 14 J Econ Psych at 730 (cited in
note 29) (auditors and judges); Jennings, Lowe, and Reckers (unpublished
manuscript) (cited in note 30) (examining judges\' dependence on outcome
knowledge).

\[FN78\]. See Carli and Leonard, 8 J Soc & Clinical Psych at 338 (cited
in note 26) (Rape victim blamed for failing to foresee attack.); Goggin
and Range, 3 J Soc & Clinical Psych at 234-35 (cited in note 26) (Family
members of a suicide victim blamed for failing to have predicted the
tragedy.); Lipshitz and Barak, 88 Acta Psychologica at 110-15 (cited in
note 29) (Consequences of a threatened terrorist attack heavily
influenced Israeli Defense Force officer\'s evaluations of a military
commander\'s response to the threat.). Similarly, a series of studies
have shown that people blame accountants for failing to predict adverse
business outcomes even when accountants in foresight could not have
predicted these outcomes. See Anderson, Lowe, and Reckers, 14 J Econ
Psych at 725-27 (cited in note 29); Jennings, Lowe, and Reckers
(unpublished manuscript) (cited in note 30); Lowe and Reckers, 25
Decision Sci at 413-14 (cited in note 36). The hindsight bias even
influences evaluations of decisions made within the legal system. See
Galen V. Bodenhausen, Second-Guessing the Jury: Stereotypic and
Hindsight Biases in Perceptions of Court Cases, 20 J Applied Soc Psych
1112, 1116 (1990) (finding that when subsequent information reveals that
a verdict is inaccurate, people evaluate the quality of a jury
deliberation as poor); Jonathan D. Casper, Kennette Benedict, and Jo L.
Perry, Juror Decision Making, Attitudes, and the Hindsight Bias, 13 L &
Human Beh 291, 298-301 (1989) (Mock jurors\' verdicts in a suit against
police officers for an alleged Fourth Amendment violation depended upon
whether the search revealed incriminating evidence or not.); Dorothy K.
Kagehiro, et al, Hindsight Bias and Third-Party Consenters to
Warrantless Police Searches, 15 L & Human Beh 305, 309-11 (1991)
(Subjects\' assessments of roommate\'s right to consent to a police
search of residence is dependent on whether incriminating evidence is
found.).

\[FN79\]. Susan J. LaBine and Gary LaBine, Determinations of Negligence
and the Hindsight Bias, 20 L & Human Beh 501 (1996).

\[FN80\]. Kamin and Rachlinski, 19 L & Human Beh 89 (cited in note 4).

\[FN81\]. LaBine and LaBine, 20 L & Human Beh at 507-09 (cited in note
79).

\[FN82\]. Id at 510. LaBine and LaBine did not inform their subjects
that the precautions taken by the therapist were approved by a consensus
of mental health professionals, which might have helped the therapists
in such cases defend themselves against liability. See W. Page Keeton,
et al, Prosser and Keeton on the Law of Torts § 32 at 189 (West 5th ed
1984) (\"Prosser on Torts\").

\[FN83\]. Kamin and Rachlinski, 19 L & Human Beh at 93-94 (cited in note
4).

\[FN84\]. \"(I)f the probability (of injury) be called P; the injury, L;
the burden (of precautions), B; liability depends upon whether B is less
than L multiplied by P: i.e., whether B \< PL.\" United States v Carroll
Towing Co, 159 F2d 169, 173 (2d Cir 1947) (opinion by Hand).

\[FN85\]. The materials stated that the precaution would completely
eliminate the probability of a flood. Kamin and Rachlinski, 19 L & Human
Beh at 95 (cited in note 4).

\[FN86\]. Id at 98.

\[FN87\]. For example, according to the Restatement (Second) of Torts, a
tort defendant is the legal cause of all harm that flows from his or her
negligent conduct unless \"after the event and looking back from the
harm to the negligent conduct, it appears to the court highly
extraordinary that it should have brought about the harm.\" (emphasis
added). Restatement (Second) of Torts § 435(2) (1965). A comment to this
section makes it even more clear that the rule intentionally relies on
outcome knowledge:

While the actor may be responsible for the situation, it is not
necessarily a situation which he, as a reasonable man, should have
expected to result from his conduct. The court, however, knows that it
has resulted and in such a manner as to make the actor responsible for
its creation. Knowing this, the court may well not be surprised nor
regard it as highly extraordinary that the stimulus of the situation
should produce the intervening act; indeed, to one knowing the
situation, the intervention of the act might well appear certain or
almost inevitable.

Restatement (Second) of Torts § 435(2) comment d. By affirmatively
asserting that the assessment of causation should be made in light of
all available information, the Restatement deliberately requests a
determination that is influenced by the known outcome, even though this
standard ensures that defendants will be responsible for all but the
most outlandish consequences. See Keeton, et al, Prosser on Torts § 43
at 298-99 (cited in note 82) (\"(T)o one gifted with omniscience as to
all existing circumstances, no result could appear remarkable, or indeed
anything but inevitable, as a matter of hindsight.\"). Although some
have argued that rules that incorporate ex ante knowledge have adverse
economic consequences, see Omri Ben-Shahar, Should Products Liability Be
Based on Past or Present Scientific Knowledge? (Apr 1997) (on file with
U Chi L Rev), many legal rules retain this feature.

\[FN88\]. Restatement (Second) of Torts § 282.

\[FN89\]. Id at § 282 comment g.

\[FN90\]. Keeton, et al, Prosser on Torts § 31 at 170 & n 15 (cited in
note 82), quoting Green v Sibley, Lindsay & Curr, Co, 257 NY 190, 192,
177 NE 416, 417 (1931) (opinion by Cardozo).

\[FN91\]. See Baron and Hershey, 54 J Personality & Soc Psych at 578
(cited in note 35).

\[FN92\]. See Donald C. Langevoort, Capping Damages for Open-Market
Securities Fraud, 38 Ariz L Rev 639, 644-46 (1996) (discussing the
implications of the hindsight bias to the assessment of scienter in
securities fraud cases).

\[FN93\]. See Janet Cooper Alexander, Do the Merits Matter? A Study of
Settlements in Securities Class Actions, 43 Stan L Rev 497, 508-09
(1991) (discussing massive derivative class action suits that follow
drastic falls in a stock\'s price).

\[FN94\]. Fischhoff, 1 J Exp Psych at 295-97 (cited in note 2).

\[FN95\]. Although a discussion of the application of the hindsight bias
to criminal law is beyond the scope of this Article, if the bias does
affect subjective judgments, then it is likely to have an impact on the
outcome of criminal cases.

\[FN96\]. See Aaron D. Twerski, The Many Faces of Misuse: An Inquiry
Into the Emerging Doctrine of Comparative Causation, 29 Mercer L Rev
403, 420-26 (1978). This doctrine has evolved, and the draft Restatement
of Products Liability proposes that a comparative fault scheme be used
to judge liability as between the manufacturer of a product and a
plaintiff who misuses the product. See Restatement of the Law (Third)
Torts: Products Liability § 11 comment b (Tentative Draft no 3 1996).

\[FN97\]. See Restatement (Second) of Torts § 281 comment c. This
assertion can be traced originally to Justice Cardozo\'s majority
opinion in Palsgraf v Long Island R Co, 248 NY 339, 162 NE 99 (1928).

\[FN98\]. LaBine and LaBine, 20 L & Human Beh at 509 (cited in note 79),
did report that subjects described the actual outcome of their scenarios
as more foreseeable than ones that did not occur. Their data, however,
does not track the legal limitation on foreseeability\--that is, whether
the plaintiff was a foreseeable plaintiff and the harm done was a
foreseeable type of harm. See Keeton, et al, Prosser on Torts § 43 at
297-300 (cited in note 82).

\[FN99\]. See generally Marc Galanter, Why the \"Haves\" Come Out Ahead:
Speculations on the Limits of Legal Change, 9 L & Society Rev 95 (1974).

\[FN100\]. In medical malpractice, there are ten injuries for every
plaintiff who makes a claim for compensation. See Patricia M. Danzon,
Medical Malpractice: Theory, Evidence and Public Policy 22-25 (Harvard
1985). See also The Report of the Harvard Medical Practice Study,
Patients, Doctors, and Lawyers: Medical Injury, Malpractice Litigation,
and Patient Compensation in New York 7-1 (Harvard 1990) (analyzing
trends in the use of legal recourse to recover for injuries); Troyen A.
Brennan, et al, Incidence of Adverse Events and Negligence in
Hospitalized Patients: Results of the Harvard Medical Practice Study I,
324 New Eng J Med 370, 371-75 (1991) (finding medical management causes
substantial injuries, many of which are the result of substandard care);
A. Russell Localio, et al, Relation between Malpractice Claims and
Adverse Events due to Negligence: Results of the Harvard Medical
Practice Study III, 325 New Eng J Med 245, 249-50 (1991) (arguing that
medical malpractice litigation infrequently compensates patients). Even
in automobile accidents, only about half of all injured victims of
negligence pursue claims. See Alfred F. Conard, The Economic Treatment
of Automobile Injuries, 63 Mich L Rev 279, 285 (1964) (Only 14 percent
of persons sustaining losses due to automobile accidents hire
attorneys.). See also Donald Harris, et al, Compensation and Support for
Illness and Injury 46 (Clarendon 1984) (\"Three-quarters of accident
victims never considered the question of damages at all, and of the
quarter who did, only about half actually sought legal advice about
claiming.\"); Richard L. Abel, The Real Tort Crisis\--Too Few Claims, 48
Ohio St L J 443, 448-52 (1987) (discussing the tendency of accident
victims not to file claims for their injuries).

\[FN101\]. See Neal Feigenson, Jaihyun Park, and Peter Salovey, Effect
of Blameworthiness and Outcome Severity on Attributions of
Responsibility and Damage Awards in Comparative Negligence Cases
(forthcoming L & Human Beh) (describing an antiplaintiff bias among
jurors); Valerie P. Hans and William S. Lofquist, Jurors\' Judgments of
Business Liability in Tort Cases: Implications for the Litigation
Explosion Debate, 26 L & Society Rev 85, 108 (1992) (presenting evidence
that jurors are skeptical of plaintiffs\' motives, not defendants\'
motives in mounting a defense).

\[FN102\]. See Keeton, et al, Prosser on Torts § 65 at 461 (cited in
note 82).

\[FN103\]. The hindsight bias probably affects modified comparative
systems, in which a plaintiff who is at least as responsible for his or
her injury as the defendant cannot recover, see Keeton, et al, Prosser
on Torts § 76 at 473 (cited in note 82), the same way that it affects
comparative systems\--making both parties look more culpable.

\[FN104\]. One study found that increasing the severity of the outcome
caused mock jurors to increase the blame they assigned to victims of
accidents (plaintiffs) rather than to injurers (defendants). Feigenson,
Park, and Salovey, forthcoming L & Human Beh at 13 (cited in note 101).
This suggests that the hindsight bias influences judgments of plaintiffs
more so than defendants.

\[FN105\]. Simulation studies of jury decisionmaking like those by the
LaBines and Kamin and me have been criticized for failing to replicate
the detail and gravity of judgments made in actual cases. See Robert M.
Bray and Norbert L. Kerr, Methodological Considerations in the Study of
the Psychology of the Courtroom, in Norbert L. Kerr and Robert M. Bray,
eds, The Psychology of the Courtroom 287, 305-08 (Academic 1982). But
see Robert J. MacCoun, Experimental Research on Jury Decision-Making,
244 Sci 1046, 1046 (1989) (concluding that \"mock jurors do not appear
to reach decisions by a fundamentally different process than actual
jurors\").

\[FN106\]. See Mark F. Grady, A New Positive Economic Theory of
Negligence, 92 Yale L J 799, 814-21 (1983); R. Posner, Economic Analysis
of Law at 549-52 (cited in note 6). But see John E. Calfee and Richard
Craswell, Some Effect of Uncertainty on Compliance with Legal Standards,
70 Va L Rev 965, 974-89 (1984) (arguing that errors can create adverse
consequences).

\[FN107\]. See Calfee and Craswell, 70 Va L Rev at 971-74.

\[FN108\]. See William M. Landes and Richard A. Posner, The Economic
Structure of Tort Law 64 (Harvard 1987); A. Mitchell Polinsky, An
Introduction to Law and Economics 40-42 (Little, Brown 2d ed 1989); R.
Posner, Economic Analysis of Law at 175 (cited in note 6); Steven
Shavell, Strict Liability Versus Negligence, 9 J Legal Stud 1, 2-9
(1980).

\[FN109\]. See Calfee and Craswell, 70 Va L Rev at 971-74. But see
Grady, 92 Yale L J at 819-21 (arguing that the negligence system
accommodates this uncertainty efficiently).

\[FN110\]. See Landes and R. Posner, The Economic Structure of Tort Law
at 64- 73 (cited in note 108); R. Posner, Economic Analysis of Law at
175-80 (cited in note 6); Shavell, 9 J Legal Stud at 23 (cited in note
108).

\[FN111\]. If potential defendants systematically underestimate the
likelihood of an accident in foresight, then they would be taking
inefficient levels of precautions, absent the hindsight bias. In such a
scenario, the hindsight bias might undo some of the adverse effects of
such underestimates. The size of the effect of the hindsight bias,
however, would not necessarily match the degree to which potential
defendants are underestimating the probability of an accident. The
combined effect might result in overdeterrence, as described in the
text, or in underdeterrence. This Article does not address the
possibilities of ex ante underestimation, although such an effect is a
possibility.

\[FN112\]. Even defendants might have difficulty determining whether
they should take an excess of precautions or not under the circumstances
that they face. Repeat defendants, such as insurance companies and
manufacturers, probably have adequate data to make this determination,
because they will know the relationship between their expenditures on
precautions and the expected costs of liability.

\[FN113\]. See Landes and R. Posner, The Economic Structure of Tort Law
at 64- 73 (cited in note 108); R. Posner, Economic Analysis of Law at
175-80 (cited in note 6); Shavell, 9 J Legal Stud at 4-5 (cited in note
108).

\[FN114\]. Defendants who, for whatever reason, take an excess of
precautions will pay less under a negligence system than a strict
liability system. Such defendants will be spending much more than they
need to, however.

\[FN115\]. Simply adopting a system of strict liability instead of
negligence would also avoid the possibility that negligence judged in
hindsight would create incentives to take socially excessive
precautions. This solution might have other adverse consequences,
however. See text accompanying notes 108-10.

\[FN116\]. Thomas v Sorrell, Vaughan 330, 124 Eng Rep 1098, 1102 (KB
1677).

\[FN117\]. US Const Art I, § 9, cl 3. The Constitution does not prohibit
ex post facto civil liability unless such liability is punitive in
nature. United States Trust Co v New Jersey, 431 US 1, 17 n 13 (1977).
Retroactive civil liability violates the Due Process Clause of either
the Fifth or Fourteenth Amendments if its consequences are \"harsh and
oppressive.\" Welch v Henry, 305 US 134, 146-47 (1938).

\[FN118\]. Weaver v Graham, 450 US 24, 28-29 (1981).

\[FN119\]. Lon L. Fuller, The Morality of Law 39 (Yale rev ed 1969)
(identifying this problem as one of the ways in which the Rule of Law
can miscarry).

\[FN120\]. See Fischhoff, 1 J Exp Psych at 298 (cited in note 2).

\[FN121\]. See Jules Coleman and Arthur Ripstein, Mischief and
Misfortune, 41 McGill L J 91, 110-12 (1995) (analyzing the interplay
between liberty and security in the debate over negligence and strict
liability).

\[FN122\]. See, for example, FRE 403.

\[FN123\]. Kamin and Rachlinski, 19 L & Human Beh at 97-98 (cited in
note 4).

\[FN124\]. Id at 97.

\[FN125\]. Id.

\[FN126\]. Id at 98.

\[FN127\]. See note 71.

\[FN128\]. BAJI § 3.11 (West 7th ed 1986).

\[FN129\]. See, for example, 1A New York Pattern Jury
Instructions\--Civil § 2:10 (Law Co-op 3d ed 1997). But see Edward J.
Devitt, Charles B. Blackmar, and Michael A. Wolff, 3 Federal Jury
Practice and Instructions\--Civil § 80.07 (West 4th ed 1987) (exhibiting
a light attempt to debias by instructing the jury that \"the mere fact
that an accident happened . . . does not permit the jury to draw the
inference that the accident was caused by anyone\'s negligence\").

\[FN130\]. Instructions are available that implement a substantive
restriction that juries refrain from inferring negligence based only on
the occurrence of an adverse outcome. See note 129. This issue is
discussed in Part IV.B.3.

\[FN131\]. FRCP 49(a) authorizes the use of special verdict forms in the
federal courts.

\[FN132\]. See FRCP 49(a) (\"(T)he court may require a jury to return
only a special verdict in the form of a special written finding upon
each issue of fact.\").

\[FN133\]. See Charles A. Wright, The Law of Federal Courts § 94 at
674-76 (West 5th ed 1994); Charles A. Wright, The Use of Special
Verdicts in Federal Court, 38 FRD 199, 201-06 (1966).

\[FN134\]. See Jorgenson v York Ice Machinery Corp, 160 F2d 432, 435 (2d
Cir 1947) (expressing reluctance to constrain deliberative process of
the jury).

\[FN135\]. See Elizabeth C. Wiggins and Steven J. Breckler, Special
Verdicts as Guides to Jury Decision Making, 14 L & Psych Rev 1, 1-2
(1990) (Jurors render their verdicts \"on the basis of overall
impressions, rather than on an orderly consideration of the relevant
issues.\").

\[FN136\]. See In re Richardson-Merrill, Inc \"Benedectin\" Products
Liability Litigation, 624 F Supp 1212, 1222-23 (S D Ohio 1985), affd as
Hoffman v Merrill Dow Pharmaceuticals, Inc (In re Benedectin
Litigation), 857 F2d 290 (6th Cir 1988). See also FRCP 42(b) (allowing
bifurcation of issues). For a full discussion of issue separation, see
James A. Henderson, Jr., Fred Bertram, and Michael J. Toke, Optimal
Issue Separation in Modern Products Liability Litigation, 73 Tex L Rev
1653, 1675-96 (1995) (outlining which types of issues are best
adjudicated in a bifurcated trial scenario).

\[FN137\]. See Irwin A. Horowitz and Kenneth S. Bordens, An Experimental
Investigation of Procedural Issues in Complex Tort Trials, 14 L & Human
Beh 269, 281-85 (1990) (finding bifurcation of issues resulted in more
verdicts for defendant but higher average damage awards).

\[FN138\]. See Arkes and Schipani, 73 Or L Rev at 633-36 (cited in note
8) (advocating this procedure as a means of reducing the impact of the
hindsight bias).

\[FN139\]. See David B. Wexler and Robert F. Schopp, How and When to
Correct for Juror Hindsight Bias in Mental Health Malpractice
Litigation: Some Preliminary Observations, 7 Beh Sci & L 485, 494 (1989)
(\"The jury will undoubtedly know that they are not being asked simply
to engage in academic exercise.\").

\[FN140\]. See Part IV.B.4.

\[FN141\]. See Walster, 20 Human Rel at 247-48 (cited in note 14). This
study did show, however, that the magnitude of the outcome can influence
the size of the bias. Id at 244-47.

\[FN142\]. See Part I.A.

\[FN143\]. See David Kaye, The Laws of Probability and the Law of the
Land, 47 U Chi L Rev 34, 47-56 (1979) (defending the proposition that
the preponderance of the evidence standard is properly defined as
requiring that there be at least a 50 percent chance that the defendant
is liable); David Kaye, The Limits of the Preponderance of the Evidence
Standard: Justifiably Naked Statistical Evidence and Multiple Causation,
1982 Am Bar Found Res J 487, 492-503 (considering the application of
probability ratios in joint tortfeasor/multiple defendant situations).
See also Neil Orloff and Jery Stedinger, A Framework for Evaluating the
Preponderance-of-the-Evidence Standard, 131 U Pa L Rev 1159 (1983)
(providing a thorough discussion of the preponderance of the evidence
standard).

\[FN144\]. Edward W. Cleary, ed, McCormick on Evidence § 340 at 961
(West 3d ed 1984).

\[FN145\]. See Dorothy K. Kagehiro and W. Clark Stanton, Legal vs.
Quantified Definitions of Standards of Proof, 9 L & Human Beh 159,
163-73 (1985) (Empirical study showing that the different standards of
persuasion produced similar jury verdicts.). But see Kevin M. Clermont,
Procedure\'s Magical Number Three: Psychological Bases for Standards of
Decision, 72 Cornell L Rev 1115, 1148 (1987) (arguing that each commonly
used standard of persuasion has a distinct psychological meaning).

\[FN146\]. Raising the standard to the criminal standard, \"beyond a
reasonable doubt,\" would probably have a similar, albeit greater,
effect.

\[FN147\]. The regulatory compliance defense has several supporters. See
Richard C. Ausness, The Case for a \"Strong\" Regulatory Compliance
Defense, 55 Md L Rev 1210, 1221-23, 1265-67 (1996) (Administrative cost
savings offset any negative effects in product safety or victim
compensation.); James A. Henderson, Jr., Manufacturers\' Liability for
Defective Product Design: A Proposed Statutory Reform, 56 NC L Rev 625,
625-26 (1978) (Integrity of the judicial process depends on limiting
products liability recovery.); Peter Huber, Safety and the Second Best:
The Hazards of Public Risk Management in the Courts, 85 Colum L Rev 277,
329-35 (1985) (Regulatory agencies are best equipped for making ex ante
reasonableness determinations.). Professor Richard Epstein has provided
the most vigorous argument for custom as a complete defense to
liability. Richard A. Epstein, The Path to The T.J. Hooper: The Theory
and History of Custom in the Law of Tort, 21 J Legal Stud 1, 6- 11
(1992).

\[FN148\]. The hindsight bias also might make it difficult for a
defendant to establish that his or her actions actually complied with
the custom or regulation. See Arkes and Schipani, 73 Or L Rev at 597-601
(cited in note 8). A judge or jury, faced with an adverse outcome that,
psychologically, needs to be explained, might disregard the decision
rule and simply find the defendant negligent. If the hindsight bias
operates this way, it would be hard or even impossible to avoid its
effects. There is no evidence, however, that the bias induces judges or
juries to disregard the decision rule.

\[FN149\]. See Restatement (Second) of Torts § 288C (\"Compliance with a
legislative enactment or an administrative regulation does not prevent a
finding of negligence where a reasonable man would take additional
precautions.\"); id at § 295A (\"In determining whether conduct is
negligent, the customs of the community, or of others under like
circumstances, are factors to be taken into account but are not
controlling where a reasonable man would not follow them.\"). In
contrast, the failure to comply with a regulation can constitute
negligence per se. See id at § 288B.

\[FN150\]. See id at §§ 288C, 295A. See also The T.J. Hooper, 60 F2d
737, 740 (2d Cir 1932) (opinion by Hand) (\"Courts must in the end say
what is required (to avoid negligence).\"). Ironically, Judge Hand also
suggested that custom could supplant the cost-benefit analysis of
negligence. See Carroll Towing, 159 F2d at 173.

\[FN151\]. See Ausness, 55 Md L Rev at 1214-17 (cited in note 147).
Presumably, a regulatory compliance defense would not apply to safety
regulations that were not intended to approximate a reasonable level of
care. See Henderson, 56 NC L Rev at 638-40 (cited in note 147). Many
federal regulations, however, would meet this criteria. Ausness, 55 Md L
Rev at 1214-17 (cited in note 147).

\[FN152\]. See Ausness, 55 Md L Rev at 1238 (cited in note 147); Clayton
P. Gillette and James E. Krier, Risk, Courts, and Agencies, 138 U Pa L
Rev 1027, 1064-69 (1990) (analyzing the problem of industry \"capture\"
of a regulatory agency); Richard B. Stewart, The Reformation of American
Administrative Law, 88 Harv L Rev 1667, 1682-88 (1975) (documenting
widespread popular fear of industry \"capture\" phenomenon).

\[FN153\]. See Ausness, 55 Md L Rev at 1238 (cited in note 147); Susan
Rose-Ackerman, Progressive Law and Economics\--And the New
Administrative Law, 98 Yale L J 341, 361-63 (1988) (documenting the
compromises made in propounding OSHA standards).

\[FN154\]. See Thomas O. McGarity, Reinventing rationality: The role of
regulatory analysis in the federal bureaucracy 126-42 (Cambridge 1991).

\[FN155\]. See Ausness, 55 Md L Rev at 1238 (cited in note 147).

\[FN156\]. See Erie Railroad Co v Tompkins, 304 US 64, 99-100 (1938).

\[FN157\]. See Restatement (Second) of Torts § 288B.

\[FN158\]. See Ausness, 55 Md L Rev at 1237-38 (cited in note 147);
Stephen A. Gardbaum, The Nature of Preemption, 79 Cornell L Rev 767,
804-12 (1994) (analyzing the federalism issues relating to the
preemption of tort claims).

\[FN159\]. See Eric Posner, Law, Economics, and Inefficient Norms, 144 U
Pa L Rev 1697, 1705-10 (1996) (arguing that social norms have a tendency
to generate inefficiency).

\[FN160\]. Keeton, et al, Prosser on Torts § 33 at 194 (cited in note
82).

\[FN161\]. R. Posner, Economic Analysis of Law at 168 (cited in note 6).

\[FN162\]. \<cn\>60 F2d 737, 740 (2d Cir 1932).

\[FN163\]. But see Epstein, 21 J Legal Stud at 32-36 (cited in note 147)
(arguing that the custom at the time favored the use of radios).

\[FN164\]. The T.J. Hooper, 60 F2d at 740. Law and economics scholars
have questioned the merits of this suggestion. Professor Epstein refers
to this assertion as \"perhaps the most influential, and mischievous,
sentence in the history of the law of torts.\" Epstein, 21 J Legal Stud
at 38 (cited in note 147).

\[FN165\]. The T.J. Hooper, 60 F2d at 740.

\[FN166\]. The rule that custom is relevant to the determination of
negligence but is not controlling has been adopted into the Restatement
(Second) of Torts § 295A and is followed in a majority of jurisdictions.
Epstein, 21 J Legal Stud at 38 (cited in note 147). A small minority of
jurisdictions defer completely to custom and another small minority
treat evidence of custom as irrelevant. Id at 17-32.

\[FN167\]. See Landes and R. Posner, The Economic Structure of Tort Law
at 132-33 (cited in note 108); R. Posner, Economic Analysis of Law at
168 (cited in note 6).

\[FN168\]. See James A. Henderson, Jr. and John A. Siliciano, Universal
Health Care and the Continued Reliance on Custom in Determining Medical
Malpractice, 79 Cornell L Rev 1382, 1389-95 (1994) (arguing that the
complexity of medical practice and the ignorance of patients challenge
the wisdom of relying on custom).

\[FN169\]. See Keeton, et al, Prosser on Torts § 33 at 194-95 (cited in
note 82).

\[FN170\]. See Landes and R. Posner, Economic Structure of Tort Law at
137 (cited in note 108); Keeton, et al, Prosser on Torts § 32 at 189
(cited in note 82). Other professionals are liable if their conduct
fails to conform to that of a \"reasonable\" member of the profession,
see Keeton, et al, Prosser on Torts § 24 at 145, leaving them subject to
the hindsight bias. In a medical malpractice case in which there is no
relevant custom, a determination of liability would be influenced by the
hindsight bias as well.

\[FN171\]. See, for example, Hood v Phillips, 554 SW2d 160, 165 (Tex
1977) (\"A physician who undertakes a mode or form of treatment which a
reasonable and prudent member of the medical profession would undertake
. . . shall not be subject to liability.\"). But see Helling v Carey, 83
Wash 2d 514, 519 P2d 981, 983 (1974) (finding an opthamologist liable
for failing to give a glaucoma test to a young plaintiff, even though
medical practice opposed giving the test). The case is probably a rare
exception to the general rule that adherence to customary treatments
cannot be negligent. See Neil Meltzer, Comment, Helling v. Carey:
Landmark or Exception in Medical Malpractice, 11 New Eng L Rev 301,
303-07 (1975). Curiously, the Helling case is one in which medical
custom was not supported by a cost-benefit analysis. See William B.
Schwartz and Neil K. Komesar, Doctors, Damages, and Deterrence: An
Economic View of Medical Malpractice, 298 New Eng J Med 1282, 1283
(1978) (concluding that under the circumstances in the case, a glaucoma
test cost \$5, but saved \$27 in expected losses). The court, in
Helling, did not rely on this cost-benefit analysis, but, had it done
so, it would have been able to rely on fairly precise ex ante estimates
for costs and benefits rather than subjective ones. This might have
enabled it to avoid the hindsight bias. To the extent that any ambiguity
in ex ante estimates exists, however, the hindsight bias would probably
re-emerge as an influence on judgment.

\[FN172\]. See R. Posner, Economic Analysis of Law at 168-69 (cited in
note 6). But see Henderson and Siliciano, 79 Cornell L Rev at 1389-1400
(cited in note 168) (arguing that courts\' assumption that appropriate
custom will develop in medical practice may be incorrect).

\[FN173\]. See Keeton, et al, Prosser on Torts § 33 at 192-95 (cited in
note 82).

\[FN174\]. See R. Posner, Economic Analysis of Law at 169 (cited in note
6).

\[FN175\]. Although he was not referring to the hindsight bias,
Professor Henderson remarked that \"to reject the use of . . . (safety)
regulations as a standard . . . is to miss an important opportunity to
render more consistent and rational the patterns of decisions in many
product areas.\" Henderson, 56 NC L Rev at 639 (cited in note 147).

\[FN176\]. Epstein, 21 J Leg Stud at 38 (cited in note 147); R. Posner,
Economic Analysis of Law at 168 (cited in note 6).

\[FN177\]. Competitive pressures would likely keep the industry from
taking more precautions than they need to avoid liability.

\[FN178\]. See Ernest Bainbridge Lipscomb III, Libscomb\'s Walker on
Patents § 6.1 at 4 (Law Co-op 3d ed 1985).

\[FN179\]. Hotchkiss v Greenwood, 52 US (11 How) 248, 267 (1850). For
example, the patent at issue in Hotchkiss was for a ceramic doorknob.
The Court deemed this an obvious innovation. Id.

\[FN180\]. 35 USC § 103(a) (1994) (emphasis added).

\[FN181\]. Graham v John Deere Co, 383 US 1, 17 (1966).

\[FN182\]. Id at 15 n 7.

\[FN183\]. See the discussion of the hindsight bias and foreseeability
in Part II.B.3.

\[FN184\]. \<cn\>35 USC § 103(a).

\[FN185\]. Ellicott Machine Corp v United States, 405 F2d 1385, 1390 (Ct
Cl 1969).

\[FN186\]. Teleflex Inc v American Chain & Cable Co, 273 F Supp 573, 587
(S D NY 1967). See also Kaz Manufacturing Co v Northern Electric Co, 412
F Supp 470, 484 (S D NY 1976) (referring to hindsight as \"convenient
but misleading\"); Borden, Inc v Occidental Petroleum Corp, 381 F Supp
1178, 1205 (S D Tex 1974) (\"Obviousness can(not) . . . be resolved
through . . . analysis distorted by . . . retrospective self-evidence or
hindsight.\"); Erie Technological Products, Inc v Die Craft Metal
Products, Inc, 318 F Supp 933, 936 (N D Ill 1970), modified on other
grounds, 461 F2d 5 (7th Cir 1972) (\"In determining whether a patent is
invalid for obviousness, a court must guard against . . . slipping into
hindsight.\"). The most extreme statement on hindsight was made in
Ransburg Electro-Coating Corp v Nordson Corp, 293 F Supp 448, 482 (N D
Ill 1968) (\"(H)indsight is of no value in determining what would have
been obvious at the time the invention was made.\").

\[FN187\]. Graham, 383 US at 17-18.

\[FN188\]. Id at 36, quoting Monroe Auto Equipment Co v Heckthorn
Manufacturing & Supply Co, 332 F2d 406, 412 (6th Cir 1964).

\[FN189\]. Vandenberg v Dairy Equipment Co, 740 F2d 1560, 1567 (Fed Cir
1984).

\[FN190\]. See Dorothy Whelan, Note, A Critique of the Use of Secondary
Considerations in Applying the Section 103 Nonobviousness Test for
Patentability, 28 BC L Rev 357, 360-65 (1987) (discussing the case law
and questioning the use of certain secondary characteristics).

\[FN191\]. The bias is especially pernicious in an unfamiliar context.
See Christensen-Szalanaski and Willham, 48 Org Beh & Human Decision
Processes at 154-55 (cited in note 2).

\[FN192\]. See Keeton, et al, Prosser on Torts § 39 at 242 (cited in
note 82). In cases in which the doctrine of res ipsa loquitur is
applicable, however, the plaintiff need only demonstrate that an adverse
outcome occurred. See Restatement (Second) of Torts § 328D; Keeton, et
al, Prosser on Torts § 39 at 242 (cited in note 82).

\[FN193\]. Cain v Rijken, 300 Or 706, 720, 717 P2d 140, 149 (1986).

\[FN194\]. Keeton, et al, Prosser on Torts § 39 at 242 (cited in note
82).

\[FN195\]. Securities Act of 1933, Pub L No 73-38, 48 Stat 74, codified
at 15 USC §§ 77a-77z (1994); Securities Exchange Act of 1934, Pub L No
73-404, 48 Stat 881, codified at 15 USC §§ 78a-78ll (1994). See D. Brian
Hufford, Deterring Fraud vs. Avoiding the \"Strike Suit\": Reaching an
Appropriate Balance, 61 Brooklyn L Rev 593, 605-06 (1995) (\"Courts have
been especially aggressive in dismissing cases that merely plead \'fraud
by hindsight.\"\'); Robert A. Prentice and John H. Langmore, Beware of
Vaporware: Product Hype and the Securities Fraud Liability of High-Tech
Companies, 8 Harv J L & Tech 1, 25 (1994) (\"Courts generally have been
careful to prevent plaintiffs from alleging \'fraud by hindsight.\"\').

\[FN196\]. See Basic, Inc v Levinson, 485 US 224, 231 (1988) (stating
the elements of a violation of Section 10(b) of the Securities Exchange
Act of 1934).

\[FN197\]. FRCP 9(b). This Rule requires that a complaint alleging fraud
must describe the particular circumstances of the alleged fraud. See
Charles A. Wright and Arthur L. Miller, 5 Federal Practice and Procedure
1297 (West 1990). Rule 9(b) has been used extensively in federal
securities cases. See Alexander, 43 Stan L Rev at 524-28 (cited in note
93). Since few of these cases go to trial, the merits of these cases are
fought in pre-trial motion practice. See id. As a consequence, the
\"fraud-by-hindsight\" doctrine is raised earlier in securities cases
than it would be in a tort suit. For example, note that the prohibition
against relying exclusively on hindsight in Cain, 717 P2d at 142, arose
in the context of a summary judgment motion.

\[FN198\]. See William S. Feinstein, Pleading Securities Fraud With
Particularity\--Federal Rule of Civil Procedure 9(b) in the Rule 10b-5
Context: Kowal v. MCI Communications Corporation, 63 Geo Wash L Rev 851,
857-58 (1995) (noting courts\' reluctance to admit \"fraud by
hindsight\" without supporting evidence); Elliott J. Weiss, The New
Securities Fraud Pleading Requirement: Speed Bump or Road Block?, 38
Ariz L Rev 675, 684 (1996) (discussing whether requiring that fraud be
plead with particularity deters \"fraud by hindsight\" claims).

\[FN199\]. Dileo v Ernst & Young, 901 F2d 624, 628 (7th Cir 1990),
quoting Denny v Barber, 576 F2d 465, 470 (2d Cir 1978) (opinion by
Friendly).

\[FN200\]. This assumes that the hindsight bias implicates subjective
standards. See discussion in Part II.B.2.

\[FN201\]. See FRE 407; David P. Leonard, Selected Rules of Limited
Admissibility, The New Wigmore §§ 2.3.4, 2.5 (Little, Brown 1996) (Only
two states, Maine and Rhode Island, regularly admit such evidence to
prove negligence.). Subsequent remedial measures are admissible for
other purposes, \"such as proving ownership, control, or feasibility of
precautionary measures, if controverted, or impeachment.\" FRE 407.

\[FN202\]. The relevance of subsequent remedial measures to negligence
has been a point of some debate, but the debate is about whether they
are relevant at all. See Leonard, Selected Rules of Limited
Admissibility at §§ 2.2, 2.3.1 (providing an account of both sides of
the argument).

\[FN203\]. See FRE 407 Advisory Committee\'s Note (Adopting a subsequent
remedial measure \"is not in fact an admission\" of fault, but \"(u)nder
a liberal theory of relevancy, this ground alone would not support
exclusion as the inference is still a possible one.\").

\[FN204\]. See Leonard, Selected Rules of Limited Admissibility § 2.2 at
2-14 (cited in note 201).

\[FN205\]. Hart v The Lancashire & Yorkshire Railway Co, 21 LTR (ns)
261, 263 (Exch 1869).

\[FN206\]. See, for example, Flaminio v Honda Motor Co, 733 F2d 463, 471
(7th Cir 1984) (opinion by Posner) (\"It is only because juries are
believed to overreact to evidence of subsequent remedial measures that
the admissibility of such evidence could deter defendants from taking
such measures.\").

\[FN207\]. See Dennis J. Block, Nancy E. Barton, and Stephen A. Radin,
The Business Judgment Rule: Fiduciary Duties of Corporate Directors and
Officers 3- 4 (Prentice Hall 2d ed 1988).

\[FN208\]. See E. Norman Veasey and Julie M.S. Seitz, The Business
Judgment Rule in the Revised Model Act, The Trans Union Case, and the
American Law Institute Project\--A Strange Porridge, 63 Tex L Rev 1483,
1484-97 (1985) (discussing different formulations of the business
judgment rule).

\[FN209\]. See Franklin A. Gevurtz, The Business Judgment Rule:
Meaningless Verbiage or Misguided Notion?, 67 § Cal L Rev 287, 289
(1994) (\"Defining the business judgment rule is no easy task.\").

\[FN210\]. American Law Institute, Principles of Corporate Governance:
Analysis and Recommendations § 4.01(c) at 177-78 (ALI 1991). The
hindsight bias might affect the ex post assessment of whether a decision
was \"rational.\" However, the standard of liability under the business
judgment rule is so low that even judgments in hindsight are unlikely to
ever lead to a finding of liability under this standard.

\[FN211\]. The basic elements of the business judgment rule are: (1)
business decision, (2) disinterest and independence, (3) due care to
make an informed choice, (4) no bad faith, and (5) no abuse of
discretion. See Block, Barton, and Radin, The Business Judgment Rule at
12-22. The rule of course supplies no protection otherwise. Id at 12.
See also Joy v North, 692 F2d 880, 886 (2d Cir 1982) (\"The business
judgment rule . . . does not apply in cases, e.g., in which the
corporate judgment lacks a business purpose, is tainted by conflict of
interest, . . . is so egregious as to amount to a no-win decision, . . .
or results from obvious and prolonged failure to exercise oversight or
supervision.\").

\[FN212\]. See, for example, Louisiana World Exposition v Federal
Insurance Co, 864 F2d 1147, 1151 (5th Cir 1989) (\"Simple negligence
alone is insufficient for a finding of personal liability of an officer
or director to the corporation.\"); Joseph W. Bishop, Jr., Sitting Ducks
and Decoy Ducks: New Trends in the Indemnification of Corporate
Directors and Officers, 77 Yale L J 1078, 1099 (1968) (\"The search for
cases in which directors of industrial corporations have been held
liable in derivative suits for negligence uncomplicated by self-dealing
is a search for a very small number of needles in a very large
haystack.\").

\[FN213\]. Joy, 692 F2d at 885 (citations omitted).

\[FN214\]. Aronson v Lewis, 473 A2d 805, 812 (Del 1984).

\[FN215\]. See Block, Barton, and Radin, The Business Judgment Rule at
63-64 (cited in note 207).

\[FN216\]. See, for example, Gearhart Industries, Inc v Smith
International, Inc, 741 F2d 707, 721 (5th Cir 1984) (\"Texas courts . .
. will not impose liability upon a noninterested corporate director
unless the challenged action is ultra vires or tainted by fraud.\"). See
also Marcia M. McMurray, Note, A Historical Perspective on the Duty of
Care, the Duty of Loyalty, and the Business Judgment Rule, 40 Vand L Rev
605, 614-16 (1987) (discussing various standards). The standard of
review for \"gross negligence\" likewise applies only to the
decisionmaking process, not to the substantive decision, which receives
more deferential treatment. See Veasey and Seitz, 63 Tex L Rev at
1486-87 (cited in note 208). The Delaware legislature was even unhappy
with the \"gross negligence\" standard. After the Delaware Supreme Court
adopted the \"gross negligence\" standard in Aronson, 473 A2d at 812,
and Smith v Van Gorkom, 488 A2d 858, 873 (Del 1985), the legislature
lowered the standard so as to give corporate managers even more
discretion. See Arkes and Schipani, 73 Or L Rev at 618 (cited in note
8).

\[FN217\]. Other justifications include the effort to promote managerial
control over shareholder control of the corporation and the relatively
unsympathetic position of the shareholders, who are usually free to
dispose of their ownership interest in the corporation if they feel that
the management is incompetent. See Block, Barton, and Radin, The
Business Judgment Rule at 7-11 (cited in note 207); McMurray, 40 Vand L
Rev at 616-17; Ralph A. Peeples, The Use and Misuse of the Business
Judgment Rule in the Close Corporation, 60 Notre Dame L Rev 456, 483-85
(1985).

\[FN218\]. See Auerbach v Bennett, 47 NY2d 619, 630, 419 NYS2d 920, 926,
393 NE2d 994, 1000 (1979) (\"The business judgment doctrine, at least in
part, is grounded on the prudent recognition that courts are ill
equipped . . . to evaluate what are and must be essentially business
judgments.\"); Joseph Hinsey, IV, Business Judgment and the American Law
Institute\'s Corporate Governance Project: the Rule, the Doctrine, and
the Reality, 52 Geo Wash L Rev 609, 612 (1984) (recognizing the courts\'
tendency to defer to managerial discretion).

\[FN219\]. See, for example, Gevurtz, 67 § Cal L Rev at 305 (cited in
note 209). Courts do defer somewhat to doctors by allowing a defense
based on compliance with customary medical practice. See Part IV.B.1.

\[FN220\]. Joy, 692 F2d at 886.

\[FN221\]. Washington Bancorp v Said, 812 F Supp 1256, 1267-68 (D DC
1993).

\[FN222\]. See Arkes and Schipani, 73 Or L Rev at 621-29 (cited in note
8) (comparing the liability of corporate managers to doctors).

\[FN223\]. See Gevurtz, 67 § Cal L Rev at 288 (cited in note 209) (using
these similarities to extend Judge Hand\'s cost-benefit analysis for
negligence to business decisions).

\[FN224\]. See Peeples, 60 Notre Dame L Rev at 461 (cited in note 217)
(\"Courts have deferred to managerial decisions because of the
assumption that the shareholder has an alternate course of action:
selling the interest in the corporation.\").

\[FN225\]. See Arkes and Schipani, 73 Or L Rev at 623 (cited in note 8).

\[FN226\]. See Gevurtz, 67 § Cal L Rev at 312-14 (cited in note 209).

\[FN227\]. See text accompanying notes 230-31.

\[FN228\]. This is because even though strict liability and negligence
are equally efficient, strict liability may decrease activity levels by
placing the entire cost on the potential defendant. R. Posner, Economic
Analysis of Law at 175-80 (cited in note 6).

\[FN229\]. See, for example, Briggs v Spaulding, 141 US 132, 148-49
(1891); Godbold v The Branch Bank, 11 Ala 191, 199 (1847); Percy v
Millaudon, 8 Mart (ns) 68, 77-78 (La 1829); Spering\'s Appeal, 71 Pa 11,
24 (1872); Hodges v New England Screw Co, 1 RI 312, 346-47 (1850).

\[FN230\]. See Joy, 692 F2d at 886 n 6.

\[FN231\]. See R. Posner, Economic Analysis of Law at 405 (cited in note
6).

\[FN232\]. \<cn\>692 F2d 880, 886 (2d Cir 1982).

\[FN233\]. FRCP 11(b) 1983 Amendments.

\[FN234\]. See Robert G. Bone, Modeling Frivolous Suits, 145 U Pa L Rev
519, 529-33 (1997).

\[FN235\]. FRCP 11(b) 1983 Amendments.

\[FN236\]. FRCP 11(b) 1993 Amendments.

\[FN237\]. Law and economics scholars have theories explaining each of
these. These rest largely on the possibility of errors or judicial
incompetence relative to corporate managers. However, a large part of
judicial incompetence is not fear of random error but systematic biases,
such as the hindsight bias.

END OF DOCUMENT