bounded rationality and ip - harvard universityabove average in their endowment of positive traits...
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BoundedRationalityandIP
WilliamFisherNovember10,2017
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$
Quantity
The Incentive Theory of IP is founded upon the following conception of the impact of giving innovators exclusive rights
P
Q
Prof
it-m
axim
izin
g pric
e
Profit-maximizing output
MonopolyProfits
ConsumerSurplus
DeadweightLoss(foregoneconsumersurplus)
Marginal Cost
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RefiningtheApproach
• Ouraspirationshouldbetoadjustpatentdoctrinethatincreaseitssociallybeneficialeffectsanddecreaseitssociallyperniciouseffects
• Ourabilitytodosowillincreaseifourpredictionsoftheimpactofthesevariousincentivesisfoundeduponamoresophisticatedmodelofhumanmotivations
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Rationality1) ExpectedUtilityTheory
a) Concaveutilityfunctionsb) Decisionmaking onthebasisofexpectedutilityc) Generalphenomenonofriskaversion
2) UbiquitousFormsofBoundedRationality3) FormsofBoundedRationalityspecificto
creators
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Source:Prakash,EnterpriseandIndividualRiskManagement
StandardUtilityCurve
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StandardUtilityCurve
Source:http://economicsconcepts.com/total_utility_and_marginal_utility.htm
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Decision-making on the basis of expected utility
• Rationalchoice=selectingpathBoverpathAiffthesumoftheexpectedutilitiesofthevariouspossibleoutcomesofpathBexceedthoseofpathA
• Toillustrate:– pathAleadstocertaingainof20utiles (orunitsofpleasure)
– pathBleadsto25%chanceofgaining100utiles anda75%chanceofgainingnothing
– expectedutilityfrompursuingpathAis20;– expectedutilityfrompursuingpathBis.25(100)+.75(0)=25utiles
– Underthesecircumstances,arationalpersonwillchoosepathB
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Rationality1) ExpectedUtilityTheory
a) Concaveutilityfunctionsb) Decisionmaking onthebasisofexpectedutilityc) Generalphenomenonofriskaversion
2) UbiquitousFormsofBoundedRationality3) FormsofBoundedRationalityspecificto
creators
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Source:Prakash,EnterpriseandIndividualRiskManagement
StandardUtilityCurve
Statusquo Personisofferedabet:--odds:50/50--ifshewins,gains$2K--ifsheloses,forfeits$2KSherefusesthebet.
Expectedutilityofthegamble
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Decision-making on the basis of expected utility
• Rationalchoice=selectingpathBoverpathAiff thesumoftheexpectedutilitiesofthevariouspossibleoutcomesofpathBexceedthoseofpathA
• Toillustrate:– pathA(HarvardLawSchool)leadstocertainlifetimetotalincomeof$20M(discountedtopresentvalue)
– pathB(BerkeleyColleyofMusic)leadsto25%chanceoflifetimeincomeof$100Manda75%chanceof$1M
– expectedbenefitfrompursuingpathAis$20M– expectedbenefitfrompursuingpathBis.25(100)+.75(1)=$25.75M
– Intheabsenceofriskaversion,arationalpersonwillchoosepathB
– ButriskaversionislikelytocausethepersontochoosepathAinstead
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Rationality1) ExpectedUtilityTheory2) UbiquitousFormsofBoundedRationality
a) ProspectTheoryb) EndowmentEffectc) PresenceHeuristicd) Overoptimisme) LotteryEffect
3) FormsofBoundedRationalityspecifictocreators
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ProspectTheory• Ingeneral,peopleunderweightprospectsthataremerelyprobableincomparisontoprospectsthatarecertain
• Gains:– 100%chanceofwinning$100shouldbetreatedasequivalentof10%chanceofwinning$1000
– butpeoplebehaveasifthelatteris5%– givesrisetoriskaversionforgains– butforareasondifferentfromthatofferedbyclassicaltheory
• Losses:– 100%chanceoflosing$100shouldbetreatedasequivalentof10%chanceoflosing$1000
– butpeoplebehaveasifthelatteris5%-- i.e.,expectedutilityis$500loss
– givesrisetoriskpreferenceforlosses
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EndowmentEffect• ThepaincausedbyalossofXistypicallygreaterthanthepleasurereapedbyagainofX– Putdifferently,peopleplacehighervaluesonthingstowhichtheythinktheyalreadyhaverights,thantheydoonidenticalthingstowhichtheythinktheydon’t(yet)haverights.
– Theresult:peoplewilldemandahigherpricetoinducethemtosurrenderanobjectoranentitlementthantheywilloffertoacquirethatobjectorentitlement.
• Thereferencepointfromwhichgainsandlossesareassessedisapsychologicalquestion,onlyindirectlyalegalone
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GainsLosses
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EndowmentEffect
• Springsteentickets:https://www.npr.org/2017/11/09/563133762/bruce-springsteen-on-broadway-comes-with-an-economics-lesson?utm_medium=RSS&utm_campaign=business
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GainsLosses
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Illustration:ValuationofSolarEasements
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GainsLosses
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Illustration:SelectionofInsurance-PolicyProvisions
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GainsLosses
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Becausetheyarelessconcernedwiththisthanwiththis.
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Rationality1) ExpectedUtilityTheory2) UbiquitousFormsofBoundedRationality
a) ProspectTheoryb) EndowmentEffectc) PresenceHeuristicd) Overoptimisme) LotteryEffect
3) FormsofBoundedRationalityspecifictocreators
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Rationality1) ExpectedUtilityTheory2) UbiquitousFormsofBoundedRationality
a) ProspectTheoryb) EndowmentEffectc) PresenceHeuristicd) Overoptimisme) LotteryEffect
3) FormsofBoundedRationalityspecifictocreators
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Source:http://www.orvfc.org/files/1212/5851/4939/NCAA%20-%20Professional%20Probabilities.pdf
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Source:http://www.orvfc.org/files/1212/5851/4939/NCAA%20-%20Professional%20Probabilities.pdf
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Levallow &Kahneman,“DelusionsofSuccess: HowOptimismUnderminesExecutives’Decisions”(2003)
“Researchintohumancognitionhastracedthisoveroptimismtomanysources.Oneofthemostpowerfulisthetendencyofindividualstoexaggeratetheirowntalents—tobelievetheyareaboveaverageintheirendowmentofpositivetraitsandabilities.Considerasurveyof1millionstudentsconductedbytheCollegeBoardinthe1970s.Whenaskedtoratethemselvesincomparisontotheirpeers,70%ofthestudentssaidtheywereaboveaverageinleadershipability,whileonly2%ratedthemselvesbelowaverage.Forathleticprowess,60%sawthemselvesabovethemedian,6%below.Whenassessingtheirabilitytogetalongwithothers,60%ofthestudentsjudgedthemselvestobeinthetopdecile,andfully25%consideredthemselvestobeinthetop1%.”
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Levallow &Kahneman,“DelusionsofSuccess: HowOptimismUnderminesExecutives’Decisions”(2003)
“Theinclinationtoexaggerateourtalentsisamplifiedbyourtendencytomisperceivethecausesofcertainevents.Thetypicalpatternofsuchattributionerrors,aspsychologistscallthem,isforpeopletotakecreditforpositiveoutcomesandtoattributenegativeoutcomestoexternalfactors,nomatterwhattheirtruecause.Onestudyofletterstoshareholdersinannualreports,forexample,foundthatexecutivestendtoattributefavorableoutcomestofactorsundertheircontrol,suchastheircorporatestrategyortheirR&Dprograms.Unfavorableoutcomes,bycontrast,weremorelikelytobeattributedtouncontrollableexternalfactorssuchasweatherorinflation.Similarself-servingattributionshavebeenfoundinotherstudiesofannualreportsandexecutivespeeches.”
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Carden,“Behavioraleconomicsshowthatwomentendtomakebetterinvestmentsthanmen”(2013)
“TerryOdean,aUniversityofCaliforniaprofessor,hasstudiedstockpickingbygenderformorethantwodecades.Aseven-yearstudyfoundsinglefemaleinvestorsoutperformedsinglemenby2.3percent,femaleinvestmentgroupsoutperformedmalecounterpartsby4.6 percentandwomenoveralloutperformedby1.4percent.Why?Theshortanswerisoverconfidence.Mentrademore,andthemoreyoutrade,typicallythemoreyoulose— nottomentionrunninguptransactioncosts….Additionally,menholdontotheirlosersalotlongerthanwomen.They’resurethestockwillcomeroaringback— evenasitsinks.Academicscallitconfirmationbias;investmentadviserscallitboneheaded.”
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Goodman-Delahunty etal.,“InsightfulorWishful:Lawyers’AbilitytoPredictCaseOutcomes”(2010)
“Thefindingsextendpreviousresearchonoverconfidenceindefenselawyers(Loftus&Wagenaar,1988;Malsch,1990),byestablishingthatsimilarbiasesariseinpredictionsbycriminalprosecutorsandbycounselforbothplaintiffsanddefendantsincivilcases.Lawyersfrequentlymadesubstantialjudgmentalerrors,showingaproclivitytooveroptimism.Themostbiasedestimateswereexpressedwithveryhighinitialconfidence:Intheseinstances,lawyerswereextremelyoverconfident.Thesefindingsareconsistentwithalargebodyofliteraturedocumentingoverconfidenceinarangeofjudgments(theoreticalexplanationsofmiscalibrationofconfidencearediscussedinGigerenzer,Hoffrage,&Kleinbolting,1991;Kahneman,Slovic,&Tversky,1982;Moore&Healy,2008).”
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Goodman-Delahunty etal.,“InsightfulorWishful:Lawyers’AbilitytoPredictCaseOutcomes”(2010)
“Withrespecttothecorrelatesoftheoverconfidencebias,certainresultsweresomewhatcounterintuitive,suchasthefindingthatlawyerswithmoreexperiencewerenotbettercalibratedthanlessexperiencedlawyers….“Withregardtogender,wereplicatedresultsobtainedbyMalsch(1990)thatfemalelawyerswerebettercalibratedthantheirmalecolleagues.Malepractitionersweremoreoverconfidentthanfemalepractitioners.Thesefindingsareinlinewithgenderdifferencesobservedinresearchonmetacognition(Pallier,2003).”
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“LotteryEffect”• (Some)peopleoverweightsmallprobabilitiesofreapingverylargegains
• Manifestations– Playinglotteries(Scherer;Crouch)
• Peopleplaylotteries,despite“houserake”of~50%• Achangeintheamountofthepayoutwillaffecttheirwillingnesstoparticipatemuchmorethanachangeinprobabilityofthepayout
– Amateurinvestors(Stout1995)– Entrepreneurialism(Hopenhyn 2003;Astebro2003)
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Scherer,“InnovationLottery”
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GainsLosses
Value
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Rationality1) ExpectedUtilityTheory2) UbiquitousFormsofBoundedRationality3) FormsofBoundedRationalityspecificto
creatorsa) Unusuallystrongversionof“overoptimism”?b) Areartists“skewness lovers”?c) Theintuitionsunderlyingpersonalitytheoryand
labortheorymayhelptodefineartists’referencepoints
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Scherer,“InnovationLottery”
Clapton
MusicianswaitingtablesinNY&LA
$
Scherersuggeststhispatternmaybesociallybeneficial
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ChrisAnderson,“TheLongTail”
Source:http://www.thelongtail.com/about.html
“hits”
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ChrisAnderson,“TheLongTail”
“ThetheoryoftheLongTailisthatourcultureandeconomyisincreasinglyshiftingawayfromafocusonarelativelysmallnumberof"hits"(mainstreamproductsandmarkets)attheheadofthedemandcurveandtowardahugenumberofnichesinthetail.Asthecostsofproductionanddistributionfall,especiallyonline,thereisnowlessneedtolumpproductsandconsumersintoone-size-fits-allcontainers.Inanerawithouttheconstraintsofphysicalshelfspaceandotherbottlenecksofdistribution,narrowly-targetedgoodsandservicescanbeaseconomicallyattractiveasmainstreamfare.”
Source:http://www.thelongtail.com/about.html
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Scherer,“InnovationLottery”
Clapton
MusicianswaitingtablesinNY&LA
Thesearethe(relativelyfew)folkswhomakethe(relativelyfew)“hits”
Thesearethe(many)folkswhomakethe(largenumber)ofunpopularworks
IfAndersoniscorrect,weshouldseeashifttowardapatternlikethis.
Clapton
$
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Rationality1) ExpectedUtilityTheory2) UbiquitousFormsofBoundedRationality3) FormsofBoundedRationalityspecificto
creatorsa) Unusuallystrongversionof“overoptimism”?b) Areartists“skewness lovers”?c) Theintuitionsunderlyingpersonalitytheoryand
labortheorymayhelptodefineartists’referencepoints
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TaylorSwift“Inmyopinion,thevalueofanalbumis,andwill
continuetobe,basedontheamountofheartandsoulanartisthasbledintoabodyofwork,andthefinancialvaluethatartists(andtheirlabels)placeontheirmusicwhenitgoesoutintothemarketplace.”“Musicisart,andartisimportantandrare.
Important,rarethingsarevaluable.Valuablethingsshouldbepaidfor.It'smyopinionthatmusicshouldnotbefree,andmypredictionisthatindividualartistsandtheirlabelswillsomedaydecidewhatanalbum'spricepointis.Ihopetheydon'tunderestimatethemselvesorundervaluetheirart.”WallStreetJournal,July7,2014
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Swiftv.Spotify• Spotify pays70%ofitsrevenuesinlicensefees• Spotify paysrecordcompaniesinlicensefeesroughly$.01perplay
• Inmid-2014,Spotify paidSwifts’recordcompaniesandmusicpublisherroughly$500Mpermonth
• InNovember2014,SwiftremovedallhermusicfromSpotify
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Swift’sIncome($M)
64
20142011 2012 20132009 2010
55574545
18
Sources: http://www.forbes.com/lists/2009/53/celebrity-09_Taylor-Swift_2OIN.html;http://www.forbes.com/profile/taylor-swift/
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TimeMagazine,November13,2014“Ithinkthereshouldbeaninherentvalueplacedonart.I
didn’tseethathappening,perception-wise,whenIputmymusiconSpotify.Everybody’scomplainingabouthowmusicsalesareshrinking,butnobody’schangingthewaythey’redoingthings.Theykeeprunningtowardsstreaming,whichis,forthemostpart,whathasbeenshrinkingthenumbersofpaidalbumsales.
“WithBeatsMusicandRhapsodyyouhavetopayforapremiumpackageinordertoaccessmyalbums.AndthatplacesaperceptionofvalueonwhatI’vecreated.OnSpotify,theydon’thaveanysettings,oranykindofqualificationsforwhogetswhatmusic.Ithinkthatpeopleshouldfeelthatthereisavaluetowhatmusicianshavecreated,andthat’sthat.IwroteaboutthisinJuly,Iwroteanop-edpieceintheWallStreet Journal.Thisshouldn’tbenewsrightnow.ItshouldhavebeennewsinJulywhenIwentoutandstoodupandsaidI’magainstit.Andsothisisreallykindofanoldstory.”
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GainsLosses
Value
-2-6 2-8 -4 4 6
-2
8
2
6
4
-4
-6
-8
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PossibleImplicationsforIPLaw1) Hyper-optimismofcreatorsmaybesociallybeneficial
– argumentagainst“debiasing”(Crouch)2) Ifcreatorsare“skewnesslovers,”weshouldhesitatetoalter
thecurrentdistributionpattern(Scherer)3) Otherthingsequal,weshouldadjustdoctrinestoincrease
payoutsbutreduceprobability(Crouch)-- e.g.KSR’sincreaseinnon-obviousnessstandardmakeseconomicsense
4) Limitsonwork-for-hiredoctrineandpre-employmentpatentassignmentagreementsmaybesociallybeneficial(Scherer)
5) Legaldoctrinehas(partial)controloverthelocationofreferencepoints– andthushowinnovatorsandusersvaluetheirentitlements-- e.g.,rhetoricof“intellectualproperty”-- complication:referencepointsmaynotbefullycomplementary(e.g.,withrespecttofile-sharing)
6) Uncertaintymaynotbesobad(Horowitz)
Ethical?
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StevenHorowitz,“Copyright’sAsymmetricUncertainty”
• Assumebothcopyrightowners(creators)andpotentialnonpermissiveusersareindividuals
• Endowmenteffectincreaseswithcertaintyoflegalentitlements
• Uncertaintyprompts:– Creatorstolicensetheirworksmoreoften,becausetheyarelessdeterredbylossaversion
– Userstomakemorenonpermssive usesofcopyrightedworks,becausetheyanticipatecreatorswillbelesslikelytosue
• Botheffectspromotesocialwelfare