Mimesis Law
17 October 2017

Inefficient Markets Are Inefficient: What Behavioral Econ Says About Why Some Law Schools Fail

In this series of posts, we’ll look at the problem of law schools with perpetually dismal bar passage rates.  Why don’t these schools do something to improve their bar outcomes?  Why do students enroll in schools like this?  How do schools like this not get shut down?  In order to get to the bottom of these questions, we’ll let a little bit of behavioral economics be our guide.

The first installment focuses on the faculty and administration at the law schools.

The percentage of a law school’s graduates who pass a state bar exam on the first try is a solid metric for basic law school fitness.  Yet some schools perpetually lag behind on this metric, year after year.  If insanity is repeating the same actions and expecting different results, then the faculty and administration at schools with perpetually low bar passage rates must be comfortable with failure or fucking nuts.

Unfortunately, faculty and administrators at these law schools are acting like behavioral economics predicts they will — selfish, short-sighted, and sometimes irrational.  Fortunately, behavioral econ also lets us know what tweaks to the system are necessary for change.

Sow’s Ears and Silk Purses and All of That

A law school’s admissions policy is crucial to its bar passage rate.  Even the best teachers must work with the students who appear in their classrooms.  So, let’s focus on the relationship between admissions and bar exam outcomes.

As law school applications drop nationwide, a lot of schools have been maintaining their class sizes by accepting applicants with lower GPAs, LSAT scores, and other admissions metrics.  But what if a school is already taking chances on applicants whose numbers are rock-bottom?

Law schools with already-low standards are caught on the horns of a dilemma:

(1) Maintain standards, though that means enrolling fewer students.  Fewer enrolled students mean fewer tuition dollars funding the school’s operating costs.  Deep cuts mean hiring freezes, pay reductions, and even eventual lay-offs.

(2) Lower admissions standards.  Put warm bodies in seats — and money in coffers — by any means necessary.  But what happens in three years when those students sit for the bar exam?  If a school’s bar passage rate has been in the sewer for years, to what depths will it sink when a crop of ostensibly less-qualified students face the exam?  Abysmal bar numbers threaten a school’s ABA accreditation.  So, an admissions policy prioritizing enrollment over student success sidesteps next year’s financial crisis but it might doom the entire institution several years in the future.

Unfortunately, a lot of schools with low bar passage rates have been taking what’s behind Door #2. Why?

Perverse Incentives Are Perverse.

Perverse incentives create adverse consequences by unintentionally rewarding bad behavior.  

At most law schools, admissions policies are set by faculty vote or by the dean, with faculty approval.  The people deciding are the same people whose paychecks could take a hit if next year’s incoming class is down 40%.

Faculty participation is supposed to make sure that the people closest to the consequences of the policy are the ones who set the standards.  Unfortunately, the system unintentionally rewards faculty for putting their own financial interests before the good of the school.

Hyperbolic Discounting Is Hyperbolic.

In econ terms, discounting involves re-weighting the value of a reward or loss to take into account the delay before the reward or loss will happen.  If the discount rate is constant, the value of a reward diminishes consistently over time.  This method is rational, but may not be what people usually do.  Instead, people tend to discount future rewards at a lower rate when they will have to wait longer to get them.  They tend to choose smaller rewards if they get them sooner over larger rewards if they get them later.  This is hyperbolic discounting.

Low enrollment today frightens many law schools more than low bar passage rates three years from now.   The reward of funding the current budget is a small reward compared to better bar passage and keeping the law school out of trouble with the ABA.  But schools get that smaller reward right away.  The reward of maintaining standards and ensuring the school’s future is greater overall, but schools won’t get that reward for several years, when the class of students admitted under the policy reaches the bar exam.

It’s not that professors don’t care about students passing the bar.  It’s just that they care about cuts to next year’s budget more.

Moral Hazards Are Hazardous

Moral hazards happen when one party to a transaction takes greater risks because another party will bear the negative costs of the risk.  

Data-driven admissions policies can predict with surprising accuracy who will achieve what level of success in law school and on the bar exam.  When a law school admits an applicant, the school has greater information about the predictive data than the applicant does.

Let’s say Albert Applicant has a 2.5 undergraduate GPA and an LSAT score of 142.  The school knows that their past students with indices in this range have a 20% chance of passing the bar on the first try.  Albert has no idea that odds are this bad for someone in his position.

Albert might be one of those lucky 20% . . . or not.  The school is willing to take the risk of admitting him.  Yet, if things go pear-shaped, Albert will be the one saddled with debt and no bar card.

The school’s interests and Albert Applicant’s interests aren’t aligned. The law school benefits from enrolling students. Albert benefits from graduating from law school and passing the bar.

How do you turn things around when it seems like the Invisible Hand is flipping law students the bird?  Correct the information asymmetry that leads to the admissions moral hazard, and change the incentives that law schools are responding to.

Schools can and should provide prospective students with more information about performance trends for the school’s prior graduates.  Most schools know a lot more than they are telling about what the chances of success are for any given applicant with a particular combination of credentials.  Law schools should affirmatively share customized prognoses with admitted students before the students enroll.

Law schools should tie faculty salaries to student bar exam performance.  If money from student enrollment motivates schools to fill seats, then money ought to be the incentive to admit and train students who will pass the bar exam.  When professors won’t earn as much money unless and until they devise new ways to effectively equip their students with the knowledge and skills necessary to help them pass the bar exam, otherwise unmotivated profs will innovate in their teaching.  If nothing else, this would better align the interests of the school with the interests of applicants and students.

In the next installment of the series, we’ll shift our probing gaze to the students who choose to enroll in programs with historically low bar passage rates.

Main image via Flickr/Kai Schreiber.

2 Comments on this post.

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  • Theodore Seto
    22 March 2015 at 5:37 pm - Reply

    As a former big-firm hiring partner, I can tell you that I would never hire out of such a school. The bar tests minimum competence — that’s all. My firm requires a lot more — the ability to think critically, to question. The bar tests none of these.

  • Barry
    26 March 2015 at 11:36 am - Reply

    I have a few comments:

    First, if business is taking a hit, sacrificing the long-term for the short-term is not irrational. You can’t stay in business long-term if you fail in the short-term. In some cases, local (third- and fourth-tier) schools are likely hoping that one or two of the others will fail first, allowing the survivors to pick up part of that market.

    Second, the faculty are between a rock and a very hard and very spiky place. There is no market for ex-faculty members, save from the higher-tier schools, which would be the ones which aren’t in danger of failing. If their school closes or they are RIF’d/laid off/fired, they are unemployed, even more so than their graduates. Given a choice between impoverishment and dropping one’s ethical standards, most people will choose the latter. And given that most of the lower-tier schools have had horrible outcomes for a majority of their students for quite some time, those ethical standards weren’t there to begin with.

    Third, the ABA will allow massive reductions in standards. This is because they already have and the people running the ABA’s education committee are people from the lower tiers of law schools. The ABA is quite OK with lousy schools charging high tuition to deliver horrible outcomes, while saying anything which gets student loan signers in seats.