Justice is what the judge ate for breakfast

Published in The Sunday Times on May 21st 2023.

'Justice is what the judge ate for breakfast' was a trope of legal realists, invoked to explain the inexplicably divergent outcomes in very similar court cases.  Are judges’ rulings solely based on rational decisions and written laws?

The legal realists’ line of thinking was that judges are human, and so are subject to the same foibles, biases, and imperfections that affect everything we do. A famous study conducted in 2011 showed that there’s more to this adage than meets the eye. 

In 2011, Shai Danziger and colleagues looked at 1,112 parole decisions by Israeli judges. The judges had two scheduled breaks to eat each day. The researchers wanted to know if there was a measurable difference in the severity of sentences before the food break in comparison to after. 

In other words, were hungry judges more likely to dole out harsher sentences than judges who had just eaten?

The researchers found that, at the beginning of the day, 65% of the judges’ rulings were favourable for the defendant. That percentage dropped practically to zero right before a food break and went back up to 65% right after the judges got something to eat.

Hungry judges and ego depletion 

The Danziger study was one of many supporting ego depletion, the popular theory that willpower and self-control are limited resources that diminish with use.

The concept of a “hangry hanging judge” was very novel. Massive media attention, plus a finding that feels intuitively right, is a perfect recipe for something to enter popular lore. The finding went viral and in the popular mind at least, it became fact.

However, in the same year, in the same publication, Keren Weinshall-Margel and John Shapard revealed a much more mundane explanation for the harsher sentencing: a quirk of the way sentencing hearings are scheduled.

The scheduling of cases by Israeli parole boards is not random. Unrepresented prisoners’ applications are heard at the end of the session – right before a meal break. And prisoners without legal representation receive parole at a much lower rate. The hangry judges effect was a simple case of correlation being mistaken for causation.

But the idea of hangry hanging judges and ego depletion was a far too attractive narrative to wither, despite being discredited over the last several years.

Beware of the lure of narratives

Beware of the lure of narratives. Behavioural practitioners have found that investors base their decisions more on narratives than on the facts themselves.

Narratives can be effective and efficient in stable, ordered environments, where there is a consistently observable cause and effect, but financial markets are anything but this.

Financial markets are characterised by profound randomness and unpredictability.  The best means of coping with this discomfort is to manufacture meaning by forging a relationship between the data and an explanation; a story, in other words – of why the data is what it is and how it got that way – what Nassim Taleb refers to as the ‘narrative fallacy.’ Financial markets produce incredible amounts of data and hence provide very fertile conditions for spurious narratives. 

Stock markets are fertile ground for narratives 

This is important if you are investing in the stock market – which all long-term investors should be. Stocks are daily traded and hence, daily priced. The more regularly an asset is priced, the more narratives will be linked to its behaviour. Given the daily volatility of stock prices, multiple narratives proliferate. Some investors seek protection from this daily variability by paying for guarantees of one sort or another.

The mistake made here is conflating investment risk and volatility. They are not the same thing. Unless your time horizon is measured in months rather than years, price variability should not be considered a risk that needs to be managed.

The impulse to protect what we have is instinctive to us all. But if you are seeking protection from the wrong risks, you will end up slaying the wrong dragon. Paying for guarantees is simply substituting one set of risks for another – usually a more relevant set of risks (like inflation).

The market is ruled by narratives. Stock prices move up and down (up, more often than down). The likely path of interest rates, inflation and whether there will be a recession, are the narratives driven by those price movements – not the other way around. 

You need protection from the narratives, not the price swings which drive them

The stock market can serve as a very useful barometer of the economy. However, sometimes the narratives being driven by the prices of assets on financial markets are false. What you need protection from is not the inevitable price variability that accompanies these competing narratives. It’s managing the way you respond to them. And for that, advice is critical.

The dominant determinant of long-term, real-life investment returns is the behaviour of the investor themselves. Acting toward the realisation of goals – not reacting to the whim of a market driven by narratives, false or otherwise. Simplistic as this may be, it still doesn’t make the job of investing successfully easy.

Gary Connolly is Investment Director at Davy. He can be contacted at gary.connolly@davy.ie or on Twitter @gconno1.