Revisiting the debate over attorneys' contingent fees: A behavioral analysis

Building on Kahneman and Tverskýs prospect theory, this paper presents a series of experiments designed to reveal peoplés preferences regarding attorneyś fees. Contrary to common economic wisdom, it demonstrates that loss aversion (rather than risk aversion or incentivizing the lawyer to win the case) plays a major role in clientś preferences for contingent-fee arrangements. Facing a choice between a mixed gamble and a pure positive one, plaintiffs prefer a contingent fee (framed as a pure positive gamble), even if it yields an expected fee that is 2 or 3 times higher than a noncontingent one (framed as a mixed gamble). At the same time, defendants, who face a choice between two pure negative gambles, are typically risk seeking and prefer fixed fees. Our findings indicate that information problems and lack of alternative fee arrangements probably do not loom large in clientś choice of fee arrangement. We discuss the policy implications of our findings.