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In response to
"if there's one common thread through history it's that humans are completely rational robots that always act in their best self-interest. -- nm"
by
Reagen
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One of my favorite arguments on this (which is actually a big case in my field) was a decision written by Richard Posner (a professor at my school and -- (edited)
Posted by
pmb (aka pmb)
Dec 29 '20, 16:07
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7th circuit court of appeals judge and also ridiculously prolific and interesting, though a big law and economics guy). In any event the gist of the case was trying to "value" a guaranty by a company. If a small subsidiary guaranties all of the debt of its parent, is the guaranty more than the value of the company so it's essentially rendered insolvent by giving the guaranty. Note: guaranties by subs are commonplace, so determining that it renders them insolvent would be commercially problematic. Posner decided that the way to value the guaranty is to take the total amount guarantied multiplied by the percentage likelihood the guaranty would ever be called upon. That is a perfectly rational and sensible theoretical concept. But, when you ask "how do you determine what that percentage likelihood is?" there's essentially no guidance. It's hocus pocus and likely only ever to be relevant when the guaranty has actually been called upon (so whatever that likelihood seemed at the time the guaranty was given, it turned out to be 100% in practice). Arguments like that are just wiped away with a wave, because the theory is sound.
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