Monday, January 04, 2010

The Mad Hatter on Contract Design

Greetings from Atlanta, Georgia, where, in a tribute to global warming, nature has dealt us 20F (minus 7C) and dropping.

As an aficionado of absurdity, I certainly enjoy the following provision in the contract I just accepted in order to get internet access so as to post this for my faithful and dearly appreciated readers:

By using the high-speed Internet services provided by iBAHN™ (the "Service"), whether or not you clicked "I ACCEPT" when prompted upon commencement of using the Service, you agree to be bound by these Terms of Use and iBAHN's Privacy Policy, Disclaimer of Warranties, and Limitation of Liability, all of which are incorporated as part of these Terms of Use and together form the entire agreement relating to your use of the Service. The Service includes, without limitation, iBAHN™ high-speed Internet services, wired and wireless Internet access services, and Lobby PC™ services. As used in these Terms of Use, "iBAHN" includes iBAHN, Inc. and all of its affiliated companies.

The most current version of these Terms of Use is available on iBAHN's website at Please review the Terms of Use at iBAHN's website prior to accessing the Services since the Terms of Use are revised from time to time.
(emphasis mine)

Ha ha ha! You’ve got to appreciate such nonsense and such chutzpah.

The efficient market hypothesis/ratex people seem to think that the financial crisis stemmed from an unforeseeable "black swan." Some of the Keynesians think it stemmed from irrationality and animal spirits. Both are, I guess, explanations for why all those contracts that comprise mortgage backed securities went toxic. But how about this as an alternative explanation: people intentionally design bad contracts to give themselves the upper hand in exchanges.

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