Irrationality and Repossession Law – Law and Economics and Behavioural Economic Approaches

Chapter 3

Theoretical perspectives on the South African law of sale in execution

Table of Contents

  1. Introduction.. 1
  2. Rationality: the law-and-economics of repossession.. 2

2.1.      The law-and-economics approach.. 2

2.2.      Law-and-economics and repossession.. 6

2.3.      Critics of law-and-economics theory. 7

2.4.      Efficiency from the viewpoint of the various actors. 10

2.5.      Transaction costs and the single owner rule. 14

2.6.      Moral hazard, adverse selection and risk. 21

  1. Irrationality: from heuristics to home interest 24

3.1.      Irrationality and the behavioural economics of sale in execution.. 24

3.2.      Irrationality applied: distorted perceptions of the home. 33

3.2.1. The meaning of home- five aspects. 35

  1. Conclusion. 43


1.      Introduction

In this chapter, I will firstly review the standards of efficiency and rationality and the interaction between them. I will then compare our current foreclosure standards against these criteria. To do this I look in depth at the ideas of the ‘law-and-economics’ school including the concepts of rationality and efficiency. Secondly, I will look at the critics of this school and what their own perspective would be on our repossession laws. As I study the different theories, I will also apply them to the South African law of sale in execution as it currently stands. I will find that in terms of the core principles of each opposing approach our current law may be unjust, irrational and/or inefficient. In addition, the current practice does not sufficiently weight the value of home as a separate source of value from the physical property. The perspective of home as a separate concern has been developed by Fox in terms of home interest and Radin in terms of a personal theory of property. From each of these points of view I find our sale in execution laws may be found unjustifiable.

2.      Rationality: the law-and-economics of repossession

2.1.   The law-and-economics approach

Whether or not the rules that govern these property rights are optimised in the sense of being ‘efficient’, can be analysed according to the insights of law-and-economics theory.[1] These insights derive from utilitarianism founded by Jeremy Bentham[2], where one, in this context, considers that the most moral approach to normative ethics[3] is to have the rule that creates “the greatest happiness of the greatest number”.[4] Happiness is also known in this literature as ‘utility’.[5] It is thus a ‘consequentialist’ moral theory as it judges the morality of actions by their consequences.[6] Bentham’s idea was developed by John Stewart Mill[7]  who assesses utility as pleasure minus pain but includes in pleasure the enjoyment of intellectual or moral sentiments[8] as well as more basic enjoyments such as eating and drinking. In our context we would look at the utility gained by the bank[9] and that lost by the debtor from sending a property to the sheriff to sell.[10]

One of the assumptions of mainstream (neo classical) economics[11] is that individuals are utility maximisers[12]. In other words, that they try and increase their own pleasure and minimise their own pain. When their utility is maximised then the economy is said to be efficient.[13] On that basis, utility will be maximised if individuals are free to make their own choices. When these choices are expressed in contracts (like a mortgage contract), freely made, it is then moral, according to the theory, for the state to enforce these contracts as agreed.

The law-and-economics school of thought is thus essentially a specialised branch of utilitarian theory[14] and an application of neo classical economics.[15] Utilitarianism has however, been subject to criticism both from within consequentialism[16] and from without.[17]  Posner, a prominent law-and-economics scholar and judge, has responded to criticisms[18] partly by agreeing with the critics. In response he has identified “wealth maximisation” as a better approach to utility maximisation and economic efficiency.[20]  Law and economics essentially attempts to adjust legal rules to achieve economic efficiency. In other words, the rules that will maximise utility[21] are to be preferred.  The method is criticised for ignoring more traditional ways of assessing the laws based on ideas of justice, as we shall discuss.  Law-and-economics scholars answer criticisms of this nature by saying that the efficiency criteria is in fact the essence of justice[22] or that it is preferable to[23] the more traditional concepts of justice.[24] Law and economics thus looks to neo classical economics as a guide for judicial action and legislative rule making.[25] In this approach the law is a means to the end of economic efficiency.[26]  A law will be efficient if it meets the criteria for efficiency known as the Kaldor-Hicks criteria.[27] This criterion mean that there is no alternative law that can be substituted for that law whereby after the change everyone will not be better off even after compensating the losers.[28] If there is any law that will be better for everyone (after compensating the losers) then the current law is not Kaldor-Hicks efficient. In our particular application, a new law could theoretically compel those whose houses were to be sold in execution at large discount to compensate the bank for its additional administrative costs and expected[29] losses from not selling the property in execution as per the current law. The bank and the debtor would then agree to another solution such as selling the property for market value, rescheduling the loan etc.[30] In this new scenario the debtors would save their losses from sales in execution at a potentially deep discount. If they could compensate the bank’s extra costs or extra expected losses from their savings then that would imply that the current law is not Kaldor-Hicks efficient.

Within this there is a great emphasis on the benefits to be gained from exchange,[31] buying and selling in the marketplace and the importance of prices[32] in making these exchanges efficient. In other words, in the legal context, this approach studies the role of law as a means for changing relative prices attached to alternative individual actions.[33] People place their own values on goods or on legal rights. These are subjective valuations[34] that happen in a person’s own mind.[35] In our application, these would be the action of the debtor in defaulting (in so far as they have any choice) and the actions of the bank in repossessing. The appropriate analysis from the law-and-economic theory can then be used to look at the appropriateness of the current rules (the “current rule”) with the “new rule” proposed in this thesis.[36]

This analysis rests on the efficiency criteria of orthodox economics which is the notion of maximising the total self-perceived welfare of the population. But would such an arrangement, even if achievable, be just? According to an influential book by law and economic scholars[37], it does not matter. The focus should be on economic efficiency entirely, which is held to create the greatest happiness[38] of the greatest number.

2.2.   Law-and-economics and repossession

Before I go further in analysing foreclosure further in terms of law-and-economics theory it is necessary to look at the rights involved in the process. Repossession[39] arises in connection with a mortgage.[40]  It is based on two property rights[41] – the right of ownership of the mortgagor and the real security right (which is a limited real right[42]) of the mortgagee.[43] The advantage of granting a real security right (as opposed to not owning) is that it enables people to use their property[44] rather than renting the use rights of another. In other words, real security rights enable persons to obtain home loans by granting a mortgage over their land to the lender. Thus, they can own the property and also gain the benefits from improving their property. In other words, by taking a loan out that is secured on their property, they are enabled to acquire ownership of the land. The benefits to ownership are in customising the property according to their preferences such as adding rooms or changing where doors and walls are, as well as painting and decorating the property. Another benefit is the growth in financial terms should they later sell the property for a higher price than they would otherwise have been able to do. There may be a social advantage to having a higher percentage of persons owning rather than renting if this results in a higher degree of improvements to properties and in some theories, more people with a stake in the long-term interests of the country as a whole.[45] The main entitlement a real security right holder enjoys is the right to sell the property if the mortgagor defaults[46] on the loan secured by this right. This entitlement flows from the real security right. The granting of this security to the lender results in a lower rate of interest than with an unsecured loan.[47]  In summary, the mortgage allows the mortgagor (borrower) to acquire ownership of land while simultaneously enabling the mortgagee (lender) to sell the burdened property should the mortgagor default on the loan.

2.3.   Critics of law-and-economics theory[48]

There are a number of critics of the law-and-economics position. Some of these correspond to general criticisms of neo-classical economics on which the economics of this school is based,[49] others to general criticisms of utilitarianism.[50] Classical economics works by postulating a hypothetical world that is in a certain sense perfect. Everyone has perfectly complete information, there are perfectly competitive markets, actors are perfect rational and so on.[51] In this simplified world conclusions can be more easily drawn about the effects of changing certain variables on others. Critics[52] point out that these conclusions are not valid because that perfect world is not the world in which we actually live. These criticisms apply less to the more recent neo-classical economics[53] which has explored the effects of relaxing the traditional assumptions in analyses[54] concerning asymmetric information[55], oligopoly and irrational behaviour[56].  Law-and-economics theory, in particular, has focused on these imperfect situations as will be seen in the discussion below.

Other theories can be applied to address the justness[57] of repossession law. [58] Plato sets out various theories which are critiqued by Karl Popper. Critical legal studies[59] would analyse the power relationships between the parties. Rawls[60] considers what the parties would do if they were behind a veil of ignorance. Sen argues for a justice theory that is more practical and incremental.[61] Law-and-economics theory does not concern itself with justice; the goal is rather economic efficiency. This is thus a common ground for criticism of the theory. In the South African environment, our ‘theory of justice’ is reflected in our Constitution. I consider whether our current repossession law is constitutional and the decided cases[62] in that respect[63] in chapter five of this thesis.[64]

Central to the school’s analysis is one of the most cited papers in economic literature, The Problem of Social Cost[65] by Ronald Coase. In this approach Coase proposes[66] that in the absence of ‘transaction costs’ that the initial distribution of property in any society is not important because the actors will bargain with each other until the property reaches the user for whom it has the highest value.[67] ‘Transaction costs’ are defined to be any cost related to a market exchange. These include three categories[68]: search and information costs (determining what is available at what price), bargaining costs (the time necessary to come to an agreement and to draw up a contract), and policing/enforcement costs.[69] In contracts concerning mortgages, the information costs are mostly borne by the borrower as will be explained below. In other words they are ‘asymmetrical’, not equal. Similarly the bargaining costs are extremely high[70] because due to its position as an oligopoly[71], the banking sector will not normally enter into bargaining with the debtor as to the contractual arrangement between them. Bargaining costs are often dominated by externalities and holdouts.[72] Externalities are where the parties save costs by transferring[73] their cost to third parties, exemplified by the actions of polluters.[74] Holdouts are where an efficient bargain cannot be struck because small numbers of people can stop it happening by refusing to agree and thus can “hold out” for more than their fair share[75] of the proceeds. As shall be seen, however, these two types of transaction costs are not particularly significant for the repossession situation. It is a corollary to Coase’s theorem[76] that transaction costs should be minimised if efficiency is desired,[77] as then the parties can bargain effectively to what each of them subjectively wants.

In the next section of this paper I will examine sale in execution through the lens of a number of economic concepts drawn from the law-and-economics literature. Firstly, I will provide a background of the costs and efficiencies involved from the perspectives of the various actors. Secondly, transactions costs and the single owner rule are considered. Thirdly, I consider the economics of risk, including moral hazard and adverse selection. Fourthly, I consider why remedies similar to specific performance may provide a better solution than sale in execution in some circumstances.

2.4.   Efficiency from the viewpoint of the various actors

In assessing efficiency, it is necessary to consider the efficiency of the repossession process from the owner’s point of view and, secondly, from the bank’s perspective. Thirdly, I consider third parties and society as a whole. As is ordinarily the case for purposes of this thesis, there are two parts to the analysis, namely whether the selling of immovable property for below market price is efficient and whether using alternative remedies other than sale in execution is efficient. It seems fairly clear that the law is not normally utility optimising from the point of view of the owner of the property. Other things being equal, the value of the property must be greater to the owner than its market price minus transaction costs; otherwise he would have sold it and moved somewhere else. Since he has not already moved house at the point of default, the property is worth at least the market price to him and usually in excess of that price. Debtors value their goods at greater than market price and yet market price is the greatest price they will obtain.[78] There may be some relatively exceptional situations where a quick sale in execution, even under the current law, may turn out in retrospect to have been efficient from the point of view of the owner. This could happen in situations of uncertainty. For example, if the sale in execution price obtained turned out to be higher than average and where the delaying of the process results in further interest payments on an ultimately unaffordable house. The owner, if a sale in execution occurred at a reasonable price, may be in a better position if he moves house early and switches to renting a much cheaper house than the one he owned. He thus preserves his equity[79] relatively intact. This would, in such cases, justify a paternalistic[80] selling of his house for the debtor’s own good against his wishes. Even in this case, however, it is not obvious that this solution is efficient for the owner. The utility of staying in the more expensive house for longer may well be greater than the interest payments, even though these, even if not paid during the period, are ultimately subtracted from the equity.[81] In most circumstances the owner’s choices and expressed wishes are a more reliable guide to his preferences and thus to economic efficiency than any conceivable solution imposed from outside.

I can now consider efficiency from the bank’s point of view. At the point of the default, the current rule enables the bank to execute on property relatively quickly. It does not need to wait until the person has been in arrears for 12 months[82], it does not need to consider his affordability or whether he has equity. It does not need to hire estate agents and can perhaps sell the property somewhat quicker on average if it does not have to start at market price and gradually decrease the price.[83] In the minority of cases where the debt (including arrears) is higher than market value delays in this area will directly cost the bank rather than the debtor in the short term though where there is a shortfall the bank can, in theory, later recover the shortfall from the debtor. On the other hand, where under the current rule the property is sold by the sheriff for less than the value of the loan then the bank also has a shortfall which is at the expense of the bank. The magnitude of losses from this is considerable,[84] as the situation of selling for less than the bond amount happens frequently under the current rule and each can be hundreds of thousands of rand in magnitude. Although shortfalls can be reclaimed from the client, the client is unlikely to be willing or able to do so after his house has been sold for much less than the market value. In South Africa very little of this debt is ever recovered by lenders.[85] In addition, it would very often be rational for the debtor to litigate to defend his property, as the costs of doing so would be much less than the expected costs of selling the property at auction.[86] Litigation can provide the delay for the debtor to pay off his debt or sell the house himself. These are both dramatically better outcomes for the owner than a sale in execution because the expected value of the property – as sold by the sheriff – is 40% to 50% less than the market price. Litigation by the debtor results in much larger litigation costs to the creditor as compared to default judgment. Litigation by the debtor would be much less common under the new rule where litigation would gain the debtor little. The new rule already gives him protection. Even when the debtor does not engage in defensive litigation, the costs of getting a court judgement and execution are expensive. These processes require lawyers and advocates and thus are also much more expensive to the bank than administrative work such as rescheduling[87] a loan or a law forbidding execution where the equity in the property is greater than, say, 40%.[88] Rescheduling a loan when a person gets a new job or business improves significantly, is routine for courts in England. Knowing this, the banks will usually not come to court to ask for a repossession order in these circumstances. Should they do so, the court may well reschedule the loan itself. This is similar to an order for specific performance – that the parties continue with the contract as originally agreed.

There may be more administrative costs with defaults under the new rule. But administrative costs are much cheaper than legal costs. In addition, defaults leading to sales in execution are relatively rare compared to the total number of mortgages[89]. Spread over the whole loan book, the increase in cost would be low on a per mortgage basis. In South Africa under the current rule, the bank has a right but not an obligation to sell through the sheriffs. Selling in some more effective way, such as through an estate agent would be likely to raise much higher prices. However, the process of executing a new contract with the client after a judgment appears to be unattractive to the banks. It seems unlikely then that the current rule is efficient even from the bank’s point of view. It may even be that the banks are acting irrationally[90] at least in terms of the mortgage division, as opposed to the whole bank. This is because when properties are sold for less than market price many of them sell for less than the bond price, which then results in a loss for the bank. Even when looked at from a whole bank point of view, though, the current rule may be irrational from the bank’s point of view. In South Africa, the banks have sold more than one hundred thousand people’s homes in the last twenty years.[91] Arguably, a high number of those people will never be able to recover financially from that loss.[92] Each of the 100,000[93] persons whose homes were repossessed becomes a marketing liability to the bank for the rest of their lifetimes as they tell their family and friends what the bank has done to them. This makes the normal advertising and marketing activities of the bank far less effective. The irrationality of this approach combined with a high advertising spend may be due to the fact that organisation above a certain size work in “silos”. The marketing department has very little contact with the legal department and thus the legal department take actions very detrimental to the brand of the bank overall. This kind of irrationality is another diseconomy of scale.

The last party to consider is the buyer of the property who – due to the operation of the current rule – acquires the property for a very affordable price. These buyers gain whatever the other parties lose minus costs. As a result of the costs then, this is less than a zero sum transaction. Most voluntary transactions will be positive sum, in other words the total benefits to the parties are positive. Both people benefit. Zero sum transactions are when one person loses what the other person gains. In this case the total benefits are less than zero. It is thus a negative sum transaction.[94]

Since many of these buyers are large businesses or wealthy individuals and given the decreasing marginal returns to wealth, it is very likely that the subjective benefits to gaining the properties to the buyer are considerably less than the subjective losses to the seller from losing them. And it is the subjective values of the properties to people that matter. These cannot be equated to the objective market values. A property can be worth far more to a certain person than the market value captures. The properties are gained by a few who buy many properties and thus only a few have subjective gains from the transactions. The properties are lost by the many, most of whom will be likely to only have one home to lose. On the other hand, the previous owner has lost his home and often his whole savings over many years. The subjective value to him of that loss is likely to be high.

2.5.   Transaction costs and the single owner rule

In mortgage, there is normally a contract between the debtor and the bank. However, repossession[95] does not take place in terms of a contract between the parties but by rules laid down by the state.[96] Once the bank has received a judgment from the court to execute then it can use the sheriff’s auction system to sell the property. That system is governed by Rule 46 of the Uniform Rules of Court and not by the mortgage contract between the parties. However, the bank does not need to use this option and could contract with the debtor after judgment to sell the house at auction.[97] A judgment is always required, in South Africa,[98] for any kind of forced sale.[99] One form of transaction cost is bargaining costs. In this case bargaining is completely forbidden by the fact that a contract, made when the loan was taken out to use estate agents to sell the property on default without a judgment would be unenforceable.[100]  Thus the parties cannot bargain to an efficient outcome.[101] In a world where redrafting laws to make them more efficient was costless, a better law would already be present. If however, with Coase,[102] in a world without these constraints, where such contracts are permissible, and without any other transaction costs, a different kind of system would arise. In a perfectly efficient market for mortgage bonds in the presence of perfect competition and perfectly knowledgeable actors, one would expect a contract to be adopted that does not require the property to be sold for less than market value and where every other possibility will be tried first. In this world, actors would know that there was some probability that their circumstances would change in the future and that the current system would result in them on average losing perhaps 50% of the property price on average and in extreme cases 90%. Rational actors would therefore bargain with banks and seek a contract which maximises the price that properties are sold at in forced sales. They could do this by agreeing in the contract to use estate agents[103] and not sheriffs sell the property. They could also agree that the property is put on the market at a valuation close to market price and then that the price only dropped gradually thereafter. They would also wish to contract that the property would not be sold at all in certain circumstances, such as a temporary loss of a job or where there is considerable equity in the property.[104] As mentioned above, I will refer to these improved policies together as the “new rule”. The “current rule” is thus where the banks can sell the properties for any price in any circumstances.[105] In a world of zero transactions costs, where any contracts are permitted, it would be very likely that the parties would conclude a contract that incorporates the new rule. There are little additional costs to the banks to doing so, and even the removal of some costs, and there is great value to the consumer. Consumers would be likely to accept higher interest rates from the bank in order to secure a better contract if necessary though it is likely in a competitive market that any increased interest rate would be negligible[106] or even that decreased interest rates would result.[107] As I discussed above, it is a corollary to Coase’s theorem[108] that transaction costs should be minimised if efficiency is desired.[109]

One approach to explore the view that the new contract[110] would be more efficient would be the “single owner test” developed by Richard Epstein.[111] This test asks what would happen if all the rights were held by a single owner and not, as in reality, with multiple actors which include owners, lenders and sheriffs. How would such an owner act?[112] This is in effect creating a ‘zero transaction cost’ situation as, in this hypothetical scenario, one owner does not have to transact with anyone else. The reason why imagining a zero transaction cost world is useful is that it allows us to remove the barriers to our thinking of the myriad complexities of the real world. We can then see how resources can be moved into the hands of those who value them the most.[113] The Single Owner Test is used in situations where co-operative behaviour between the parties to bring the situation to an efficient outcome is not occurring for whatever reason.[114] Epstein’s single owner test applied in our case is where one person[115] is both the lender[116] and the owners of all the houses that he lends to. What is of interest is the point in time where one or more of them default.[117] One then asks how he would behave. It seems unlikely that he would sell his own houses for half price or 90% off. He would try and obtain the best prices for them. He also would not sell the properties if there are other solutions such as rescheduling the loans[118] between them. Thus, the current rule appears to fail the single owner test and is therefore economically inefficient.

A second step can be hypothesised[119] where there is one lender and a second person who is the owner of all the properties. Again, in this second step, the owner of all the properties is going to do everything possible to avoid his properties from being sold for less than their market value, since that would result in him experiencing huge losses. Since he is one of the only two persons in this world, he and the lender are equally powerful. He will thus negotiate with the lender ex ante so that if he defaults on a property, then the properties will be sold for their market value. He will also negotiate the situation where the properties need not be sold at all. As this approach is very valuable to the single owners and costs the lender (bank) very little, these transactions would be very likely to take place. The new contract thus negotiated would then be a more efficient contract between the parties. The arrangements that would be made in a world with a single owner, according to Epstein[120], are the preferred ones to become the law in a world with many role players. One aspect of the new rule that is common in other nations[121] is to make the banks liable for selling property for less than its proper price. This provides the banks with an incentive to act as a single owner and thus in an efficient manner. Clearly establishing the right to sue the bank for selling property for too little will give the bank the incentive not to do so. This is, in fact, what is done by the legal systems of most countries notably England, Australia and the United States, common law countries sympathetic to solutions based on liability.[122] The failure to have this law explicitly[123] on the statute book in South Africa may go a long way to explaining why South Africa sells such a high number of houses in execution and why it sells them for so little, in comparison with the rest of the world.

If the single owner rule shows that the current rules are not efficient, it may be as a result of transaction costs. The particular transactions costs involved in the repossession situation that have prevented the new rule being implemented before now are ones familiar to economic thought. First, I explore oligopoly (a monopoly by a few instead of one provider) instead of perfect competition; secondly, there are diseconomies of scale; thirdly, the actors are not perfectly informed, in other words, there is information asymmetry.[124] In South Africa, the vast majority of mortgage loans are granted by only four large banks[125] which could be considered an oligopoly[126]. This means there is insufficient competition to necessitate these banks developing better rules for sale in execution. The contract is in effect a “contract of adhesion”: one contract offered by all the major banks to everyone on a take it or leave it basis. The banks’ collective market power allows it to contract in this way. Secondly, in terms of diseconomies, these banks are of such a size and scope of activities that there is little return to the management of such banks to improving rules for mortgages. This sector is a small percentage of the total profits of the bank[127] and thus does not justify the time and money required to improve rules and procedures governing the sector. This is known as a situation suffering from diseconomy of scale. Thirdly, less than 1% of the total number of mortgaged properties will be sold in execution in any given year, 99% will not. It is thus perceived not to be worth the bank’s time and energy to develop new rules for a small percentage of its customers. However, for these customers it makes a major difference whether the current rules or the new rules are in force. Fourthly, customers (when bargaining) either when signing mortgage loans or when in default are not in possession of the same information as the bank. The customer is dealing with a complicated subject, that of banking law which in most cases he will have little knowledge of. It is not even rational for him to develop this knowledge as he will complete a mortgage transaction only once or twice in his life.[128] The customer may not be financially or legally sophisticated. The bank, on the other hand, has a department of trained lawyers and other professionals who do nothing else. This situation is known as information asymmetry – where one party has far more information than the other.[129]

The customer is thus not in a position to bargain with the bank and thus the rules have for this reason also not arrived at the efficient new rules and are still, in South Africa, following the inefficient current rules. It may, in fact, be that the client is “rationally ignorant”[130] of the banks practices and of banking law at the time he signs the mortgage bond. In other words, the expected return from learning about the subject is less than the expected losses from his ignorance. He may well never lose his job and never default for any other reason and then learning about what happens if he does is thus a waste of time. In other words there would be little return to the investment of the potential mortgagor[131] learning all about mortgage law and the consequences of default before contracting with the bank. It is information that in most cases, he will never need to use. It is particularly irrational to make such an investment in new knowledge since even should a sufficient number of citizens become sufficiently knowledgeable about the contract that they would desire to make with the bank, the bank with its considerable market power may not chose to contract with them in the way that they desire. This is also an argument for an efficient new rule to be established to prevent the need for many citizens to accumulate specialised legal knowledge in order to avoid the expected losses resulting from the possible sales in execution under the current rule. The new rule makes it unnecessary for the owner or potential owner to learn the information and then bargain with the bank as the new rule establishes as law the position to which the owner would bargain to.

Apart from the problem of asymmetric information discussed above, there is also the problem of “collective action” discussed by Olson.[132] Olson holds that more influence is exerted by an organised and concentrated special interest than by a much larger but diverse and unorganised interest. He applies his theory primarily in a political context but the theory also has explanatory power in describing why the law of sale in execution favours banks (the organised, concentrated interest) rather than the consumers of mortgage products (the disorganised, diverse interest).

Other commonly occurring transactions costs are less problematic in our environment. These include the understanding of gaps in contracts. In other words the contract does not address every contingency that could occur. While the economic model of a perfect contract with every possible contingency addressed never happens under real world conditions, in any case, this is not particularly the problem in our situation[133]. The “costs of contracting can be minimised when lawmakers choose default rules that most parties would have wanted”[134]. In other words, the courts through judgment or the legislature through Acts of Parliament make clear what they will do if parties fail to contract on a particular issue such as who bears the risk while the goods are being transported or whether a bond can be ceded to a third party without the permission of the mortgagee. The difference between the current rule and the new rule could be seen in terms of these contract gaps but that would be inaccurate. It is not that the parties have not wanted to pay the time costs to fill in the gaps for other contingencies but that the market power of the oligopoly of banks does not wish to and the information asymmetry[135] between the bank and customer means the consumer does not know how. The theory around contract gaps applies mostly to the situation where parties are contracting only once for a particular situation and it is costly to define all possible situations for just one deal. However, in the highly repetitive situation of bond contracting, if the parties were able to bargain to the new rule, it would be likely to be relatively complete as the situation is one which occurs often. The rule, if updated from time to time, would soon come to cover the vast majority of the circumstances of default. These situations are, in any case, already familiar to those working in the industry.[136] Thus, gaps in contracts do not appear to be a particularly serious transaction cost in the repossession environment. A second common set of transaction costs is also not particularly relevant to this foreclosure situation. There does not appear to be a particular problem with holdouts and externalities. In terms of externalities, the costs of foreclosure are mainly borne by the owner whose house is sold for less than value. The new buyer gets most of the gain. On the face of it, there do not appear to be significant externalities, positive or negative to society as a whole.[137] In terms of holdouts, if the transaction costs I discuss above were not present, it would be theoretically quite possible for perfectly informed consumers to bargain with many, perfectly competitive banks to establish the new rule. No one holdout could stop the process happening.

2.6.   Moral hazard, adverse selection and risk

Should the bank wish to mitigate the risks of costs when a person defaults, particularly if it believes the new rule will be more costly to administer, then there are various ways to deal with uncertainty and risk in the law-and-economics literature. Real security itself, in general and the mortgage bond in particular, address these problems of adverse selection, moral hazard and uninsurable risk.[138] The evidence is that it is quite effective in doing so. Adverse selection by the bank means that some borrowers may turn out to be ‘knaves or fools’.[139]  Underwriting to some degree addresses this as the statements of the borrower can be checked. In terms of income and affordability such underwriting is required by the National Credit Act.[140] However, a borrower still has more information about his own inclinations, strengths and weaknesses, past behaviour and future intensions than the lender does. There will always be as aspect of adverse selection in any loan transaction.

Moral hazard means that the borrower may run off with the loan.[141] In Latin America it is reported “a lack of an effective framework for secured transactions has substantially limited economic growth”[142] due to legal restrictions on the use of collateral. Security is thought to lower the cost of credit by lowering the risk to the lender.[143]

One way to reduce risk is already implemented due to the economies of scale of the big four banks: risk pooling. Risks in large groups are much more predictable than in small groups. Another way is to allow people to take out insurance against the risk of mortgage default. Most types of insurance, including the one mentioned, have to deal with two problems, namely moral hazard (which is about incentives to behaviour) and adverse selection (which is about information).[144] With moral hazard, once insured, the debtor may be less careful in his business or job. He may also be less careful, in general, with his finances. This may result in him having more default events than he would if he was not insured. The same applies if the law acts like such an insurance company. In other words, if with the current rule, fear of sheriff’s auction induced a different kind of behaviour than the new, more humane rule.[145] The new rules might then, it could be hypothesised lead to more default if the current rules create compliance through fear of the bank’s actions on default.

The second type of problem is adverse selection: some consumers have better knowledge about their risk than the bank has. Even with the current level of checking required by the NCA[146], a borrower will often know more about their own likely job prospects, past behaviours and future intentions than the bank.  They know the company they work for is not doing well and may be retrenching people so they take the largest amount of insurance they can get. There are a number of ways insurance companies have of dealing with these problems and these can also inform any new rules that have the same effect as an insurance policy.[147] One way to deal with adverse selection is to make the insurance compulsory. In this case everyone who has a mortgage has to have the insurance at a certain level so the bank is not only insuring those that have the highest risk. An insurance policy that will cover payments in case of unemployment or death is a mandatory[148] part of a mortgage under French law.[149] Being compulsory, this policy creates the obvious problem of forcing many people with very low risk profiles pay for something that they do not want or need. Another solution that mitigates this problem is simply to charge different rates for different risk profiles.[150] However, in France these policies can then be very expensive for certain groups and may make mortgages unavailable entirely for the elderly.[151] Moral hazard is reduced with policies such as Standard Bank’s offering[152] which requires the person to be working for 12 consecutive months before the policy pays out for retrenchment and also the benefit is limited to 6 months payments, as compared to the full payment of the balance of death.[153] Most policies will not pay out on suicide in the first six months. In addition the total policy pay-out on death and disability is limited to R1.2 million. Law-and-economics theory informs us that any new law that deals with default risk must operate in a similar or analogous fashion if it wishes to avoid the problems of moral hazard and adverse selection. Rational parties allocate risk to the one who is the better risk avoider.[154] It may appear that the debtor is the one in that position. But as default takes place mainly as a result of factors beyond the debtor’s control, such as retrenchment, illness and death of an income earner, the creditor seems to be better at avoiding the risk, at least that of the total damage arising from the default. Law-and-economics theory thus informs us as to how to deal with considerations of risk in the creation of new and more efficient laws.

3.      Irrationality: from heuristics to home interest

Law-and-economics and its analysis largely rest on the assumptions of rationality, as we discussed above. However, should we accept a less rational view of human nature[155], we may nevertheless arrive at the same conclusions about our sale in execution laws as we arrived at from the law-and-economics perspective.  In this chapter I look first at irrationalities identified by behavioural economics and then at the idea of home interest and how it affects how we look at repossession of the home.

3.1.   Irrationality and the behavioural economics of sale in execution

As we have seen, economics has traditionally operated in terms of an assumption of the rationality of economics actors. Economic man (or ‘Homo Economicus’) portrays humans in their economic activities as being rational and self-interested.[156] Rational choice theory models the world as being as a result of the rational decisions[157] of all the individual people and thus is a form of methodological individualism.[158] This is in contrast to explanations that favour, vast deterministic social forces as the forgers of the historic world. Such would include Hegel[159] and Marx.[160] What is meant by the rationality of individuals is generally instrumental rationality in that people adopt the best methods to achieve their goals.[161]

More recently, economists[162] and psychologists have doubted or qualified this rationality assumption and suggested that there is considerable evidence for a lack of rationality in human behaviour including commercial and corporate behaviour.[163] They show that there are a number of ways that people think and behave that show a number of cognitive biases, that is, thinking that does not conform to the process or conclusions of a formal logical analysis.[164]

  • The argument for rationality

In our context, one possibility is that the bank is, in fact, acting rationally, from its own point of view when it sells a house in execution for less than it is worth without looking into other alternatives. There may be huge costs to its customers, but the bank itself may not bear these costs. In a pre-internet world, it is possible that this was rational because knowledge of the practice did not spread to other customers that may thus not find out in very large numbers what the bank is doing. This is unlikely to be the case today with a ubiquitous internet and an online media that is more difficult to control with the bank’s advertising spend than traditional media. In addition, since all the banks behave mostly in a similar way, there is little competitive advantage to stopping the practice or researching into better ways to deal with default events. This means the South African banks may have been unaware of better practices being developed or pre-existing in other parts of the world in the last century. There has thus perhaps been no compelling reason for banks to research other systems or catch up with the best practice of international peers. Barriers to entry[165] in the form of high capital requirements[166] for banks such as foreign banks wishing to compete on a fairer basis would further deter. The apartheid era also made it unfeasible for foreign banks to invest in South Africa, entrenching bad practice through the lack of overseas competition. It is also possible other banks do not know how bad the situation is in South Africa and hence the possibility to compete with the incumbent banks by committing to more just responses to default situations. In this view the banks actions can be explained rationally.

  • The argument for irrationality: bounded rationality and heuristics

The Constitutional Court found in East Zulu Motors[167] that before the question of whether an alternative means is considered (as being less restrictive of the right[168]), the first question is whether the action or regulation is rational. The constitutional State is required to act in a rational manner[169] and all legislation must be rational.[170] Rationality is considered to be a part of the doctrine of legality.[171] Both law and conduct can be challenged in terms of rationality.[172] If an action is irrational then it is “thus unlawful”.[173] Irrational action ipso facto violates the constitution.[174] Thus irrationality is an important subject for analysis in terms of the law of sale in execution.

In recent years, however, there has been significant research in behavioural economics and finance that suggested that people and organisations (which would include banks) do not always behave rationally.[175] In our case, some evidence is given for this proposition in the fact that banks also often lose in the sale in execution process where property is sold for significantly less than the bond.[176] Some of the irrational ways of thinking discovered by the behavioural economics school particularly apply to the sale in execution situations. Perhaps the most salient for our analysis is the effect of limited attention. This is simply the understanding that people have limited time and do not always look fully into the merits of situations. Rather they make quick decisions on the basis of limited information. The boards of banks deals with many different banking businesses, mostly with greater contributions to the bank’s bottom line than mortgage bonds.[177] It appears they may simply have considered it more important to deal with other areas.

The bank’s failure to improve the practice can also be explained in terms of “framing”[178]. The bank has a certain way of looking at the problem which it has had for many decades. The situation is not perceived to be a particular problem to the bank, so there is little pressure to change it.[179] This is perhaps particularly true of the legal department of a bank. Particularly as law as a discipline tends to be conservative and resistant to change. For Kahneman: “the practice of acting on the most readily available frame can sometimes be justified by reference to the mental effort required to explore alternative frames”. [180] In our case the effort would be to review the alternative methods of the world and come up with a better system.[181] As this involved considerable mental effort, keeping to the original frame is more likely. This ties in with another concept of the behaviour economists – the concept of bounded rationality.[182] This is the idea that rational thought is in practice limited by the available information, the difficulty of the decision problem and the time available to make the decision.[183] The varied practices of the rest of the world have not[184] been available for the bank’s management to consult. There has been no general international best practice developed. It has thus not been possible for the bank to look at all the possibilities and decide the best way forward. Such a fully rational decision is not possible without considerable, time consuming studies, which the South African banks do not appear to have commissioned at any point. For this reason decisions about how to react to mortgage default appears to always have been done using what Kahneman calls ‘system 1’ in the brain, which is automatic and swift and based on experience of the past and is relative unconscious. This is as opposed to ‘system 2’ which is more deliberate, reflective and analytical.[185] The latter form of thinking would require data, information and studies that would not have been available to the bank without cost. System 1 works by ‘heuristics’, cognitive short cuts that may work acceptably sometimes but can cause serious decision making errors at other times. This appears to be the case with our law of sale in execution.[186]

One of the mental shortcuts that people use to make decisions is the availability heuristic,[187] the idea that something that can be recalled must be important. Memories of family and friends being evicted from their homes are not ‘available’ to board members of banks because they and the people in their lives have never been in that situation. Thus eviction and sale in execution appear less of a problem. Similarly, a common heuristic is that of ‘affect’ which is connected to the idea of ‘risk as feeling’. The emotional reaction to sale in execution by a bank employee is more likely to recall feelings of being disciplined for not auctioning properties quickly enough and being seen as not ‘doing his/her job’ or criticisms of not working quickly enough. It is more likely that the employee to be affected by that emotional memory than by the past feeling of being evicted from one’s own house as that will not be a feeling that a bank employee will typically have encountered. [188]

An additional way of describing the lack of concern by banks as to the effects of their policies is using Simons’ concept of as ‘satisficing’, a combination of ‘satisfy’ and ‘suffice’. This word is used to describe a solution that is not the optimal solution but is a ‘good enough’ solution given the limited time available.[189] It is obtained by perusing through the available options[190] until an acceptable[191] way forward is selected. Given the scale of activity of a typical bank board member or other decision maker, the time available in our problem space, might be particularly little relative to the time needed to produce a world leading solution. In addition, behavioural economists may suggest that the board member might well be suffering from ‘choice overload’ as a result to the number of decisions that he or she has to make which will exasperate the situation and make him or her more likely to resort to the default (the existing method of execution) or simply to defer the decision and never get around to making it.[192] Thus an optimal, rational decision as to a better sale in execution policy is unlikely to emerge and has not, in fact, emerged from the banks.

  • Time Related Heuristics and Social Dimensions

There are also heuristics that recognise the ‘presence bias’ of most decision makers. A future law suit is a risk not a certainty and it is in the future not the present. This makes the bank more likely to ignore the possibility and instead sell houses in execution in large numbers in the present. In addition, another heuristic tells us we are more optimistic about our future states than is justified by our past experience, which we often fail to take into account.[193] Thus the bank may well optimistically believe that their clients are less traumatised by the experience of being thrown out their house than they actually are. It may also be panglossian with respect to the effect of the victims’ communication to the people that they know about their experience with the bank. They may believe that the sale in execution will not have as big a negative effect on the bank’s brand and how South Africans perceive it as it in fact does.

In addition to the assumption of rationality, the original economical view of man as individualistic has also been contradicted by behavioural thinking. ‘Betrayal aversion’[194] has been portrayed as a fundamental human trait. A bank’s action to sell a person’s house via the sheriff may well be perceived by the client, and others who experience it,[195] as a betrayal in the light of the general way the banking sector portrays itself in the media as helpful and friendly. This will lead to a lower perception of the bank in the minds of the public than would merely be justified by the act itself. People have also been found to have ‘inequity aversion’ which leads to a yet lower perception of the bank and its brand when inequitable things are perpetuated.[196] A similar result is predicted by behavioural game experiment where it is shown that people wish to work in a fair and reciprocal manner, yet when others treat them in the opposite manner, there is a punitive back lash. Thus banks which are often perceived by sale in execution victims to be unwilling to come to a fair arrangement may, the theory predicts, be subject to an unexpected vehement back lash.[197] This could reinforce the common perception that the banks are not obeying social norms of ethical conduct.[198] The study of social norms is another major area of research for behavioural economics. However, decisions makers in the legal department of banks and their attorneys[199] are likely to have used rationalisations, a form of ‘cognitive dissonance reduction’[200] in order to create a better view of themselves in the carrying out of the executions. In other words they will rationalise that the person who is losing their house is somehow a bad person[201] or someone who has wilfully stopped paying even though the evidence is that most of those being repossessed are suffering from events beyond their control.[202] This may be reinforced with a confirmation bias[203] which is where the information that is sought or the new information that bank employees encounter is interpreted in such a way as to confirm the existing views of the bank workers. Contrary information is ignored. This phenomenon is perhaps the most prevalent decision making bias of all and was known as early as Francis Bacon in the seventeenth century.[204]

  • Loss Aversion and Default

Loss aversion may also play a role. The bank, especially with the limited investigation into alternatives as described above, may view the risk of ending up with more properties in default for longer at a greater risk than any gain it projects. Behavioural economics shows that people value the expectation of losses more than double as highly as expected gains.[205] Thus the bank may react disproportionately to make sure that these possible losses do not occur even at the cost of greater number of execution sales than is necessary.

The normal, historic[206] ways of doing sale in execution, however unjust and inefficient it may be found to be, represents the ‘default’ in our current South African practice.[207] A default often represents lower risk that developing a new method. This is an example of ‘status quo bias’ and of ‘inertia’.[208] In other words that people have a tendency to do what they have always done. This ironically ties in with the assumption of rational choice theory that people have stable preferences.[209] This status quo bias is illustrated by the effect of changing the default for pension plans from opt in to opt out, leading to much greater enrolment rates.[210]

This relates also to the ‘sunk cost fallacy’[211]. A bank, which should stop the progress towards execution because the person now has a new job and can pay the loan, often continues to sell the house, despite the risk that it will sell for less than the bond amount and that the bank will bear a significant loss. This may be because of the costs already invested in the litigation process and thus an example of the sunk costs fallacy which is part of the status quo bias mentioned above.

  • Conclusion to behavioural economic analysis

The banks’ behaviour can to some degree be explained by the traditional ‘rational choice’ approach to economic analysis. The loss is mainly to the client and not to the bank. However, behavioural economics does add some nuances to a model of bank thinking that appear credible. The bank may well be acting in terms of ‘bounded rationality’ – the costs of gaining the information in order to make a more informed decision do not appear worth it to the bank. Some of the common heuristics outlined by this school of thought such as the availability and affective heuristics may also very well be affecting the decisions of major creditors in the sale in execution arena. Lastly, the loss aversion hypothesis also has explanatory power in explaining why the banks stick with the old instead of embarking on new and potentially much fairer ways of dealing with mortgage default situations.

In conclusion, there is at least one piece of evidence that is positive from the behaviourist stable. The salience heuristic says that what is novel, stands out or it novel influences us more. Although the information about South Africa’s poor performance on sale in execution has not been available before, it is now. This heuristic is optimistic as to the change that may take place as this information does now become available.

Nevertheless, it appears that the South African process of sale in execution may be highly irrational being subject to several identifiable decision making flaws. This affects its constitutionality as will be discussed in chapter five.


4.            Conclusion

This chapter has analysed the South African practice of sale in execution from a theoretical perspective. In terms of theories of justice, the practice does not appear to be just.  We have focused particularly on the economic point of view. Such an approach considers the transaction costs of the mortgage bond arrangement. It looks at the efficiency of the process particularly by looking at the single owner rule and its derivatives. This rule makes it clear that the current South African law is unlikely to be efficient. This conclusion is reached partly through the consideration of transactions costs like the position of the bank as an oligopoly and the asymmetrical nature of the information, also in the bank’s favour. The economics of risk were then brought into the equation to consider moral hazard and adverse selection. It appears likely that the South African law of sale in execution is not an efficient rule compared with alternative rules, either conceptual or as currently applicable in other countries. New rules, such as ensuring the bank is liable for the difference between what the property is sold for and the market price may be useful. A shift to remedies that are similar to specific performance would also be likely to be more efficient in many cases, in that they keep the contract going and the owner in the property. The insights of behavioural economics lead us to believe that the policies pursued by the banks in this area are very likely irrational – the        product of decision making processes based on errors that are now widely understood. One error that is particularly significant is the failure to take into account the intangible aspects of home.[212] In summary, the current rule cannot be said to be optimal from the economic perspective. There appear to be many changes that would improve the efficiency of the South African law of sale in execution.  It also appears neither just nor rational from any perspective – whether historic or modern; whether associated with the political left or right. Each in their own way inveighs against the current sale in execution arrangements.

[1] This phrase is largely equivalent to “the economic analysis of law”  Posner Frontiers of Legal Theory (2001) 31 as opposed to a historical analysis of law as was very popular in the 19th Century in Europe which focused on abstracting the principles of Roman law. This school was led and championed by Von Savigny (Posner Frontiers of Legal Theory (2001)) 193). It also contrasts with the sociological analysis of law though law-and-economics scholars tend to find the latter work “valuable” (Posner Frontiers of Legal Theory (2001) 412). Mainly however it contrasts with the normal activity of lawyers which is to analyse the law doctrinally for what it is but not particularly look at it from the outside or consider what it should be -Posner Frontiers of Legal Theory (2001) 2;  See also Posner The Economic Analysis of Law (2014) 29.

[2] Though Mill defines Epicurus as a Utilitarian (Mill Utilitarianism) (1863)) Chapter 2; Posner The Economic Analysis of Law (2014) 4; Marais Acquisitive Prescription in View of the Property Clause (2011 thesis) 206. There are two forms of utilitarianism: act utilitarianism and rule utilitarianism see Marais Acquisitive Prescription in View of the Property Clause (2011 thesis) 208.

[3] Normative ethics means the rule for what one ought to do as opposed to descriptive ethics which looks empirically at what people’s actual moral values or meta ethics which looks at the meaning of moral language.

[4] A Comment on the Commentaries and A Fragment on Government, ed. Burns and Hart, in The Collected Works of Bentham [hereafter CW] (, 1977), p. 393; Bentham   A Fragment on Government (1776) Preface; Marais Acquisitive Prescription in View of the Property Clause (2011 thesis) 206.

[5] Posner The Economic Analysis of Law (2014) 4.

[6] As opposed to a deontology theory which focuses on the character of the behaviour and not the consequences of the behaviour.

[7] Mill Utilitarianism (1863) Chapter 2.

[8] Mill Utilitarianism (1863) Chapter 2.

[9] “Bank” here as elsewhere in the thesis includes other creditors. I use “bank” as it is the most likely creditor.

[10] Bentham Introduction to the Principles of Morals and Legislation (1780; expanded 1789); Posner “Frontiers of Legal Theory” (2001) 52.

[11] Main stream economics is sometimes referred to as Neo- Classical economics.

[12]Weintraub,  (2002). “Neoclassical Economics”. In  Henderson (ed.). Concise Encyclopedia of Economics (1st ed.). Library of Economics and Liberty. This does not follow from the idea that utility should be maximised which is a moral theory. It could have been argued by Marxists in the nineteenth century that for the state to decide for everyone would be utility maximising as it knew better than individuals what would make them happy, or that it was in a better position to maximise utility than a free, individualistic system. The failure of the Soviet System to deliver economically compared to freer systems indicates empirically that the assumption of classical economics is closer to the truth; Posner The Economic Analysis of Law (2014). See also Marais Acquisitive Prescription in View of the Property Clause (2011 thesis) 215.


[13] There are at least five standards of efficiency in the economic literature according to Coleman: “(1) Productive efficiency, (2) Pareto optimality, (3) Pareto superiority, (4) Kaldor-Hicks efficiency” and (5) one based on Posner’s “wealth maximisation” theory.

[14] Coleman, “Efficiency, Utility, and Wealth Maximization” (1980). Faculty Scholarship Series. Paper 4202.p510; Marais Acquisitive Prescription in View of the Property Clause (2011 thesis) 206.

[15] Though the analytical approach and jurisprudential approach move beyond utilitarianism. CBT

[16] A full discussion of these is beyond the scope of this work, however Coleman is on point as follows:” These objections fall into two categories: those which do not question the consequentialist character of utilitarianism and those which do. Objections of the first sort include: (1) Boundary problems – whose utilities or preferences should count and which of a person’s preferences should count; (2) The total/average utility problem – whether utilitarianism is committed to promoting total utility without regard to its distribution; and (3) The interpersonal-utility comparison problem – how to determine if a course of conduct or policy that makes some individuals better off and others worse off increases total utility, and if it does, by how much.”  Coleman, “Efficiency, Utility, and Wealth Maximization” (1980). Faculty Scholarship Series. Paper 4202.

[17] Coleman “Efficiency, Utility, and Wealth Maximization” (1980). Faculty Scholarship Series. Paper 4202.p511+

[18] Posner “Utilitarianism, Economics, and Legal Theory”, 8 J. Legal Stud. 103 (1979).

[19] Coleman “Efficiency, Utility, and Wealth Maximization” (1980). Faculty Scholarship Series. Paper 4202.p512.

[20] Wealth and welfare maximisation, along with efficiency, are similar but not identical to the concept of utility maximisation, at least according to Posner who associates efficiency with utilitarianism and wealth maximisation with law-and-economics. The main advantage is precision as in wealth maximisation. What is looked at is only what can be measured in dollars (or rands). Posner, Utilitarianism, Economics, and Legal Theory, 8 J. Legal Stud. 103 (1979). All these concepts however are on the utilitarian end of the scale rather than that of deontology philosophy with which it is usually contrasted. Critique’ Coleman critiques Posner’s view at Coleman “Efficiency, Utility, and Wealth Maximization” (1980). Faculty Scholarship Series. Paper 4202.520.

[21] Or wealth if we take Posner’s new alternative criteria.

[22] Calabresi “About Law-and-economics: A Letter to Ronald Dworkin”, Hofstra Law Review 8,553-62. See also Mill’s original attempt to reconcile utilitarianism and justice in Chapter 5 of Mill Utilitarianism. Discussed in Marais Acquisitive Prescription in View of the Property Clause (2011 thesis) 206.

[23] Kaplow and Shavell, Fairness versus Welfare (2002).

[24] Posner The Economic Analysis of Law (2014) 34.

[25] Posner “Wealth Maximisation Revisited” Notre Dame Journal of Law, Ethics and Public Policy 2, 85-105. However, it is frequently argued by practitioners that the efficiency criteria leads to results that are similar to the existing common law positions in other words that the common law is efficient. Posner and Parisi The Economics Foundations of Private Law: An Introduction (2002) xiii and 65-207.

[26] Friedman Law’s Order (2000) 17-25.

[27] Hicks “The Foundations of Welfare Economics”. Economic Journal. Vol. 49, No. 196. 49 (196): 696–712; Posner. (2007). Economic Analysis of Law (Seventh ed.).

[28]Posner The Economic Analysis of Law (2014)14; There is another criterion known as Pareto efficiency where the law is only efficient if it cannot be changed in such a way that it makes certain people better off and no one worse off. Since there are few changes that make no one worst off, the Pareto criteria is rather impractical according to Friedman. Friedman Law’s Order (2000) and also Posner The Economic Analysis of Law (2014) 14.

[29] An expected loss is the average magnitude of the loss multiplied by the probability of it happening.

[30] Requiring the bank to reschedule the loan and/or take the other measures discussed in the chapter concerning remedies is unlikely to add much to the banks overall costs and hence to the interest rate on mortgages for consumers. It has been found that even fairly radical interventions in the mortgage contract would only increase interest rates by 12 to16 per cent. Goodman and Levitin “Bankruptcy Law and the Cost of Credit: The Impact of Cramdown on Mortgage Interest Rates,” The Journal of Law and Economics 57, no. 1 (February 2014): 139-158. Similarly, higher levels of bankruptcy exemption was also found not to increase mortgage interest rates of the probability of being granted a mortgage – Berkowitz and Hynes, “Bankruptcy Exemptions and the Market for Mortgage Loans,” The Journal of Law and Economics 42, no. 2 (October 1999): 809-830.; Whether or not the debtor is employed is a listed factor in Jaftha at para 60 but the banks have largely ignored this and fail to reschedule debts when the debtor gets a new job. CBT

[31] Friedman Law’s Order (2000) 20; Parisi “Coase theorem” in The New Palgrave Dictionary of Economics, Second Edition, 2008 1; Posner The Economic Analysis of Law (2014).

[32] Friedman Price Theory: an intermediate text (1986).

[33] Posner and Parisi  The Economics Foundations of Private Law: An Introduction (2002) xi

[34] The subjective school of value is fundamental to economic thought. Before around 1890, all economists (including Marx, Adam Smith, Ricardo, etc.) valued goods according to their inputs – land, labour, capital etc. The first part of Capital is almost entirely built around an objective theory of value. Walrus and his school in the 1890s introduced the great insight that whatever inputs one puts into a product its value is what someone will pay for it, not what went into making it. The value is in our minds (subject) and not in the product (objective).  The concept of subjectivity is not unknown to law. In criminal law we look at what the subjective state of the criminal is. In delict we look at an objective test – what a reasonable person would have done regardless of the actual, subjective state of the actor.

[35] Thus it is said in economics “you cannot make interpersonal comparisons of utility” – you do not know what the value of something is to someone else. In our case, you can know that someone values a house more than the market price plus transaction costs (or he would have sold it), but not how much more.

[36] See especially the Chapter on Relief.

[37] Kaplow and Shavell, Fairness versus Welfare (2002).

[38] Or maximised utility or welfare functions as it is generally expressed within economics. There are various distinctions between the various terms and exact expressions which need not concern us here. See Posner “Utilitarianism, Economics, and Legal Theory”8 J. Legal Stud. 103 (1979) and Bernstein “Whatever Happened to law-and-economics?” 64 Md. L. Rev. 312 (2005) which critiques the ideas in Posner’s book.

[39] In this document I will use “Repossession” as synonymous with “Sale in execution” and “Foreclosure”. Distinctions could be made as to their uses in various countries. It is also true that the bank does not technically repossess as it has never been in possession before.

[40] Brits ”Mortgage Foreclosure under the Constitution: Property, Housing and the National Credit Act” (Thesis 2012) p138-139.

[41] For a discussion of theories of property rights and their interaction with constitutional rights in general see Van der Walt, The Modest Systemic Status of Property Rights, 1 J. L. Prop. & Society 15 (2014).

[42] For a fuller discussion of the limitation of the right and the nature of the right see Brits ”Mortgage Foreclosure under the Constitution: Property, Housing and the National Credit Act” (Thesis 2012) p45 and in Chapter Two of this thesis.

[43] This separation of rights in rem (real property) from rights in personam (merely contractual rights) is the standard approach in most Western European countries and their former colonies as well as other countries who have adopted their codes. It implies that ownership of the property does not pass to the lender.

[44] In this chapter the primary reference of “property” is to immovable property.

[45] Thus for most of Western history property ownership was a requirement for the vote.  This criterion was only abolished in the US in 1856 and also in most European countries in the 19th century.

[46] Brits ”Mortgage Foreclosure under the Constitution: Property, Housing and the National Credit Act” (Thesis 2012) p49-54 esp. at 54.

[47] Schwartz “The Enforceability of Security Interests in Consumer Goods” Journal of Law & Economics, Vol. 26, No. 1 (Apr., 1983), 127.  

[48] It is beyond the scope of this work to address each of these criticism in detail.

[49] That law in economics is based on Neo classical as opposed to other types of economics. See Bernstein “Whatever Happened to law-and-economics?” 64 Md. L. Rev. 303 (2005). Bernstein traces (at p304) the development of the school in a certain stage to primarily borrowing the ideas of neo classical economics and applying them to law.

[50] The first problem is that utilitarianism does not take into account the rights of the individuals or minorities The greatest happiness of the greatest number, and/or the welfare optimisation in Nazi Germany was arguably to eliminate the Jews. Constitutionalism both in the US and in South Africa now protects the rights of individuals from majoritarian oppression. Most scholars in most countries however are assuming a constitutional framework. Thus we will define utilitarianism for our purposes as utility maximisation within a constitutional framework that project individual rights.

A second problem was common in 19th Century Germany to whom seeking the greatest happiness of the greatest number appeared to contrast with rather seeking for one’s nation to be the best possibly at the expense of the happiness of the population at least for a while. Utilitarian appears consumptive rather than concerned with investment. Utilitarianism could be redefined however, or clarified to mean the greatest utility or welfare of the population over a long time period, say 50 or 100 years, rather than simply in any given year or election cycle.

[51] Another one is that all of people’s desires can be reduced to one factor: utility. This is called commensurability. Nussbaum seems to think that this particular aspect of the problem is solvable as commensurability, while untrue in her view, is not necessary for the rationalist and utilitarian project: NussbaumFlawed Foundations: The Philosophical Critique of. (a Particular Type of) Economics64 UCHILRev 1197 (1997) esp. at 1204.

[52] Eichner and Kregel (1975) “An Essay on Post-Keynesian Theory: A New Paradigm in Economics”, Journal of Economic Literature, V. 13, N. 4 (Dec.):   1293-1314. See also the Real World Economics Review (an open access journal) at

[53] And by implication the law-and-economics school.

[54] This leads to a possible problem in the other direction, according to Bernstein law-and-economics can now be seen to have become so inclusive that it is not distinct from other schools of thought. Bernstein “Whatever Happened to law-and-economics?” 64 Md. L. Rev. 309 (2005).

[55] Stiglitz. and Greenwald, “Externalities in economies with imperfect information and incomplete markets”. Quarterly Journal of Economics  (May 1986): 229–264. Schwartz has attempted to lay out more practical conceptual tools to work out when intervention to cure information asymmetries is appropriates. Schwartz and Wilde.  “Intervening in Markets on the Basis of Imperfect Information: A Legal and Economic Analysis.” University of Pennsylvania Law Review 1979 127: 630–96.

[56] Behavioural economics has addressed the rationality assumption -see the subsection below. However of all the assumptions that have been relaxed, rationality has probably been relaxed the least. This is problematic in a number of ways. First of all, Bernstein points out that although Western philosophy has held that choices are endogenous (shaped by the society around them); economics (and thus law-and-economics) holds them independent of the outside world concern us here. See Posner, “Utilitarianism, Economics, and Legal Theory”, 8 J. Legal Stud. 103 (1979) and Bernstein, “Whatever Happened to law-and-economics?”  64 Md. L. Rev. 309 (2005). Further she quotes Nussbaum that the very idea of preferences is a confusion of several other distinct ideas “belief, desire, perception, appetite, and emotion” see NussbaumFlawed Foundations: The Philosophical Critique of (a Particular Type of) Economics” 64 UCHILRev 1197 (1997).

[57] See my forthcoming paper; Shaw Repossession and the Idea of Justice.

[58] Popper, The Open Society and Its Enemies: Volume 1: The Spell of Plato (1995) 97; Plato The Republic.

[59] Kennedy “The Role of Law In Economic Thought: Essays On The Fetishism Of Commodities” available at . Stiglitz in his Nobel prize lecture agreed: Stiglitz  “Information And The Change In The Paradigm In Economics” (2001); Kennedy “Distributive and Paternalistic Motives in Contract and Tort Law: With Special Reference to Compulsory Terms and Unequal Bargaining Power,” 41 Maryland L. Rev. 563 (1982).

[60] Rawls A Theory of Justice (1971) and also Rawls Justice as fairness (1971).

[61] Sen The Idea of Justice (2009) 52; See also Van Der Walt “A South African reading of Frank Michelman’s theory of social justice” TSAR 2004 19 2 for a discussion in the South African context.

[62] Including: Jaftha v Schoeman and Others, Van Rooyen v Stoltz and Others (CCT74/03) [2004] ZACC 25; 2005 (2) SA 140 (CC); 2005 (1) BCLR 78 (CC) (8 October 2004); Gundwana v Steko Development CC and Others (National Consumer Forum as Amicus Curiae) 9 NO 2009 (5) SA 451 (ECG); Port Elizabeth Municipality v Peoples Dialogue of Land and Shelter and another 2001 1 all SA 381 (E); Port Elizabeth Municipality v Various Occupiers [2004] JOL 13007 (CC); Twee Jonge Gezellen (Pty) Ltd and Another v Land and Agricultural Development Bank of SA t/a the Land Bank and Another 2011 (5) BCLR 505  (CC)President of RSA and Another v Modderklip Boerdery (Pty) Ltd and Others 2005 (8) BCLR 786 (CC).

[63] Eviction cases are also involved. Evictions and sales in execution cannot be separated. See Brits and Van Der Walt “Application of the housing clause during mortgage foreclosure: a subsidiarity approach to the role of the National Credit Act (part 1)” TSAR 2014 2 290.

[64] See Chapter 5 The constitutionality of the South African law of sale in execution.

[65] Coase “The Problem of Social Cost” Journal of Law-and-economics 3: 1–44. See also Merrill  and Smith “Making Coasean Property More Coasean” in  The Journal of Law and Economics 2011 54:S4, S77-S104 which argues that in a positive transaction world, property in the Coasean views looks more like the traditional legal view thereof; Marais  Acquisitive Prescription in View of the Property Clause (2011 thesis) 207.

[66] Parisi “Coase theorem” in The New Palgrave Dictionary of Economics, Second Edition, 2008 1.

[67] Posner and Parisi (The Economics Foundations of Private Law: An Introduction   2002) xvi.

[68] Dahlman (1979). “The Problem of Externality”. Journal of Law-and-economics 22 (1): 141–162.

[69] At the time of bargaining this is not an already incurred cost but an ‘expected cost’. Expected costs is a statistical construct much used in economics which is calculated by multiplying the amount of the cost should it occur by the probability of it occurring. This expected cost is thus a component of the total transaction costs for each market transaction.

[70] High in the sense not that much time is spent bargaining but that because there is no bargaining the borrower can experience a situation that is highly detrimental to him.

[71] An oligopoly is a monopoly by a few instead of one.

[72] Posner and Parisi The Economics Foundations of Private Law: An Introduction (2002).    xix According to Epstein the best rule will minimise the sum of externalities and hold out costs. See Epstein “Holdouts, Externalities and the Single Owner Rule: One More Salute to Ronald Coase” The Journal of Law & Economics, Vol. 36, No. 1, Part 2, John M. Olin Centennial Conference in Law-and-economics at the University of Chicago (Apr., 1993), 553-586.

[73] “Externalising” in the literature.

[74] Friedman Law’s Order (2000) 36-46.

[75] As in for more than the efficient share.

[76] Coase “The Problem of Social Cost” Journal of Law-and-economics 1 (1960).

[77] Posner Frontiers of Legal Theory (2001) 6.

[78] Schwartz “The Enforceability of Security Interests in Consumer Goods” in The Journal of Law & Economics, Vol. 26, No. 1 (Apr., 1983), 112.

[79] Equity is the difference between the market value of the property and the total loan outstanding. This not to be confused with the English law concept of equity as distinct from law or the general concept of equity as synonymous with ‘justice’ or ‘fairness’.

[80] Paternalism in economics refers to doing things in the interests of a person but without his consent and sometimes against his will.

[81] Equity is the difference between the market value of the property and the total loan outstanding.

[82] Although South African court will now, post Jaftha and Gundwana, usually not grant execution if the arrears are less than about 8 months.

[83]Thus  the issue could be framed as being one of procedural fairness in terms of Van Der Walt   “A South African reading of Frank Michelman’s theory of social justice” TSAR 2004 19 2  261.

[84] Spreadsheets from the major four lenders in South Africa.

[85] The bank’s own data record recovery rates of around 5% to 9%. The exact source of this information is protected by privilege as it arose during a court case that is not yet complete.

[86] A property valued at R1 000 000 would on average sell for around R550, 000 leading to a loss of R450,000. In contrast defending such a case would cost R40,000 to R100,000. Even if the litigation only buys time to sell the property for close to the market price, there are major savings.

One constraint on this behaviour maybe his cash flow situation as he is almost by definition in difficult financial circumstances.

[87] Whether or not the debtor is employed is a listed factor in Jaftha at para 60 but the banks have largely ignored this and fail to reschedule debts when the debtor gets a new job. CBT

[88] If the property will ultimately, if the debtor’s situation does not improve, be sold for market price or close, then there is no harm to the bank in waiting. Ultimately, they will get all the interest due. On the other hand, there may be great benefit to the debtor as she may obtain a new job, business may improve or she may be able to sell her own house for market price.

[89] Though the number of executions are a lot more common than in other countries – see Chapter Foreign Law.

[90] As we will discuss in detail in Chapter 5 on constitutionality. Rationality is an assumption of the economic model. Irrationality on the part of the banks would be a transaction cost that would impede bargaining.

[91] Sale in execution statistics spreadsheets, available from Lightstone, a firm which collects and sells such statistics.

[92] More academic work needs to be done on quantifying the long terms effects.

[93] See chapter of comparative law of sale in execution.

[94] These are sometimes referred to as “games” e.g. “It’s not a zero sum game”. This refers to the literature on game theory.

[95] Both in South African and in all other countries studied.

[96] In this case by the Rules Board, in terms of Rule 46 of the Uniform Rules of Court.

[97] Alternatively, the parties could, in theory, contract initially that they would not use the sheriff’s auction system should the mortgagor default on the loan but use another system such as estate agents. However this may not be enforceable in South Africa, since if the contract was so that the bank could sell the property with estate agents without a judgment then it would be considered “self-help”. On the other hand, should the contract be written so that only after judgment would estate agents be used then by that stage the court would have given an order for execution by the sheriff and the bank would use this if they preferred. That the law does not permit such contracts can be seen as a transaction cost. See the Chapter of this thesis: The South African law of sale in execution in historical perspective.

[98] It is also required in Europe and other countries deriving from the civil law tradition. Certain US states do not require judicial supervision.

[99] See the Chapter of this thesis: The South African law of not sale in execution in historical perspective.

[100] This is not to argue that a judgement should not be required as parties would probably not in any case be able to bargain to an efficient outcome due to the other factors discussed in this chapter.

[101] This right is thus “inalienable” see Calabresi & Melamed, “Property Rules, Liability Rules and Inalienability: One View of the Cathedral” Harv. L. Rev. 1089 (1972).

[102] As laid out in Coase “The Problem of Social Cost” 3 Journal of Law-and-economics 1 (1960).

[103] Or other private parties such as private auctioneers.

[104] The definition of equity is that the market value of the property is worth considerably more than the outstanding loan amount including arrears.

[105] The current circumstances in South Africa are very similar to this (dystopian) idealised version.

[106] As a result of the fact that only a tiny percentage of the total number of bonds are sold in execution.

[107] At the current time banks often sell properties for less than the bond leading to losses. Banks also in the current system incur legal costs that would be unnecessary in a system where most defaults lead to an outcome that can be dealt with administratively (such as rescheduling the loan) rather than legally.

[108]  Coase “The Problem of Social Cost” Journal of Law-and-economics 1 (1960).

[109] Posner “Frontiers of Legal Theory” (2001) 6.

[110] Based on the new rule.

[111] Epstein “Holdouts, Externalities and the Single Owner Rule: One More Salute to Ronald Coase” The Journal of Law & Economics, Vol. 36, No. 1, Part 2, John M. Olin Centennial Conference in Law-and-economics at the University of Chicago (Apr., 1993), 553-586.

[112] In another paper Epstein puts it as follows:” That method is this: assume that you reap all the gains and bear all of the losses associated with a particular project, just as if you were a single owner of all relevant resources: as a single owner, what would you do given that all relevant resources are under your command?”  Epstein “Regulation–and Contract´ Environmental Law 1991 865.

[113] Epstein “Holdouts, Externalities and the Single Owner Rule: One More Salute to Ronald Coase” The Journal of Law & Economics Vol. 36, No. 1, Part 2, John M. Olin Centennial Conference in Law-and-economics at the University of Chicago (Apr., 1993), 555.

[114] Epstein “Holdouts, Externalities and the Single Owner Rule: One More Salute to Ronald Coase” The Journal of Law & Economics 553.

[115] Juristic or otherwise.

[116] That is to say he employs his own capital of which he has sufficient for the houses in question rather than borrowing from a third party.

[117] This is also rather hypothetical of course in the case of a single owner as there could be no actual default event when everything is owned by the same parties. Readers interested in greater realism might rather envision where a person’s children were the owners of the properties and defaulted.

[118] Whether or not the debtor is employed is a listed factor in Jaftha at para 60 but the banks have largely ignored this and fail to reschedule debts when the debtor gets a new job.

[119] This step is the author’s and not part of Epstein’s scheme.

[120] Epstein “Holdouts, Externalities and the Single Owner Rule: One More Salute to Ronald Coase” The Journal of Law & Economics, Vol. 36, No. 1, Part 2, John M. Olin Centennial Conference in Law-and-economics at the University of Chicago (Apr., 1993), 557.

[121] For example England, Australia, New Zealand, the United States (UCC), see chapter on Foreign Law.

[122] This is discussed in much more debt in my Chapter on Foreign Law.

[123] Banks may in fact also be liable in delict for selling people’s houses for less than they are worth but the point has not been argued to Constitutional Court level in South Africa as yet.

[124] Information asymmetries in the credit market were found in Bhutta, “The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighbourhoods” The Journal of Law and Economics 54, no. 4 (November 2011): 953-983.

[125] ABSA, Nedbank, FNB and Standard Bank.

[126] The largest 4 banks control 84.1% of banking assets which amounts to high concentration according to The Reserve Bank: Bank Supervision Department Annual Report 2011 page 55.The total number of banks in South Africa decreased from 30 to 17 from 2002 to 2011 according to the same report p56.

[127] See the annual accounts of each bank.

[128] In a voting situation this is known as rational ignorance – it is not rational to develop knowledge of political issues because your vote will not be able to change it. The mortgage situation is analogous.

[129] A more sophisticated analysis is beyond the scope of this research but would involve understanding screening and signalling. Spence “Job Market Signalling”. Quarterly Journal of Economics 87 (3): 355–374. Simkovic, (2013). “Risk-Based Student Loans”. Washington and Lee Law Review 70 (1): 527. The main example of the application of these theories is the labour market. These contrast with the “Human Capital” approach advanced by Becker – Becker Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. Briefly, simplifying, Becker’s approach is that the higher prices of educated people reflect increased knowledge whereas the Signalling approach is that their higher educational simply ‘signals’ their increased innate abilities. These debates generalise to the wider asymmetric information problem.

[130] Downs An Economic Theory of Democracy 1957.

[131] In other words, the borrower who grants a mortgage on his property.

[132] Olson The Logic of Collective Action: Public Goods and the Theory of Groups (1971).

[133] Posner and Parisi The Economics Foundations of Private Law: An Introduction (2002) xxi.

[134] Posner and Parisi The Economics Foundations of Private Law: An Introduction (2002) xxi.

[135] Asymmetric information is the situation where one party knows considerably more about the subject (in this case of the mortgage contract) than the other.

[136] This assumes that the banks desire a complete contract. In other words a contract with no gaps in that it allows for every possible contingency. In fact, part of the reason why the current contract does not include the terms of the new rule may be because the banks utilised strategic behaviour to ensure an inefficient outcome that they perceive to be to their advantage. The theoretical framework that explains this reason for gaps is found in Ayres and Gertner (1989) “Filling Gaps in Incomplete Contracts: An Economic Theory of Defaults Rules” Yale Law Journal 99(1) 87 -130 especially at 127.

[137] A large number of foreclosures in an area will bring the overall property price down. Dependents of particular persons evicted from their home will suffer. But these may not be large costs compared to the overall costs and benefits of the total mortgage system.

[138] McCormack Secured Credit and the Harmonisation of Law: the UNCITRAL experience 55

[139] McCormack Secured Credit and the Harmonisation of Law: the UNCITRAL experience 55

[140] Brits” Mortgage Foreclosure under the Constitution: Property, Housing and the National Credit Act” (Thesis 2012) p138-139.

[141] McCormack Secured Credit and the Harmonisation of Law: the UNCITRAL experience 55.

[142] McCormack Secured Credit and the Harmonisation of Law: the UNCITRAL experience 59.

[143] McCormack Secured Credit and the Harmonisation of Law: the UNCITRAL experience 60.

[144] Friedman Law’s Order (2000) 67 -70. Adverse selection is a form of asymmetrical information. The classic paper on adverse selection is Akerlof “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism”. Quarterly Journal of Economics 84 (3): 488–500. This highly cited paper uses the example of used cars to show that the quality of products in a market may reduce in the presence of information asymmetries. Such markets are not necessarily solved by consumer protection measures however according to Hoffer and Pratt. “Used vehicles, lemons markets, and Used Car Rules: Some empirical evidence”. Journal of Consumer Policy 10 (4): 409–414.

[145] Posner and Parisi The Economics Foundations of Private Law: An Introduction (2002) xxii.

[146] Brits” Mortgage Foreclosure under the Constitution: Property, Housing and the National Credit Act” (Thesis 2012) p138-139.

[147] In other words a rule that makes banks take more of the risk of default. Note most of the solutions suggested herein do not shift the risk of losses but eliminate them through selling for market price (no loss) or not selling at all (no loss).

[148] A requirement that is sometimes costly depending on the loan. To make this mandatory is an interesting policy position but the expense would need to be looked at closely. Analysis of life insurance rates for policies reveal that in most cases the increase in mortgage payments would be negligible even for people starting a mortgage in their 40s and finishing in their 60s. Critical illness cover however is much more expensive at that age.

[149]; Vorms  “The effectiveness of the French credit system faced with the challenge of budgetary restrictions “ Housing Finance International Summer 2012 The Quarterly Journal of the International Union for Housing Finance p20. According to this source this is not a legal requirement but a universally applied lender requirement.

[150] Standard Bank’s policy charges different amounts for different ages and has maximum entry ages and finishes at 65 or 75.

[151]; Vorms  “The effectiveness of the French credit system faced with the challenge of budgetary restrictions “ Housing Finance International Summer 2012 The Quarterly Journal of the International Union for Housing Finance.

[152] These are the terms of Standard Bank’s policy – .

[153] There is not much moral hazard here as few people prefer to die than pay their mortgage. Suicide for these purposes is rare.

[154] Posner and Parisi The Economics Foundations of Private Law: An Introduction (2002) xxii.

[155] See my forthcoming paper Shaw “Irrationality and the behavioural economics of repossession”.

[156] See Mill, “On the Definition of Political Economy, and on the Method of Investigation Proper to It,” London and Westminster Review, October 1836.Essays on Some Unsettled Questions of Political Economy, 2nd ed. London: Longmans, Green, Reader & Dyer, 1874, essay 5, paragraphs 38 and 48.

[157] Blume and Easley (2008). “rationality,” The New Palgrave Dictionary of Economics , 2nd Edition;  Becker (1976). The Economic Approach to Human Behaviour.  Anand (1993). Foundations of Rational Choice Under Risk.

[158] This is at the level of individual decision making. Balog points out that there would be no macroeconomics with only individual decisions, only micro economics so this assumption does not actually cover the whole of economics. Balog (1992). The Methodology of Economics: Or, How Economists Explain.  pp. 45–46. For our purposes, however the assumptions apply.

[159] Hegel’s Phenomenology of Spirit: Selections Translated and Annotated by Kainz.

[160] Marx “The German Ideology” (1932) Marx of course following Hegel, at least with respect to the dialectic theory of history.

[161] Anand (1993). Foundations of Rational Choice Under Risk.

[162] The law-and-economics school above has reservations about behavioural economics. Posner’s main problem with this school is that while undermining the rational actor model it does not provide any theory of action of its own. See Posner “Rational Choice, Behavioural Economics, and the Law” 50 Stan. L. Rev. 1551, 1551 (1998). On the other hand, Nussbaum thinks that the theory of the law-and-economics school “has not yet put itself onto the map of conceptually respectable theories of human action” NussbaumFlawed Foundations: The Philosophical Critique of. (a Particular Type of) Economics64 UCHILRev 1197 (1997) 1211.

[163] Kahneman, and Tversky, (1979). “Prospect Theory: An Analysis of Decision under Risk” (PDF). Econometrica 47 (2): 263—Kahneman and Tversky have 14 different problems in this paper, expressed mathematically that illustrate this point. A recent popularisation of the theory is Thaler & Sunstein (2009). Nudge: Improving decisions about health, wealth, and happiness.

[164] Samson (Ed.) (2014). The Behavioral Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 15; Ariely (2008). Predictably Irrational.

[165] In other words policies and realities that make it difficult for new competitive banks to enter the market.

[166] The Banks Act CBT.

[167] East Zulu Motors (Pty) Ltd v Empangeni/ Ngwelezane Transitional Local Council and Others1998 (2) SA 61 (CC), 1998 (1) BCLR 1 (CC) at para 24 (in the context of equality).

[168] See the Constitutional chapter of this thesis for an explanation of this.

[169] See also Prinsloo v Van der Linde & Another1997 (3) SA 1012 (CC), 1997 (6) BCLR 759 (CC) at para 25.

[170] New National Party v Government of the Republic of South Africa 1999 (3) SA 191 (CC), 1999 (5) BCLR 489 (CC)(‘New National Party’) at para 24.

[171] CLOSA 13.4 b ii citing unnamed ‘cross border municipality claims’ and United Democratic Movement v President of the Republic of South Africa (No. 2) [2002] ZACC 21, 2003 (1) SA 495 (CC), 2002 (11) BCLR 1179 (CC).

[172] CLOSA 13.4 d ii However, the passage goes on to say that this is not to be used where a court simply disagrees with the law or where there are better means.

[173] Bel Porto School Governing Body & Others v Premier of the Province, Western Cape & Another2002 (3) SA 265 (CC), 2002. (9) BCLR 891 (CC) paragraph 120.

[174] Pharmaceutical Manufacturers Association of South Africa: In re Ex parte President of the Republic of South Africa [2000] ZACC 1, 2000 (2) SA 674 (CC), 2000 (3) BCLR 241 (CC)(‘Pharmaceutical Manufacturers‘) at para 17.

[175] Kahneman; Tversky (1979). “Prospect Theory: An Analysis of Decision under Risk” (PDF). Econometrica 47 (2): 263—Kahneman and Tversky have 14 different problems in this paper, expressed mathematically that illustrate this point.

[176] Although the amount can theoretically be recovered from the borrower, the borrower has been financially ruined in many cases and is not likely to be able (or willing) to pay the bank further.

[177] Bear in mind the penetration of mortgage bonds into the South African market is only around 5% of adults and that interest rates are lower than for more risky loans.

[178] Tversky and Kahneman “The Framing of Decisions and the Psychology of Choice” Science New Series, Vol. 211, No. 4481. (Jan. 30, 1981), pp. 453- 458.

[179] This is reinforced by the ‘primary effect’ that the knowledge picked up early in the process (in this case in their years of experience with the bank) is given preference to new knowledge about better ways to do sale in execution – Nickerson (1998). Confirmation bias: A ubiquitous phenomenon in many guises. Review of General Psychology, 2, 187.

[180] Tversky and Kahneman “The Framing of Decisions and the Psychology of Choice” Science New Series, Vol. 211, No. 4481. (Jan. 30, 1981), pp. 458.—Kahneman however refers the reader to his Prospect theory rather than to rely on ‘ad hoc notions about the cost of thinking’.

[181] As we have done in the chapters on Foreign Law and on Remedies.

[182] Simon “A Behavioural Model of Rational Choice” The Quarterly Journal of Economics, Vol. 69, No. 1. (Feb., 1955), pp. 99-118.

[183] Gigerenzer and Selten, (2002). Bounded Rationality: The Adaptive Toolbox: Simon, (1991). “Bounded Rationality and Organizational Learning”. Organization Science 2 (1): 125–134; Simon (1957). “A Behavioural Model of Rational Choice”, in Models of Man, Social and Rational: Mathematical Essays on Rational Human Behaviour in a Social Setting.; see also Barros & Simon and the concept of rationality: Boundaries and procedures Brazilian Journal of Political Economy, vol. 30, nº 3 (119), pp. 455-472, July-September/2010 for the argument that the concept of ‘procedural rationality’ is actually more important.

[184] Was this not the case, this thesis would not be necessary.

[185] Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.)  4 Retrieved from See also Kahneman, 1934-.  2011). Thinking, fast and slow.

[186] The bank, of course, does not decide the law but is very influential in making law regarding credit. If it had pressed for respond as soon as the system stopped working (say 50 years ago), there would certainly be a different system of law today.

[187] Esgate; Groome (2005). An Introduction to Applied Cognitive Psychology. Psychology Press. p. 201; Tversky, Kahneman, (1973). “Availability: A heuristic for judging frequency and probability”. Cognitive Psychology 5 (2): 207–232; Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 5.

[188] Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 24; Loewenstein, Weber, See, & Welch (2001). Risk as feelings. Psychological Bulletin, 127(2), 267-286.

[189] Manktelow (2000). Reasoning and Thinking. Hove:  p. 221.

[190] In other words, those available without too much extra work.

[191] Not an optimal solution.

[192] Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 14 Retrieved from; Iyengar, & Lepper (2000). When choice is demotivating: Can one desire too much of a good thing? Journal of Personality and Social Psychology, 79, 995-1006.

[193] Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 7 Retrieved from

[194] Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 7 Retrieved from; Bohnet, Greig, Herrmann, & Zeckhauser (2008). Betrayal aversion: Evidence from Brazil, China, Oman, Switzerland, Turkey and the United States. American Economic Review, 98, 294-310.

[195] Either first hand or in hearing the story of what happened in a social environment.

[196]Barone and Tirthankar (2010). Does exclusivity always pay off? Exclusive price promotions and consumer response. Journal of Marketing, 74(2), 121-132’ Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 19 Retrieved from

[197] Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 8 Retrieved from; Fehr, & Schmidt (1999). A theory of fairness, competition, and cooperation. The Quarterly Journal of Economics, 114, 817-868.

[198] Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 8 Retrieved from; Dolan, Hallsworth, Halpern., King & Vlaev (2010). MINDSPACE: Influencing behaviour through public policy.; Akerlof, & Kranton (2010). Identity Economics.

[199] And indeed sheriffs.

[200] Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 9 Retrieved from; Festinger (1957). A theory of cognitive dissonance.; Cialdini, Wosinska, Barrett, Butner, Gornik-Durose (1999). Compliance with a request in two cultures: The differential influence of social proof and commitment/consistency on collectivists and individualists. Personality and Social Psychology Bulletin, 25, 1242-1253.

[201] Nickerson gives the advantage of witch hunts as an example of confirmation bias, an example not entirely lacking in analogy to the treatment of debtors today. Nickerson (1998). Confirmation bias: A ubiquitous phenomenon in many guises. Review of General Psychology, 2, 191.

[202] A job loss, health event (including death) or a divorce are the most common.

[203]Nickerson (1998). Confirmation bias: A ubiquitous phenomenon in many guises. Review of General Psychology, 2, 175-220; Nickerson’s article points out that what is in view is not intentional case building such as lawyers would do but with the less explicit and conscious kind of case building (175) See also Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 15.

[204] Nickerson (1998). Confirmation bias: A ubiquitous phenomenon in many guises. Review of General Psychology, 2, 176 CBT.

[205] Kahneman; Tversky (1979). “Prospect Theory: An Analysis of Decision under Risk” (PDF). Econometrica 47 (2): 263 — Especially Problems 12 and 13. This is described using the terms “concave’ and “convex” in terms of the utility functions. See also Kahneman; Tversky Journal of Risk and Uncertainty, 5:297-323 (1992) © 1992 Advances in Prospect Theory: Cumulative Representation of Uncertainty, a more recent paper incorporating a cumulative aspect to the theory; Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 20.

[206] At least for Gauteng since 1905 and for Cape Town since 1955. For previous historical models before that point, see Chapter Two: The South African law of sale in execution in historical perspective

[207] Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 1,3,15 Retrieved from See also 218-225. Johnson & Goldstein (2003). Do defaults save lives? Science, 302, 1338-1339.

[208] Madrian & Shea (2001). The power of suggestion: Inertia in 401(k) participation and savings behaviour. Quarterly Journal of Economics, 116, 1149-1187.

[209] Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 1 Retrieved from

[210] Samson(Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 6 Retrieved from Similarly, with organ donation on death.

[211] Arkes and Blumer (1985), The psychology of sunk costs. Organizational Behaviour and Human Decision Processes, 35, 124-140.; Samson (Ed.) (2014). The Behavioural Economics Guide 2014 (with a foreword by George Loewenstein and Rory Sutherland) (1st ed.) 26.

[212] Brits ”Mortgage Foreclosure under the Constitution: Property, Housing and the National Credit Act” (Thesis 2012) 378.

For me, this is good and belongs in the exposition of the law and economics approach.  For a contrast, see Lauren B. Edelman, “Rivers of Law Contested Terrain: A Law and Society Approach to Economic Rationality,” Law & Society Review 38 (2004): 181–97.