Prospect Theory and due process paranoia: what behavioural models say about arbitrators’ assessment of risk and uncertainty

Abstract

Abstract The term ‘due process paranoia’ is used to describe a perceived reluctance by arbitral tribunals to act decisively in certain situations for fear of the arbitral award being challenged on the basis of a party not having had the chance to present its case fully. This article approaches due process paranoia from the perspective of Prospect Theory, which is a behavioural model describing how individuals make decisions under risk and uncertainty. The authors examine how Prospect Theory’s insight that decision makers tend to overweight low-probability events in their decision-making (the ‘possibility effect’) affects decision-making by arbitrators when faced with the threat of challenge to their awards on due process grounds (the ‘enforcement risk’). The article concludes that the possibility effect is prone to contribute to an overweighting by arbitrators of the enforcement risk, thereby explaining the perceived tendency by tribunals to make sub-optimal decisions when faced with due process-related complaints or threats.