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Lissadell House, Prospect Theory and risk aversion

Irish people will be familiar with the saga of Lissadell House which seems to have come to an end yesterday. It is a stately mansion in Sligo which a couple bought and restored at considerable expense to use it both as a family home and to develop as a tourist extraction. It is known for it’s association with W B Yeats and his brother, the artist Jack B Yeats. The county council tried to establish rights of way across the property which the owners opposed. The council won in in the High Court but lost yesterday in the Supreme Court.

Ex-post of course, the council were wrong to fight it since they lost but hindsight is wonderful. A senior council official is quoted in the Irish Independent’s article as saying the council had “no choice” but to defend the court actions. “We did it in the public interest,” he said. But quite clearly they did have a choice. The council currently has debts of about €93 million and this case could add another €10 million: costs have to be decided. A lot of county councils are in a poor state financially following the economic crisis.

What can we say about the decision to purse the case or what could we have said without the benefit of hindsight? Given that they lost, the chances are that their ex-ante probability of winning was not high. The owners are both SC’s (senior lawyers) so you would not expect them to be naive legally. Even if it was 50% that is still an expected loss of about €5 million. In the council’s dire financial circumstances, that might seem foolhardy.

But who is going to pay? Not literally the local politicians who made the decisions to try establish right of way and then fight the case all the way – though there may be some political consequences later. In the short run, those who rely on council services may suffer and, my conjecture is, that the tax-payer via central government, will end up bailing out the local government. It is unthinkable in Ireland that a county council would be allowed go bust.

Psychology and behavioural economics suggests a couple of possible explanations for this foolish behaviour. The obvious one is optimism bias, the county council over-estimated their chance of winning. Of course, if they had won, one could accuse the other side of this. Prospect theory is more useful: it suggests that we are risk averse with regard to gains (play safe, you’re in the money) and risk loving with regard to losses (might as well take a chance). Faced with losing a lot of money (& face) the council seems to have thrown caution to the winds. That the decison-makers were somewhat immune to the consequences of their actions would surely have strengthened this.

Without having studied the details, these thoughts are necessarily speculative.

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