From Severed Spots to Category Cliffs (by Lee Anne Fennell)

Posted on behalf of Lee Anne Fennell as part of the Legal Discontinuities Online Symposium:

The New-York-based MSCHF recently acquired L-Isoleucine T-Butyl Ester, one of Damien Hirst’s spotted paintings, and sliced it up into 88 single-spot servings that sold for $480 a pop—more, in total, than the $30,485 purchase price of the painting. They then auctioned off the hole-filled remainder for $261,400.  The whole, in this case, was apparently worth less than the sum of its parts (counting the added value of the stunt itself).  While MSCHF’s “Severed Spots” project is a very literal example of how slicing up an asset can increase its value, it speaks to an issue that is ubiquitous in law, policy, and everyday life:  the lumpy, discontinuous, all-or-nothing nature of many things in the world.  Efforts to address such (apparent) indivisibilities underpin many market innovations and are also central to problem-solving in multiple spheres, from public goods to personal goals. 

I explored the significance of configuration—whether dividing things up or piecing them together—in my recent book, Slices and Lumps: Division and Aggregation in Law and Life (which you can sample here).  But the topic is huge, and the book could only scratch the surface of the many implications for law—an assortment of which received thoughtful attention in a University of Chicago Law Review Online book symposium (and here's my introductory essay).  The daily news also contains constant reminders of how much lumpiness—and responses to it—matter to everyday life.  Severed spots are an entertaining example, but more serious ones abound, from lumpy work arrangements that exacerbate gendered patterns, to the seemingly lumpy choices that public officials now face about whether—and what—to reopen. 

My new paper, Sizing Up Categories, delves into another aspect of lumpiness: the all-or-nothing cliffs that categories generate.  Categories break the world into cognizable chunks to simplify the informational environment, flattening within-category differences and heightening between-category distinctions.  Because categorization often carries high stakes, it predictably generates strategic jockeying around inclusion and exclusion.  These maneuvers can degrade or scramble categories’ informational signals, or set in motion cascades like adverse selection that can unravel markets. 

I argue that high categorization costs can be addressed through two opposite strategies—making classification more fine-grained and precise (splitting), and making classifications more encompassing (lumping).  Although the former strategy is intuitive, the latter, I suggest,  is often more suitable.  If category membership carries multiple and offsetting implications, the incentive to manipulate the classification system is dampened. To take a simple example, insurance that covers only one risk is more vulnerable to adverse selection than is an insurance arrangement that covers two inversely correlated risks. Making categories larger, more durable, and more heterogeneous can help to produce such offsets. These and other forms of bundling can arrest damaging instabilities in categorization.

Categories present just one context in which it is worthwhile to consider multiple approaches to discontinuities. To return to our starting point, serving up lumpy artwork to a wider audience typically proceeds not by cutting individual works apart but rather by bundling works together  and enabling their shared consumption in an art museum.  Such bundling does not just provide a more sustained viewing experience, it also allows individuals paying identical entry fees to effectively pay more for what they value more, and less for what they value less—a form of price discrimination found in many contexts. The same principle explains why health insurance that covers more risks, more of the life cycle, or even more people (such as entire families) may stand in for more fine-grained pricing of individual risks where the latter is not feasible or desirable.    

Discontinuities are everywhere, but we need not take lumps as we find them.  We should look for places where breaking them down—or building them up—will add value.    

This post is adapted in part from a draft paper, Sizing Up Categories, to be published in a forthcoming symposium issue in Theoretical Inquiries in Law. The papers were part of the Legal Discontinuities conference held at Tel Aviv University Law School’s Cegla Center in December 2019.