What Is an Adjudication?

An adjudication is a legal ruling or judgment, usually final, but can also refer to the process of settling a legal case or claim through the court or justice system, such as a decree in the bankruptcy process between the defendant and the creditors.

Normally, an adjudication represents the final judgment or pronouncement in a case that will determine the course of action taken regarding the issue presented. Outside of a legal process, adjudication can also more generally refer to other formal processes of judgment or ruling that render a final decision, such as the process of validating an insurance claim.

Understanding Adjudication

Adjudication describes the legal process that helps expedite and deliver a court’s resolution regarding an issue between two parties. The result of the process is a judgment and court opinion that is legally binding. Most adjudication hearings center on disputes that involve money or nonviolent infractions and result in the distribution of rights and obligations for all parties involved.

This legal process differs from other justice-seeking or evidence-based court cases. It is instead used to settle disputes between private parties, political officials and a private party, and public bodies and public officials. In the healthcare industry, for example, adjudication can determine a carrier’s liability for monetary claims submitted by an insured person.

Adjudication Disputes

The types of disputes handled or resolved through adjudication include the following:

• Disagreements between private parties, such as single-persons, individual entities, or corporations
• Disagreements between private parties and public officials
• Disagreements between public officials and/or public bodies

Requirements for full adjudication include requisite notice to all interested parties (all legally-interested parties or those with a legal right affected by the disagreements) and an opportunity for all parties to have their evidence and arguments heard.

The Adjudication Process

Formal rules of evidence and procedure govern the process where the initiating party, or trier, gives a notice establishing the facts in controversy and defines any applicable laws. The notice also sometimes outlines the nature of the dispute between the parties and recounts where and when the dispute occurred, and the desired result based on law. However, there are no specific requirements regarding the notice of adjudication.

An adjudicator is then appointed and a notice is sent to the defending party, who responds by submitting a defense to the claim of adjudication by the plaintiff. The adjudicator gives the plaintiff and defendant a chance to present their arguments at a hearing and makes a final ruling. This is not too dissimilar from an arbitrator in an arbitration hearing settling a business dispute.

What is Arrow’s Impossibility Theorem?

Arrow’s impossibility theorem is a social-choice paradox illustrating the flaws of ranked voting systems. It states that a clear order of preferences cannot be determined while adhering to mandatory principles of fair voting procedures. Arrow’s impossibility theorem, named after economist Kenneth J. Arrow, is also known as the general impossibility theorem.

Understanding Arrow’s Impossibility Theorem

Democracy depends on people’s voices being heard. For example, when it is time for a new government to be formed, an election is called, and people head to the polls to vote. Millions of voting slips are then counted to determine who is the most popular candidate and the next elected official.

According to Arrow’s impossibility theorem, in all cases where preferences are ranked, it is impossible to formulate a social ordering without violating one of the following conditions:

• Nondictatorship: The wishes of multiple voters should be taken into consideration.
• Pareto Efficiency: Unanimous individual preferences must be respected: If every voter prefers candidate A over candidate B, candidate A should win.
• Independence of Irrelevant Alternatives: If a choice is removed, then the others’ order should not change: If candidate A ranks ahead of candidate B, candidate A should still be ahead of candidate B, even if a third candidate, candidate C, is removed from participation. 
• Unrestricted Domain: Voting must account for all individual preferences.
• Social Ordering: Each individual should be able to order the choices in any way and indicate ties.

Arrow’s impossibility theorem, part of social choice theory, an economic theory that considers whether a society can be ordered in a way that reflects individual preferences, was lauded as a major breakthrough. It went on to be widely used for analyzing problems in welfare economics. 

Example of Arrow’s Impossibility Theorem

Let’s look at an example illustrating the type of problems highlighted by Arrow’s impossibility theorem. Consider the following example, where voters are asked to rank their preference of three projects that the country’s annual tax dollars could be used for: A; B; and C. This country has 99 voters who are each asked to rank the order, from best to worst, for which of the three projects should receive the annual funding.

• 33 votes A > B > C (1/3 prefer A over B and prefer B over C)
• 33 votes B > C > A (1/3 prefer B over C and prefer C over A)
• 33 votes C > A > B (1/3 prefer C over A and prefer A over B)

Therefore,

• 66 voters prefer A over B
• 66 voters prefer B over C
• 66 voters prefer C over A

So a two-thirds majority of voters prefer A over B and B over C and C over A—a paradoxical result based on the requirement to rank order the preferences of the  three alternatives.

Arrow’s theorem indicates that if the conditions cited above in this article i.e. Non-dictatorship, Pareto efficiency, independence of irrelevant alternatives, unrestricted domain, and social ordering are to be part of the decision making criteria then it is impossible to formulate a social ordering on a problem such as indicated above without violating one of the following conditions.

History of Arrow’s Impossibility Theorem

The theorem is named after economist Kenneth J. Arrow. Arrow, who had a long teaching career at Harvard University and Stanford University, introduced the theorem in his doctoral thesis and later popularized it in his 1951 book Social Choice and Individual Values. The original paper, titled A Difficulty in the Concept of Social Welfare, earned him the Nobel Memorial Prize in Economic Sciences in 1972.

Arrow’s research has also explored the social choice theory, endogenous growth theory, collective decision making, the economics of information, and the economics of racial discrimination, among other topics.

What Is a 5/1 Hybrid Adjustable-Rate Mortgage (5/1 ARM)?

A 5/1 hybrid adjustable-rate mortgage (5/1 ARM) begins with an initial five-year fixed interest rate period, followed by a rate that adjusts on an annual basis. The “5” in the term refers to the number of years with a fixed rate, and the “1” refers to how often the rate adjusts after that (once per year). As such, monthly payments can go up—sometimes dramatically—after five years.

How a Hybrid Adjustable-Rate Mortgage (Such as a 5/1 Hybrid ARM) Works

The 5/1 hybrid ARM may be the most popular type of adjustable-rate mortgage, but it’s not the only option. There are 3/1, 7/1, and 10/1 ARMs as well. These loans offer an introductory fixed rate for three, seven, or 10 years, respectively, after which they adjust annually.

Also known as a five-year fixed-period ARM or a five-year ARM, this mortgage features an interest rate that adjusts according to an index plus a margin. Hybrid ARMs are very popular with consumers, as they may feature an initial interest rate significantly lower than a traditional fixed-rate mortgage. Most lenders offer at least one version of such hybrid ARMs; of these loans, the 5/1 hybrid ARM is especially popular.

Other ARM structures exist, such as the 5/5 and 5/6 ARMs, which also feature a five-year introductory period followed by a rate adjustment every five years or every six months, respectively. Notably, 15/15 ARMs adjust once after 15 years and then remain fixed for the remainder of the loan. Less common are 2/28 and 3/27 ARMs. With the former, the fixed interest rate applies for only the first two years, followed by 28 years of adjustable rates; with the latter, the fixed rate is for three years, with adjustments in each of the following 27 years. Some of these loans adjust every six months rather than annually.

Example of a 5/1 Hybrid ARM

Interest rates change based on their marginal rates when ARMs adjust along with the indexes to which they’re tied. If a 5/1 hybrid ARM has a 3% margin and the index is 3%, then it adjusts to 6%.

But the extent to which the fully indexed interest rate on a 5/1 hybrid ARM can adjust is often limited by an interest rate cap structure. The fully indexed interest rate can be tied to several different indexes, and while this number varies, the margin is fixed for the life of the loan.

A borrower can save a significant sum on their monthly payments with a 5/1 hybrid ARM. Assuming a home purchase price of $300,000 with a 20% down payment ($60,000), a borrower with very good/excellent credit can save 50 to 150 basis points on a loan and more than $100 per month in payments on their $240,000 loan. Of course, that rate could rise, so borrowers should anticipate a rise in their monthly payment, be prepared to sell their home when their rate goes up, or be ready to refinance.

Advantages and Disadvantages of a 5/1 Hybrid ARM

In most cases, ARMs offer lower introductory rates than traditional mortgages with fixed interest rates. These loans can be ideal for buyers who plan to live in their homes for only a short period of time and sell before the end of the introductory period. The 5/1 hybrid ARM also works well for buyers who plan to refinance before the introductory rate expires. That said, hybrid ARMs like the 5/1 tend to have a higher interest rate than standard ARMs.

There’s also a chance that the interest rate might decrease, lowering the borrower’s monthly payments when it adjusts. But in many cases, the rate will rise, increasing the borrower’s monthly payments.

If a borrower takes out an ARM with the intention of getting out of the mortgage by selling or refinancing before the rate resets, then personal finances or market forces might trap them in the loan, potentially subjecting them to a rate hike that they can’t afford. Consumers considering an ARM should educate themselves on how they work.

5/1 Hybrid ARM vs. Fixed-Rate Mortgage

A 5/1 hybrid ARM may be a good mortgage option for some homebuyers. But for others, a fixed-rate mortgage may be more appropriate. A fixed-rate mortgage has one set interest rate for the life of the loan. The rate is not tied to an underlying benchmark or index rate and doesn’t change; the interest rate charged on the first payment is the same interest that applies to the final payment.

A fixed-rate mortgage could yield advantages for a certain type of homebuyer. If you’re interested in predictability and stability with mortgage rates, for example, then you might lean toward a fixed-rate loan instead of a 5/1 hybrid ARM. Comparing them side by side can make it easier to decide on a mortgage option.