Academic journal article Vanderbilt Law Review

Comment: The Future of Behavioral Economic Analysis of Law

Academic journal article Vanderbilt Law Review

Comment: The Future of Behavioral Economic Analysis of Law

Article excerpt

I. INTRODUCTION

Behavioral economic analysis of law presents an important challenge to conventional law and economics, strengthened in part by the fact that conventional law and economics is itself a behavioral approach to law. Indeed, conventional law and economics can be viewed as the first widely-adopted behavioral approach to law.

A central contribution of Ronald Coase's pathbreaking article was the claim that one cannot determine the effect of a law by simply looking at the law itself-at the conduct the law requires. Instead, one must determine how people will respond to the law.l Legal rules, he argued, do not dictate behavior-they simply establish prices and sanctions for various actions. Thus the initial allocation of a resource will not necessarily determine its ultimate use because people will bargain when doing so is mutually profitable.2 This is, at its core, a behavioral analysis of law.

Where behavioral economic analysis of law and conventional law and economics differ, however, is in the model of human behavior they employ. Conventional law and economics assumes that people exhibit rational choice: that people are self-interested utility maximizers with stable preferences and the capacity to optimally accumulate and assess information.3 Law and economics scholars do not claim that this rational choice model perfectly captures all human behavior. But they do claim that deviations from rational choice generally are not systematic, and thus generally will cancel each other out. For example, law and economics scholars argue that even if people do not accurately estimate the risk that they will be injured, some people will overestimate the risk while others will underestimate it, producing only "noise" and not a systematic bias. These scholars thus assert that rational choice, while not a perfect description of human behavior, is the best workable approximation of human behavior.

Behavioral economic analysis of law scholars argue that people do not behave consistently with rational choice theory, and, moreover, that the deviations from rational behavior are systematic, not random.4 Most people are likely to exhibit certain biases, they assert, and thus these deviations from rational choice do not cancel each other out.5 Indeed, behavioral economic analysis of law scholars argue that biased reasoning is a more plausible model of human behavior than is rational choice because biased reasoning is what natural selection would most likely produce.6

These systematic deviations from rational choice theory present a challenge to conventional law and economics. Conventional law and economics generally seeks to influence-or at least describe the effects of-actual policy in the real world. Yet if people regularly behave differently than the economists' model predicts, the results of this analysis may be suspect.

The presence of systematic biases poses a particular challenge to the strongest anti-paternalism claims of conventional law and economics, many of which appear to depend on the assumption that individuals choose rationally. For example, some law and economics scholars have argued against products liability for injuries to consumers on the grounds that consumers' market choices will provide firms with the correct incentives to produce safe products and that consumers can better insure against the risk of injury using first party insurance.7 Others have argued against paternalistic contracts doctrines that protect people from the consequences of contracts into which they freely entered.8 Both arguments are based on the assumption that people are rational and can best decide what is in their own best interest, provided they are fully informed.

Behavioral analysis scholars argue that we cannot necessarily base policy decisions on the assumption that people are rational since people regularly make decisions that deviate from rational choice in predictable ways. …

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