Behavioral Law and Economics Symposium

Truth on the Market, a law and economics blog, is hosting a symposium called "Free to Choose? A Symposium on Behavioral Law and Economics." Contributors to the symposium include Richard Epstein, Claire Hill, David Friedman, Larry Ribstein, Henry Manne, Geoffrey Manne, and several other notable scholars. The contributions are thought-provoking and quite useful for anyone interested in the subject. You can read all of them here.

Several of the contributors have noted, quite rightly, that behavior law and economics so far lacks a sufficient theoretical basis for displacing conventional approaches to law and economics. This is a point Richard Posner noted in a 1998 article in the Stanford Law Review ("Rational Choice, Behavioral Economics, and the Law"). However, I think such complaints miss the point of behavioral law and economic studies, which is not so much to displace conventional theories and assumptions of rationality but to enrich and improve them. As Cass Sunstein (currently head of the Office of Information and Regulatory Affairs in the President's Office of Management and Budget) observed in a 1999 article in the American Law & Economics Review ("Behavioral Law and Economics: A Progress Report"):

[I]t is unproductive to see a general struggle between economic analysis of law and behavioral law and economics. The question is what kinds of assumptions produce good predictions about the effects of law, and this will vary with context. Sometimes the simple assumptions of conventional analysis will work entirely well; sometimes it is necessary to introduce complications by, for example, saying a bit more about what is counted in the utility function (such as a desire to be treated fairly, and willingness to punish those who act unfairly), or incorporating bounded rationality.

Sunstein's reference to "bounded rationality" is a useful reminder that the challenge to the conventional rational actor model is not a new one. The Nobel laureate Herbert Simon coined that phrase back in the 1950s. Since then, progress has been made, particularly by the likes of Daniel Kahnemann, Amos Tversky, Richard Thaler, and Sunstein himself, in defining and assessing various ways in which individuals regularly and often predictably deviate from the standard rationality assumption in decision making. But their work may be less of a threat to conventional economic theories than is often supposed. No one is arguing, for instance, that incentives (including prices) do not matter.