Behavioral law and economics

Abstract

ABSTRACT-Behavioral combines and psychology to produce a body of evidence that individual choice behavior departs from that predicted by neoclassical in a number of decisionmaking situations. Emerging close on the heels of over the past thirty years has been the behavioral law and economics movement and its philosophical foundation-so-called Even the least paternalistic version of law and makes two central claims about government regulation of seemingly irrational behavior: (1) the regulatory approach, by manipulating the way in which choices are framed for consumers, will increase welfare as measured by each individual's own preferences and (2) a central planner can and will implement the law and policy program in a manner that respects liberty and does not limit the choices available to individuals. This Article draws attention to the second and less scrutinized of the behaviorists' claims, viz., that law and poses no significant threat to liberty and individual autonomy. The behaviorists' libertarian claims fail on their own terms. So long as law and continues to ignore the value to economic welfare and individual liberty of leaving individuals the freedom to choose and hence to err in making important decisions, paternalism will not only fail to fulfill its promise of increasing welfare while doing no harm to liberty, it will pose a significant risk of reducing both. INTRODUCTION Behavioral is one of the most significant developments in over the past thirty-six years. The field combines and psychology to produce a body of evidence that individual choice behavior departs from that predicted by neoclassical in a number of decisionmaking situations. These departures from rational choice behavior are said to be the result of the individual's that is, systematic failures to act in one's own interest because of defects in one's decisionmaking process. The documentation of these cognitive biases in laboratory experiments has been economics' primary contribution to microeconomics. These biases, economists assert, demonstrate systematically irrational choice behavior by individuals and firms. This irrational behavior, in turn, breaks the link between revealed preference and individual welfare upon which neoclassical economic theory depends. Emerging close on the heels of over the past thirty years has been the behavioral law and economics movement, which explores the legal and policy implications of cognitive biases. The legal academy has widely disseminated the body of experimental evidence documenting irrational behavior and is largely responsible for the behaviorists' foothold in regulatory policy circles,1 in and out of the Obama Administration, and, more recently, the government of the United Kingdom as well. Behaviorist proposals include mandates requiring the supply of more or better information in an attempt to debias individual decisionmakers, altering legal default rules, and imposing sin taxes upon or even banning disfavored products. Despite its remarkably broad scope, covering nearly every area of law and human behavior, the law and regulatory agenda reflects a common philosophical source-so-called libertarian paternalism. That seemingly oxymoronic phrase, coined by proponents Richard Thaler and Cass Sunstein, is intended to describe legal interventions that both (1) increase the individual's economic welfare by freeing him from the limitations of his cognitive biases and (2) change the individual's behavior without limiting his choices.2 In other words, the promise of law and is to regulate so as to improve economic welfare by more closely aligning each individual's actual choices with his true or unbiased preferences without reducing his liberty, at least as it is represented by the choices available to him. …