Why Law and Economics' Perfect Rationality Should Not Be Traded for Behavioral Law and Economics' Equal Incompetence

Abstract

The emerging movement within legal scholarship known as behavioral law and economics seeks to replace the perfect rationality assumption found in law and economics with an equal incompetence assumption: drawing on empirical research in psychology and behavioral economics, behavioral law and economics scholars assert that all people systematically fall prey to biases and errors in their judgment and decision-making and that these biases and errors lead to predictable irrational behaviors. Adopting this equality of incompetence view, these scholars argue for changes across virtually all areas of the law and offer new justifications for legal policies that would be deemed paternalistic and inefficient in a system of rational legal actors. Unfortunately, this equality of incompetence view propounded in behavioral law and economics overlooks substantial empirical evidence that people are not equally irrational and that situational variables exert an important influence on the rationality of behavior. A review of the empirical evidence on individual and situational variability in rational behavior reveals that the assumption of uniformly imperfect rationality found in behavioral law and economics is no more plausible than the assumption of uniformly perfect rationality found in law and economics. An empirical approach to rationality places the concept between perfect rationality and equal incompetence. While this middle ground position makes general theory development more difficult, it illuminates ways that the legal system may foster rational behavior or counter irrational behavior.