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Law in Contemporary Society
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Behavioral Economics: The More We Learn, The Less We Seem To Know-- By MichaelDuignan - 06 Apr 2010 Neoclassical economics has, over a half century, come to exert great influence over legal structures. As a positive system, it provides mathematical precision to legal thinking. As a normative system, it shapes vast areas of law dealing with transaction and choice. Some wonder if its legal influence, however, has reached a zenith. As new tools enable researchers to learn more about the human brain and its cognitive limitations, some economists have begun to question the assumptions neoclassical economics made considering human nature. If a social theory is ultimately valued by how well it explains the forces guiding human behavior, this essay considers just how the answers to these questions might impact normative principles anchored to the neoclassical model.The Hand formulaIn the 1947 case of United States v. Carroll Towing Co., J. Learned Hand put forth his eponymous formula for negligence liability. Where the burden of avoiding harm is less than the probability of the harm times the loss associated with the harm (B < P x L), the defendant causing harm acts without requisite care. In that Hand introduced the idea of using a cost-benefit analysis to create a bright line rule of tort liability, Carroll Towing represents prescient use of rational choice theory to render consistent qualitative judgments in the law. And though the Hand formula was non-binding dicta, it retains analytical significance; it presumes a reasonable person is always capable of making rational decisions before acting.Rational Choice Theory and the LawThe debate over rational choice theory is fiercest at the U. of Chicago, with Richard Posner representing the traditional law and economics movement, and Richard Thaler leading a mutiny in the developing field of behavioral economics (“developing,” because, as of yet, the field is without a formal theory). According to Posner, the full range of human psychology can be sufficiently explained within rational choice theory. Fellow Chicagoan Gary S. Becker in his 1976 essay The Economic Approach to Human Behavior said, “[A]ll human behavior can be viewed as involving participants who [1] maximize their utility [2] from a stable set of preferences and [3] accumulate an optimal amount of information and other inputs in a variety of markets.” (p. 14). Though generally accepted, the breadth of this rule has invited challenge ever since. Conversely, Thaler asserts certain peculiarities of human nature, though predictable, lie outside the scope of the traditional model. In so many words, this view posits that, the more evidence showing human decision-making processes differ from neoclassical presumptions, the less explanatory power the traditional model retains.Reasonable persons, in spite of ourselvesDan Ariely, author of Predictably Irrational, delightfully exposed the relativity of choice in a social experiment. A group of 100 college students were given an advert from The Economist magazine and asked to select one of three annual subscription options: print-only for $59, online-only for $125, or print-plus-online for $125. A small portion opted for the first, none for the second, and the overwhelming majority for the third, print-plus-online option. Then, Ariely asked another group of students the same question, only this time he removed the second online-only option that no one wanted. When deciding between print-only for $59 and print-plus-online for $125, the majority of students opted for the cheaper package.
The shift in students’ subscription choice undermines Becker’s assumption that people make decisions from “a stable set of preferences.” Ariely demonstrates that people’s preferences are not always fixed and absolute, but can be dynamic and relational to the environment in which choice is permitted to occur. According to Ariely, the way to get people to choose option A over option B is to add option A', a clearly less desirable alternative to option A, thereby increasing option A's relative attractiveness.
Choice as a double edged swordUnder the rational choice theory, multiple consumption options increase the chance that a given consumer will be able to find a choice suitable to his or her fixed preferences. However, Ariely suggests that benefit may be illusory, because the availability of choices may actually be guiding the preferences of the individual. Anyone who has ever entered a supermarket with one item in mind, and left carrying a completely dissimilar item, might relate to this latter view.
General Implications for the Normative SystemThe more we as human beings come to understand our cognitive function, the more we recognize rigid definitions of rationality do not comport with the world as it is. Lacking a formal theory of their own, behavioral economists will keep poking holes in rational choice theory. Neoclassical economists will continue to play Whac-A-Mole with by crafting clever ways to fit behavioral economists' debilitative findings into the confines of rational choice theory. This competition between the dominant intellectual regime and the experimental uprising will likely continue to frame the debate between libertarian and paternalistic regulatory approaches for some time to come.You are entitled to restrict access to your paper if you want to. But we all derive immense benefit from reading one another's work, and I hope you won't feel the need unless the subject matter is personal and its disclosure would be harmful or undesirable. To restrict access to your paper simply delete the "#" on the next line: # * Set ALLOWTOPICVIEW = TWikiAdminGroup, MichaelDuignan Note: TWiki has strict formatting rules. Make sure you preserve the three spaces, asterisk, and extra space at the beginning of that line. If you wish to give access to any other users simply add them to the comma separated list |
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