Administrative, Constitutional, and International Law

Public choice theory—the application of standard economics to the behavior of public officials and citizens—has long been criticized as mischaracterizing people’s motivations and behavior. The chapter analyzes how behavioral studies might contribute to a better understanding and developing of public law, including constitutional and administrative law. It critically discusses the behavioral analysis of governmental institutions and rule-making, citizens’ judgments and choices, and human rights (including issues in freedom of speech, the fight against terrorism, and affirmative action). Finally, the chapter critically examines recent behavioral analyses of public international law, the challenges they face, and the contributions they make.

Commercial Law: Corporate Law, Securities Regulation, and Antitrust

This chapter critically surveys the behavioral analysis of commercial law. It begins by examining the preliminary question of whether bounded rationality can persist in well-functioning, highly competitive markets. As the theoretical analysis and empirical evidence demonstrate, irrational behavior is present even in such settings. The chapter goes on to discuss the implications of behavioral analysis for key issues within corporate law, securities regulation, and antitrust law. These include the ramifications of managers’ overconfidence and passive boards; the bounded rationality of retail investors; and the effect of behavioral phenomena on market competition. The chapter concludes with discussion of the critiques leveled against the behavioral analysis of commercial law.

Consumer Contracts

This chapter presents an overview of the behavioral analysis of the law of consumer contracts. The chapter reviews various marketing techniques that build upon consumers’ bounded rationality, including the manner of presenting information, limited availability, low-ball and bait-and-switch techniques, and lenient return policies. It also analyzes several pricing techniques, such as price framing, multidimensional prices, deferred and contingent payments, and odd pricing. The chapter then turns to examining the content of consumer contracts, and highlights how pricing methods, non-salient clauses, and modifications might also exploit consumers’ limited rationality. In light of this overview, the chapter examines market-based (primarily competition and reputation) and legal solutions (primarily disclosure and mandatory regulations) to the challenges posed by consumer contracts.

Behavioral Studies

Against the background of rational choice theory, this chapter provides an overview of the behavioral sub-disciplines informing behavioral law and economics—including judgment and decision-making studies, parts of social psychology, moral psychology, experimental game theory, and behavioral ethics. The chapter discusses deviations from cognitive and motivational rationality, including studies of people’s moral judgments. It begins with probability assessments and related issues. It critically describes phenomena related to prospect theory, phenomena associated with motivated reasoning and egocentrism, and those related to reference-dependence. It also summarizes studies of bounded willpower. Some attention is given to studies that show that most people do not share the consequentialist outlook that prioritizes the maximization of human welfare over all other values. Finally, the chapter discusses several issues that cut across various phenomena: individual differences in judgment and decision-making; the significance of professional training, experience, and expertise; deciding for others; group decision-making; cultural differences; and debiasing.

Litigants’ Behavior

This chapter begins with a brief overview of the standard economic analysis of litigation and settlement. It then analyzes a series of behavioral impediments to settlement. These include self-serving biases, overoptimism, non-pecuniary motivations, biases stemming from the adversarial nature of litigation, reference-dependence in assessing settlement offers, and the framing of litigation outcomes. The chapter then points to two behavioral phenomena—regret avoidance and loss aversion—that strongly encourage settlements. The chapter looks at behavioral explanations for the relatively limited use of alternative dispute resolution mechanisms. It also takes a closer look at the role of lawyers and client-lawyer relationships. Finally, it highlights the behavioral contribution to the understanding of plea bargaining in criminal proceedings.

Evidence Law

This chapter consists of three main parts. It first discusses the effect of various cognitive limitations, heuristics, and biases on the actual and perceived credibility of various types of evidence—including eyewitness testimonies, probabilistic data, and circumstantial evidence. It further examines the extent to which the use of expert testimonies can overcome such heuristics and biases. The second part analyzes behavioral aspects of burden-of-proof rules, such as the justification for placing the burden on the plaintiff, and the actual meaning of the standard of proof in civil and criminal proceedings. Finally, the third part argues that while people’s bounded rationality creates obstacles for judicial truth-finding, it also makes it much harder for interested parties, litigants and witnesses, to hide the truth—thus facilitating accurate fact-finding.

Property Law

The chapter critically analyzes the contribution of behavioral findings to property law and theory. It starts with studies of basic notions, such as psychological ownership and the endowment effect; and moves on to discuss two major fields: constitutional property law and intellectual property. With regard to the former, the analysis shows how behavioral insights illuminate the distinction between governmental taking and giving of property, between physical and nonphysical takings, and between the taking of homes and other properties. With regard to intellectual property, the chapter deals, among other things, with inventors’ behavior and judicial decision-making in matters of intellectual property. Finally, the chapter discusses the broader issue of protecting entitlements through property rules versus liability rules.

Introduction

Standard economic analysis of law is based on rational choice theory. In recent decades, numerous experimental and empirical findings have established prevalent and systematic deviations from the assumptions of economic rationality. These findings have been gradually integrated into mainstream economic analysis, including economic analysis of law, to form behavioral law and economics. The introduction highlights the important contributions of behavioral studies to economic analysis of law and to legal analysis more generally. It describes the scope of the book and outlines its structure. It also mentions legal spheres in which the existing scholarship does not yet lend itself to systematic synthesis.

Criminal Law and Enforcement

This chapter surveys the contributions of behavioral studies to the analysis of criminal law and law enforcement. It begins by introducing the key insights of economic analysis of crime control. It then examines the extent to which people’s moral judgments are compatible with the dictates of economic analysis in this sphere—and the associated normative implications. It proceeds to analyze the ramifications of behavioral findings regarding how people perceive probabilities and sanctions for deterrence theory. The chapter e also examines the contribution of research in the area of behavioral ethics to crime control. Finally, it discusses the implications of behavioral research for recidivism.

Tort Law

This chapter presents an overview of the behavioral analysis of tort law. It begins by presenting a summary of traditional economic analysis of tort law. That done, it examines various tort regimes (i.e., negligence and strict liability), as well as alternative legal regimes that base liability on the creation of risk rather than the materialization of harm, in light of the bounded rationality of potential tortfeasors and adjudicators. The chapter further explores the implications of behavioral findings for the calculation of damages in tort cases. Finally, it addresses the topic of product liability law, and highlights the ramifications of consumers’ bounded rationality for this area of law.