Introduction

The past twenty years have witnessed a surge in behavioral studies of law and law-related issues. These studies have challenged the application of the rational-choice model to legal analysis and introduced a more accurate and empirically grounded model of human behavior. This integration of economics, psychology, and law is breaking exciting ground in legal theory and the social sciences, shedding a new light on age-old legal questions as well as cutting-edge policy issues. The Oxford Handbook of Behavioral Economics and Law brings together leading scholars of law, psychology, and economics to provide an up-to-date and comprehensive analysis of this field of research, including its strengths and limitations as well as a forecast of its future development. Its twenty-nine chapters are organized into four parts. The first part provides a general overview of behavioral economics. The second part comprises four chapters introducing and criticizing the contribution of behavioral economics to legal theory. The third part discusses specific behavioral phenomena, their ramifications for legal policymaking, and their reflection in extant law. Finally, the fourth part analyzes the contribution of behavioral economics to fifteen legal spheres ranging from core doctrinal areas such as contracts, torts, and property to areas such as taxation and antitrust policy.

Litigation and Settlement

Standard economic models of litigation and settlement conceive of litigation and settlement decision-making as a process in which legal actors—litigants and their attorneys—rationally maximize expected utility. While such models provide a helpful structure for understanding litigation decision-making, litigants and their attorneys may not always behave and decide in ways that follow the assumptions of the economic models. Predicting expected outcomes, setting goals, interacting with adversaries, gathering and using information, and weighing options all present challenges for decision-makers. In addition, the dynamic interaction between lawyer and client can influence whether and how cases are settled. Recognizing the variety of psychological phenomena that make it challenging for litigants and their attorneys to identify and choose the best litigation options can make for a richer and more accurate understanding of litigation decision-making.

Behavioral Economics and the Law

This chapter argues that a behavioral law and economics approach to tax is deeply needed for a wider normative analysis of the impacts of law on social welfare. The absence of traditional markets to serve as arbitrage mechanisms in public finance means that suboptimal tax and fiscal systems can arise and persist for long periods of time. Most of the current scholarly applications of behavioral approaches to tax, however, fail to take into account the institutional settings in which tax laws exist. For example, the common recommendation for tax-favored savings plans to counteract a persistent individual-level myopia that leads to undersavings for many suffers from the possibility of being undercut on account of the ability to borrow tax-free under the current income tax system, combined with individual-level myopia itself. Similarly, a recent trend of scholarship that argues for “low salient” taxes to help ameliorate persistent fiscal crises (themselves exacerbated by pervasive behavioral biases playing out in a setting absent effective arbitrage mechanisms) ignores or underplays the real costs of even hidden taxes, both allocatively and distributionally. The chapter concludes that the most critical work for a behavioral law and economics approach to tax lies ahead.

The End of Contractarianism?

For a generation, the law of corporations depended on, and sprang from, a notion of economic rationality. This rationality took as its touchstone the efficiency of the marketplace (especially the securities market) and the predictability of the utility-maximizing behavior of the various actors. But behavioralism continues its victorious expansion throughout the law. Though corporate and securities law was perhaps one of the last bastions in the legal academy of the assumptions of neoclassical economics, it is safe to say that the global financial crisis finally marked the end of the glory days of homo economicus. This chapter will describe some of the ways in which economic rationality affected corporate law doctrine and scholarship during its heyday and will then turn to the behavioral research with implications for corporate governance and securities.

Behavioral Law and Economics of Property Law

This chapter critically surveys the behavioral law-and-economics literature on property law. First, it sketches the main features of existing studies and their tendency to excessively focus on certain topics, such as the home. The chapter then discusses various issues with respect to which behavioral analysis has made an impact, such as the characterization of property as a “thing” or as a “bundle of sticks,” compensation for takings of property, the choice between property rules and liability rules, and redistribution through rules of property law. The chapter proceeds to highlight several gaps in the current literature, such as the disregard of commercial property, fungible property, and movables. Finally, the chapter addresses the desirability and possibility of debiasing, and offers recommendations for future research.

The Importance of Behavioral Law

The chapter begins with several general policy examples that demonstrate how the empirical findings of cognitive and social psychology lead to very different predictions of human behavior and different policy options from those of rational choice theory. The chapter then turns to the topic of law and economics so as to contrast how some familiar conclusions of law and economics that were premised on rational choice by contract parties, potential injurers and victims, and others must be altered in light of the behavioral findings that undermine rational choice theory. The chapter also considers (and rejects) criticisms of behavioral law by economists, legal scholars, and philosophers. Finally, the chapter seeks to point to the next research steps in behavioral law.

Evidence Law

Recent years have witnessed the beginning of an important trend in environmental law and policy, namely the endeavor to integrate insights from the behavioral sciences into regulatory design and implementation. This chapter offers an assessment of the behavioralist turn, arguing that traditional precautionary environmental regulation—criticized by behavioralists as reflective of lay cognitive errors in risk perception—may be defended as providing significant bias correctives of its own. It finds in such perceptions a variety of contextual factors that may be of normative importance and shows that there are powerful reasons to believe that public demand for protection against harmful market externalities may systematically understate the societal need for protection. Drawing from fundamental behavioral scientific insights, the chapter suggests that environmental law must allow for public deliberation about the rearrangement of social rules and incentives in a manner that induces people to act to serve the common good.

Behavioral Analysis of Criminal Law

After contrasting behavioral criminal law and economics with the retributivist tradition and with traditional criminal law and economics, the chapter illustrates how various behavioral phenomena can be used to predict the effects of criminal law norms and to design criminal law in a way that serves social goals, in particular deterrence. It explores the effects of uncertainty on deterrence; it examines the effects of prospect theory and the differential effects of future uncertainty (prediction) and past uncertainty (postdiction) on the propensity to commit crime. It also investigates the effects of overoptimism on the propensity to commit crime. Last the chapter discusses the literature on happiness and its relevance to the optimal design of criminal law. It establishes that the literature on happiness can be used to promote retributive justice concerns. The chapter concludes by examining critically the potential contribution of behavioral studies to the optimal design of criminal law norms.

The Market, the Firm, and Behavioral Antitrust

This Handbook chapter examines the main distinct concerns facing the application of empirical behavioral evidence to antitrust law and economics—also known as “behavioral antitrust.” More than many (though not all) other legal fields, antitrust law is primarily concerned with the conduct of firms in markets rather than in individual behavior per se. Yet much of the empirical evidence that behavioral antitrust draws on concerns individual behavior outside the firm, often in nonmarket settings. Hence besides adducing additional, direct empirical evidence on behavioral phenomena within firms and markets, there is a need to determine when and how the behavioral evidence on human judgment and decision behavior more generally is informative for antitrust. To this end, the chapter considers the ways in which markets and firms shape behavior. Direct evidence and theoretical analysis both reveal these institutions variously to facilitate rationality and deviations from it. After illustrating the implications of the complex interaction among markets, firms, and the rationality of antitrust actors across different areas of the law and enforcement policy, the chapter concludes by sketching some important open questions and future research directions in behavioral antitrust.

Probability Errors

This chapter provides an overview of three probability errors and their impact on legal scholarship. Overoptimism causes people to underestimate their likelihood of experiencing negative events, to overestimate their likelihood of experiencing positive events, and to be overly confident in each of these judgments. Overoptimism can help explain numerous behaviors including excessive borrowing, excessive litigation, and insufficient preparation for negative events like divorce. Ambiguity aversion—the tendency of people to prefer known to unknown risks—helps explain patterns in contracting behavior and plea bargaining, and can also be used strategically to increase deterrence. The certainty effect, which includes the tendency of people to place a high premium on reducing the probability of a negative event to zero, has been used to illuminate the behavior of both jurors and legislators. Combined, these probability errors help explain a great deal of human behavior and have numerous implications for law.