Seminar 7

Seminar 7: Behavioural Law and Economics

 The first paper below is the seminal contributions to behavioural law and economics. The second two are critical reactions to the recent contributions.

 Reading

 Jolls, Sunstein,& Thaler ‘A Behavioural Approach to Law and Economics’ (1998) 50 Stanford Law Review 1471

 Levine ‘Is Behavioral Economics Doomed?’ (2009) http://cadmus.eui.eu/handle/1814/13654

 Frerichs False Promises? A Sociological Critique of the Behavioural Turn in Law and Economics (2011) 34 Journal of Consumer Policy 289

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6 comments on “Seminar 7

  1. Irina Domurath says:

    Behavioural Law and Economics – a comment on Jolls, Sunstein, Thaler (JST) with regard to Kaplow&Shavell (KS)

    JST claim and show that a behavioural economics have the potential to model and predict legally relevant behaviour more accurately than conventional economics and thus make more accurate predictions and prescriptions about law than conventional law ad economics. They examine different fields of law with a behavioural approach and convincingly show that actors display three features (bounded rationality, bounded willpower, and bounded self-interest) that distinguish them from the homo economicus in conventional economics, a deviation which they claim should to be taken into account on a normative level.

    Fairness is one parameter they analyse when examining the behaviour of actors in the legal field. What I found interesting was that JST’s examination of the notions of fairness seems to fit fairly well with KS’ analysis of fairness as part of, but also distinct from welfare. In the context JST examine, fairness is a consideration in economic transactions between private parties, relating to a “reference transaction” as a benchmark. This notion is reflected in K&S terms, which frame fairness as a reflection of social norms and thus put it into the realm of private parties of a transaction, as distinct from entirely public welfare considerations (which they claim should be the fundamental parameter of legislative action).

    JST claim that there is often disagreement on what is fair, so there will be opportunity for manipulation by private parties and failure of negotiations. Also, where a transaction departs from perceived fairness, that is the reference transaction (ie usurious lending), law reflects this perception by banning the practices in question. This is consistent with KS, who contend that in the event of the failure of social norms (ie fairness), the legislator can impose regulation that solves the conflict under welfare considerations, of which fairness can be a part.

    To the extent that JST argue in favour of an anti-anti-paternalism – scepticism of anti-paternalism, but not an affirmative defence either – they do not contradict KS. Even though KS claim that that regulatory welfare considerations step in where individual notions of fairness fail to provide solutions to cases, this is not a direct case for paternalism, but rather a statement on what should be guiding parameter of legislative action. A small deviation of JST from KS’ standpoint could, however, lie in their assertion that the case for paternalism is weakened to some extent in cases in which the legislator is likely to be subject to the same cognitive and limitations as private actors. KS have not addressed this question, but have assumed the capability of the legislator to respond to societal needs, among them providing a solution for a private law conflict in an economic transaction. Here, JST’s claim for taking into account insights from behavioural economics could improve legislative action.

    I did not see Levine’s criticism eroding the case for behavioural economics as advocated by JST. His criticism seems to be largely based on a broad definition of conventional law and economics, so as to include parameters of learning and incomplete learning. But I’m wondering whether it could not be that this broad approach to “conventional” law and economics came about because of the rise of behaviouralism. Moreover, Levine aims at giving weight to conventional L&E by pointing out that while behavioural L&E aims at revealing that people have an emotional side that cannot be captured well by “conventional” L&E, the focus of economists is on people who are “rational”. This strikes me as an odd argument. It basically states that conventional L&E is a valid approach in a narrow field of cases in which people do behave rationally and thus cannot be explained by behavioural L&E. It does, however, not weaken JST’s argument for taking behavioural insights into account in the normative dimension.

  2. Marios says:

    I read Kahnemans “Thinking, Fast and Slow” last year, so I was delighted to see Jolls et al. referring to his previous work here. Generally I find behavioural law and economics to be very appealing to my research, especially as it seems to address the issue I had last week with regard to the ideal circumstances that Kaplow and Shavell have to assume in order for their theory to work. One of the issues I will have to address in my research is the consumer welfare standard that competition law and international trade law have as a goal. A lot of the computations used to evaluate outcomes and see if they are welfare enhancing or not seems to me to rely on an ideal-type consumer that is well-informed and has access to information and makes rational, wealth-maximizing choices when choosing goods and services. Yet, I have often felt that the reality is far from that, as I find myself and the people around me making choices based on benevolence, stupidity, laziness, lack of time (I mean, seriously, who has the time nowadays to read the labels of all 30 varieties of ketchup available at a normal supermarket and compare their merits relative to their price per volume?) and so on. I think that behavioural economics has a lot to offer in explaining these phenomena and assisting orthodox law and economics to predict outcomes better and be more realistic. So, I do not find what Levine said in his critique of behavioural economics to be particularly damaging to it: in fact if nothing else he asserted what Jolls et al. said in their paper, namely that they do not wish to replace law and economics, only to improve it and make its models more accurate (see p. 1475 ‘… our goal is to strengthen the predictive and analytic power of law and economics, not to undermine it’).

    What I found weak in their paper was their discussion of anti-antipaternalism, or as they put it ‘a scepticism about antipaternalism, but not an affirmative defense of paternalism’ (p. 1541). I found myself agreeing with them when identifying a lot of the problems as not problems of insufficient information but of ‘insufficient ability to process accurately the information one possesses’. Although they were discussing this with regard to optimism and salience and risks to oneself I think this could be applicable in other settings. Take for example international trade: orthodox economic theory will tell you that the government should not interfere in the market to steer towards different results (let’s say a ban on tuna fished by a method that results in the killing of dolphins, or a ban on hunting seals for the use of their skin and oil to make luxury goods and food supplements, I am of course referring to the Tuna-Dolphin cases and the new WTO dispute brought by Canada and Norway against the EU’s ban on seal products). If consumers find such products abominable, they will not demand them, they will not buy them and they will not have a problem (assuming they can afford it) to pay a premium to buy products that are not have these undesirable effects. So why would a State ever need to regulate, the market ought to correct itself and any regulation is necessarily suspect of protectionism. Moreover, less restrictive measures than coercive ones should suffice: for example labelling in order to give consumers all the information they need. Behavioural economics in such cases can be useful in pointing out that the normal economic assumptions do not necessarily work, that a tuna caught killing a dolphin is not ‘alike’ a tuna caught by a dolphin-safe fishing method (not only doing let’s say a SSNIP test, but by reason of that difference in method are rendered automatically non-comparable – think Raz and incommensurability), that labelling and information campaigns are not necessarily enough (since people are not rational and do not process information accurately etc) and that a state may simply not want to be associated with some practices at all, irrespective of whether there is demand by some of its citizens (here what Jolls et al. describe about an individual’s consideration of what a person they think they are and they want to be could be transposed to a state, what values does this state think it represents etc). So I think they could have developed this point on anti-antipaternalism more (maybe they could have used Raz’s take on Mill and his idea of liberty, which allows a state to interfere in some instances to remove choices that are not good, what is called, if I remember from my studies of Jurisprudence at King’s College London “perfectionism”) .

    Finally, on a lighter note, check this out about a recent controversial paper by a behavioural economist which caught the attention of the mass media: http://www.bbc.co.uk/news/business-21518574

  3. Tim says:

    Jolls et al use concepts as bounded rationality, bounded willpower and bounded selfishness to explain the law as it is (or how it should be). Sometimes law does not comply with pure economic efficiency standards, but it is the way it is because of other reasons, captured by the behavioral economics approach. I have the impression that this is a very debatable benchmark. How to establish such a benchmark? We are all limited in our abilities – see the ketchup example above – but we (as consumers) can deal with this, e.g. by setting up interest groups that read the labels for us and provide us with the necessary information. My feeling is (as for now) that I prefer the economic efficiency approach, combined with ways to neutralize its shortcomings (see the example of setting up interest groups).

    I also find the law-making claims quite weak – in law-making legislators or agencies should be aware of our bounded rationality, bounded willpower and bounded selfishness. What does this mean? Does a legislator have conduct a survey to see whether an act is fitting all people’s bounded rationality, bounded willpower and bounded selfishness? Or should every act be personalized – every person is subject to his/her own body of law based upon his/her bounded rationality, bounded willpower and bounded selfishness. You might as well replace all law by simply stating that everybody should act reasonably and with due care in view of his/her own bounded rationality, bounded willpower and bounded selfishness. Therefore I think behavioral L&E is not an effective instrument for law-making.

  4. Haukur says:

    I liked the first paper. In my opinion it managed to show some of the shortcomings of the traditional economic approach in modelling human behaviour for the purpose of predicting actual outcomes. The example of the ultimatum game, in which players show strong tendency to act fairly despite apparent irrationality in doing so, illustrates this point neatly.

    I think that this shows the shortcomings of how economists define the rational man. They usually assume that he will act rationally by maximising his utilities given the information he possesses at any given time. As has been pointed out rationality is however usually bound by lack of information and human ability to process information. It is not unreasonable to assume that most of us are actually aware of this fact, that we do not have the full information and that we might get things wrong when we face decisions. If not consciously then at least subconsciously. The rational man will thus take full notice of that fact and rely on very simple rules of thumb that experience has taught that blindly will result in an acceptable outcome. Rationality model only makes sense if it is simple enough for everyone to follow without a taxing thought.

    Acting fairly towards others despite the opportunity to gain by selfish behaviour can be seen in this light. You never know when opportunistic behaviour will catch up with you so its always a safe rational choice to act fairly. To protect this code of conduct in the longterm, we are even prepared to spend utilities in the short term to punish those who break it. The ultimatum game showed how ingrained in people a certain fairness rule of thumb is. Most take it as given that they should offer half to the other player. Those who do not, suffer for it because their opponents are more than willing to forgo their potential share to carry out a punishment for having broken the fairness rule of thumb.

    The other articles were not really successful in refuting the main thrust of the first paper in my opinion. Although I must admit that I zoned a bit out while reading through the equations of the former and due to the excessiveness of quoting and referencing in the later.

  5. Argyri says:

    This was a very interesting debate on whether behavioural Law and Economics should replace traditional L&E completely. And also to what extend and how ought good law-making take the behaviours of ‘bounded rational’ individuals into account. I find the theory very attractive, and I understand completely the usual objection to traditional L&E that no man is perfectly rational. However, I tend to agree with Tim that, still, the law-making claims are weak. How exactly is an accurate calculation and evaluation of the aggregation of lots of different ‘bounded rational’ (or even less rational) behaviours possible?

    I think that L&E as a discipline is a tool, a method that uses a model. The model, by definition, cannot reflect reality perfectly. Likewise, the law tends to achieve an ideal that is not reflecting in societies reality perfectly. The deontological component of law itself fits, I think, well with the ideal of L&E using a model that is more perfect than the real individual.
    In all, contrary to popular opinion in this session’s blog-posts, I have to admit, I liked Levine’s article a bit more. However, I realize that L&E it is just a tool, a method, nothing less but also nothing more. The lawmaker using this method to legislate must definitely be aware of the limitations that behavioral law and economics, but also other disciplines, point to.

  6. Argyri says:

    Dear all, following our discussion on Monday I just came across the following article and thought it might be of interest. It talks about human behaviour and culture and mentions experiments very similar to the ones we discussed in class. The results as presented are quite remarkable.

    http://www.psmag.com/magazines/pacific-standard-cover-story/joe-henrich-weird-ultimatum-game-shaking-up-psychology-economics-53135/

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