Behavioral Law and Economics

We are delighted to share the news about the publication of our new book, Behavioral Law and Economics (OUP 2018). This book aims to serve as a gateway into the world of behavioral analysis. It enables readers to familiarize themselves with the rich economic and psychological literature on judgment and decision-making, and allows them to delve into the wide body of legal writing in the field.

For several decades, one of the leading perspectives in legal theory – and in the field of commercial law in particular - has been the economic analysis of law. The theory of human behavior underlying standard economic analysis of law—like economic analysis in general—has been the rational choice theory. According to this theory, people always strive to enhance their own well-being, by choosing the available option that maximizes their expected utility. In the past few decades, hand-in-hand with comparable developments in economics, economic analysis of law has been challenged by a growing body of experimental and empirical studies that attest to prevalent and systematic deviations from the assumptions of economic rationality. These studies contested the assumption of cognitive rationality by showing that people’s decisions are influenced by irrelevant information and by the way in which the information is presented, that people’s choices are not consistent, and that people use all kinds of heuristics that may lead to systematic errors. These studies also called into question the assumption of motivational rationality, by highlighting the role of factors such as fairness, envy, and altruism in people’s behavior. From a slightly different angle, experimental and empirical studies have shown that most people’s moral judgments do not fall in line with the utilitarian underpinnings of welfare economics, but are much more aligned with deontological, commonsense morality.

While these insights were initially perceived as antithetical to standard economic and legal-economic analysis, over time they have been largely integrated into mainstream economic analysis, including economic analysis of law. Moreover, the impact of behavioral insights has long since transcended purely economic analysis of law: in recent years, the behavioral movement has become one of the most influential developments in legal scholarship in general. Much as economic reasoning became a standard form of legal analysis in the 1980s and 1990s (at least in some parts of the world), behavioral analysis has become a standard form of interdisciplinary analysis. It is also gradually influencing legal policymaking throughout the world, as demonstrated by the increasing resort to nudges by regulators around the world.

In recent years, the growing impact of behavioral law and economics has been accompanied by the emergence of empirical and experimental legal studies. Rather than just draw on the results of empirical studies conducted by non-jurists, a growing number of legal academics have engaged in experimental and empirical studies of their own, designed specifically to answer distinctively legal questions.

The use of behavioral-law-and-economic insights requires familiarity with three different disciplines. Unfortunately, until now there was no textbook on this field (and there are still hardly any textbooks on behavioral economics per se, or on the psychology of judgment and decision-making). Our book strives to fill this gap.

Our book comprises sixteen chapters, organized in five parts. Part I lays the groundwork for the ensuing discussion. It introduces the basic tenets of positive and normative economics, and reviews the psychological findings that form the basis of behavioral law and economics. Part II provides an overview of behavioral law and economics, and discusses some general themes. These include an overview of the field, its history, methodology, and the challenges it faces; a general discussion of the normative and policy implications of behavioral insights; and an analysis of the intriguing correspondence between cognitive psychology, morality, and law. The remaining three parts provide a critical survey of existing contributions of behavioral studies to various legal fields. These parts deal with private and commercial law, public law, and the legal process, respectively.

Readers of this blog might find special interest in the chapter of the book on commercial law. This chapter begins by examining the preliminary question of whether bounded rationality can persist in well-functioning, highly competitive markets, and argues that as the theoretical analysis and empirical evidence demonstrate, irrational behavior is present even in such settings. The chapter then goes on to discuss the implications of behavioral analysis for key issues within corporate law, securities regulation, and antitrust law (i.e., competition law). To this end, special attention is dedicated to managerial and investor irrationality, and to legal policies geared towards such irrationality. 

Aside from the chapter on commercial law, numerous other chapters are also relevant to the business law community. The chapter on contract law explores the behavioral forces driving contract design and contractual performance, and analyzes core doctrinal questions relating to issues such as remedies for breach of contract. The chapter on consumer contracts examines in detail the behavioral phenomena underlying these contracts, and discusses the legal policies that were adopted to cope with the potential behavioral market failure. Finally, the chapter on tax law examines a broad set of policy questions relating to this legal area, and explores issues such as tax compliance.

Eyal Zamir is Augusto Levi Professor of Commercial Law at the Hebrew University of Jerusalem, Faculty of Law.

Doron Teichman is Vice Dean and holds the Jacob I. Berman Chair in Law at the Hebrew University of Jerusalem, Faculty of Law.