Tuesday, December 7, 2010

Behavioral Law and Economics Symposium

Truth on the Market, a law and economics blog, is hosting a symposium called "Free to Choose? A Symposium on Behavioral Law and Economics." Contributors to the symposium include Richard Epstein, Claire Hill, David Friedman, Larry Ribstein, Henry Manne, Geoffrey Manne, and several other notable scholars. The contributions are thought-provoking and quite useful for anyone interested in the subject. You can read all of them here.

Several of the contributors have noted, quite rightly, that behavior law and economics so far lacks a sufficient theoretical basis for displacing conventional approaches to law and economics. This is a point Richard Posner noted in a 1998 article in the Stanford Law Review ("Rational Choice, Behavioral Economics, and the Law"). However, I think such complaints miss the point of behavioral law and economic studies, which is not so much to displace conventional theories and assumptions of rationality but to enrich and improve them. As Cass Sunstein (currently head of the Office of Information and Regulatory Affairs in the President's Office of Management and Budget) observed in a 1999 article in the American Law & Economics Review ("Behavioral Law and Economics: A Progress Report"):
[I]t is unproductive to see a general struggle between economic analysis of law and behavioral law and economics. The question is what kinds of assumptions produce good predictions about the effects of law, and this will vary with context. Sometimes the simple assumptions of conventional analysis will work entirely well; sometimes it is necessary to introduce complications by, for example, saying a bit more about what is counted in the utility function (such as a desire to be treated fairly, and willingness to punish those who act unfairly), or incorporating bounded rationality.
Sunstein's reference to "bounded rationality" is a useful reminder that the challenge to the conventional rational actor model is not a new one. The Nobel laureate Herbert Simon coined that phrase back in the 1950s. Since then, progress has been made, particularly by the likes of Daniel Kahnemann, Amos Tversky, Richard Thaler, and Sunstein himself, in defining and assessing various ways in which individuals regularly and often predictably deviate from the standard rationality assumption in decision making. But their work may be less of a threat to conventional economic theories than is often supposed. No one is arguing, for instance, that incentives (including prices) do not matter.

2 comments:

  1. The complaint about insufficient theoretical basis to displace rational choice L&E is not to say that behavioral economics studies are not useful. They are. I haven't seen anybody argue that they are not, including skeptics. Generally, the critique is leveled at behavioral law and economics rather than behavioral economics itself. This theme runs through the comments at the symposium, and the distinction between behavioral economics and BLE is an important one. Consider, for example, the expansive gap between what the b.e. literature actually demonstrates with respect to various framing anomalies and their robustness and the behavioral-based regulatory proposals based on them. In the Richard Thaler retort that you cite to in your more recent post, for example, Thaler says that his work would not support much of what amounts to the policy agenda of the new Consumer Financial Protection Bureau which is explicitly designed to reflect behavioral insights.

    Importantly, one of the important limits of the BLE enterprise definitely IS that be does not yet have a sufficiently rich theoretical account to tell us when these biases apply, when they do not, and when they are offset by other biases. That's important for designing a system of regulation, one would think, and a stumbling block for generating the sort of predictive power that Thaler, Sunstein, Jolls, etc., consider the appropriate metric for measuring success (and I agree). In other words, if the goal is to enrich and improve, one must improve explanatory power of the phenomena in general. If one cannot identify conditions under which biases occur and do not --- which still plagues much of this literature --- it is difficult to succeed on that mission.

    None of this is to say that BE will not prove successful in doing so. Its early in the day still. But the "theoretical completeness" argument many skeptics make, as I've read it, is a direct response to the Sunstein quote you've got above rather than some assertion that if BE cannot displace conventional economics it is worthless.

    ReplyDelete
  2. Josh,

    I don't disagree with anything you say, but I think some of your concerns with behavioral law and economics are equally applicable to mainstream economic theories, such as rational expectations and efficient markets, which have been, and continue to be, influential in policy making. Those who complain only about the lack of explanatory support or predictive success of behavioral economics strike me as somewhat myopic.

    That said, there is reason to be suspicious of at least some of the experimental results of behavioral economics, including for example the endowment effect, which seems most often observed in the breach. That is to say, if the endowment effect were a persistent problem, then we would expect very few transactions ever to occur after the initial allocation of entitlements. But, of course, we see millions of transactions occurring every day.

    ReplyDelete

I actively moderate comments for spam, advertisements, and abusive or offensive language.