1 Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trademark of Oxford University Press in the UK and certain other countries. Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America.
To my parents, Yona and Meir Teichman D.T. To Daphna, Abigail, and Yaara E.Z.
Part One Economic and Psychological Background
1. Economic Analysis of Law: An Overview A. Introduction B. Positive Economics C. Normative Economics D. Conclusion
2. Behavioral Studies A. An Overview 1. History, Methodology, and Interdisciplinary Impact 2. Dual-Process Theories 3. Theories of Heuristics and Biases 4. Cognitive Biases versus Fast-and-Frugal Heuristics 5. Typology of Phenomena and Structure of the Chapter B. Probability Assessments and Related Issues 1. Conjunction and Disjunction Fallacies 2. Base-Rate Neglect 3. Inverse Fallacy 4. Insensitivity to Sample Size and Related Phenomena 5. Certainty Effect 6. Availability 7. Subadditivity
8. Hindsight Bias 9. Ambiguity Aversion C. Prospect Theory and Related Issues 1. General 2. Loss Aversion and Emotions 3. Reference-Dependence 4. Framing Effects 5. Status Quo and Omission Biases 6. Endowment Effect (a) Significance and Scope (b) Causes and Explanations 7. Sunk Costs and Escalation of Commitment D. Egocentrism and Motivated Reasoning 1. General 2. Motivated Reasoning and Confirmation Bias 3. Overoptimism and the Better-than-Average Effect 4. Overconfidence 5. Naïve Realism and False-Consensus Effect 6. Fundamental Attribution Error 7. Planning Fallacy 8. Illusion of Control 9. Behavioral Ethics E. Reference-Dependence and Order Effects 1. General 2. Contrast and Assimilation Effects 3. Anchoring and Adjustment 4. Order Effects: Primacy and Recency 5. Compromise and Attraction Effects 6. Diminishing Sensitivity F. Procrastination, Myopia, and Bounded Willpower 1. Procrastination 2. Myopia and Bounded Willpower G. Moral Judgment and Human Motivation 1. General 2. Deontology versus Consequentialism (a) Normative Ethics (b) Behavioral Studies 3. Fairness and Social Justice (a) General (b) Substantive Fairness (c) Procedural Fairness (d) Belief in a Just World
Part T wo Behavioral Law and Economics: A Synopsis
3. An Overview of Behavioral Law and Economics A. Introduction B. History C. Methodology D. Challenges E. Conclusion
4. Normative Implications A. Introduction B. Behavioral Findings and Normative Theories C. Prevailing Moral Judgments and the Law D. Behaviorally Informed Lawmaking 1. General 2. Ends (a) Introduction (b) Preventing Exploitation (c) Legal Paternalism 3. Means (a) Introduction (b) Disclosure Duties (c) Nudges and Shoves E. Conclusion
5. Behavioral Insights and Basic Features of the Law A. Introduction
B. Law, Reference-Dependence, and Loss Aversion 1. Private Law: Tort versus Unjust Enrichment 2. Human Rights: Civil and Political versus Social and Economic 3. Additional Examples C. Evolutionary Theories D. Cognitive Psychology, Commonsense Morality, and the Law E. A Normative Perspective F. Conclusion
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Part Three Private and Commercial Law
6. Property Law A. Introduction B. Ownership and Possession 1. Psychological Ownership 2. Determining Ownership 3. Framing Ownership 4. Ownership, Possession, and the Endowment Effect C. Constitutional Property Law 1. Takings versus Givings 2. Physical versus Nonphysical Taking 3. Scope and Mode of Compensation 4. Homes versus Other Property D. Intellectual Property 1. General 2. The Innovation Lottery 3. Endowment and Creativity Effects 4. Sequential Innovations 5. Hindsight Bias E. Protecting Property Rights: Property Rules versus Liability Rules F. Conclusion
7. Contract Law A. Introduction B. Trust, Promise, and Contract 1. General 2. Standard-Form Contracts C. Pre-contractual Negotiations 1. General 2. The Role of Default Rules and Other Reference Points D. Contract Formation E. Interpretation and Supplementation F. Performance
G. Legal Remedies for Breach of Contract 1. Analytical and Doctrinal Background 2. The Four Interests as Reference Points 3. Expectation Damages versus Specific Performance 4. Disgorgement 5. Intentions and Motivations H. Agreed Remedies: Liquidated Damages 1. A Puzzling Doctrine 2. Behavioral Insights 3. Liquidated Damages and the Decision to Breach I. Conclusion
8. Consumer Contracts A. Introduction B. Marketing Techniques 1. General 2. Information Presentation 3. Limited Availability 4. Low-Ball and Bait-and-Switch Techniques 5. Lenient Return Policies C. Pricing 1. General 2. Price Framing 3. Multidimensional and Complex Pricing 4. Deferred and Contingent Payments 5. Odd Pricing D. Non-salient Contract Clauses E. Post-contracting Behavior F. Market Solutions 1. General 2. Competition 3. Reputation 4. Conclusion G. Legal Solutions 1. General 2. Disclosure 3. Mandatory Regulation H. Conclusion
9. Tort Law A. Introduction B. Economic Analysis of Tort Law: An Overview
C. Behavioral Analysis: Liability Regimes 1. Boundedly Rational Agents 2. Boundedly Rational Adjudicators (a) Negligence versus Strict Liability and the Hindsight Bias (b) Contributory Negligence versus Comparative Negligence and Anchoring D. Behavioral Analysis: Damages 1. Framing the Question 2. Hedonic Damages E. Product Liability 1. Defective Design 2. Warnings F. Conclusion
10. Commercial Law: Corporate Law, Securities Regulation, and Antitrust A. Introduction B. Firms, Markets, and Rational Choice 1. The Efficient Market Hypothesis 2. Behavioral Corporate Finance C. Corporate Law 1. General 2. Hindsight Bias and the Business Judgment Rule 3. Behavioral Corporate Governance (a) Overconfident CEOs (b) Passive Boards (c) Legal Responses D. Securities Regulation 1. General 2. Securities Fraud 3. Retail Investors E. Antitrust Law 1. General 2. Boundedly Rational Consumers 3. Boundedly Rational Firms 4. Concluding Remarks and Reply to Critics F. Conclusion
11. Administrative, Constitutional, and International Law A. Introduction B. Institutions 1. Public Choice Theory and Cognitive Psychology (a) General (b) Designing Governmental Institutions
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2. Rule-Making (a) Judicial versus Legislative Rule-Making (b) Temporary Legislation 3. Concluding Remarks C. Citizens 1. General 2. Citizens’ Judgments and Choices 3. Governmental Manipulation of Citizens’ Heuristics and Biases D. Human Rights 1. Freedom of Speech (a) Theoretical and Doctrinal Background (b) Behavioral Analysis 2. The Fight against Terrorism 3. Affirmative Action 4. Concluding Remarks E. International Law 1. Challenges 2. Prospects F. Conclusion
12. Criminal Law and Enforcement A. Introduction B. Efficient Crime Control C. Do People Want Efficient Crime Control Policies? 1. Punishment and the Probability of Detection 2. Punishment and the Risk of Future Offending 3. Punishment Judgments and Policy Design 4. Case in Point: The Law of Criminal Attempts D. Deterrence Theory and Behavioral Analysis 1. Attitudes toward Risk 2. Perceptions of the Risk of Punishment (a) Overoptimism (b) Availability (c) Prediction and Postdiction (d) Probability Estimates and Repeat Behavior 3. Perceptions of Sanctions (a) The Hedonic Dimensions of Punishment (b) Formal Sanctions and Internal Motivations E. Behavioral Ethics—Predicting When Crime Is More Likely 1. Factual Ambiguity 2. Legal Ambiguity 3. Driving Forces F. Punishing Recidivists G. Conclusion
13. Tax Law and Redistribution A. Introduction B. Tax Design 1. General 2. Budget Balance 3. The Political Salience of Taxes 4. Tax Exemptions versus Spending C. Taxpayers’ Behavior 1. Economic Decision-Making 2. Tax Compliance 3. Challenging Taxes 4. The Normative Debate D. Behavioral Insights and Redistribution 1. General 2. Judgments of Progressivity 3. Scarcity 4. Wealth and Subjective Well-Being 5. Methods and Objects of Redistribution E. Modifying Behavior through Taxes F. Conclusion
14. Litigants’ Behavior A. Introduction B. Standard Economic Analysis of Litigation and Settlement C. Behavioral Impediments to Settlement 1. General 2. Information, Self-Serving Bias, and Overoptimism 3. “Irrational” Motives 4. Biases Stemming from the Adversarial Nature of Litigation 5. Reference-Dependence in Assessing Settlement Offers 6. Framing Litigation Outcomes and Risk Attitude 7. Conclusion D. Behavioral Factors Encouraging Settlement: Anticipated Regret and Loss Aversion E. Alternative Dispute Resolution F. Attorneys and Clients 1. General 2. Fee Arrangements 3. Lawyers’ Decision-Making 4. Lawyers’ Motivation G. A Note on Plea Bargains H. Conclusion
15. Judicial Decision-Making A. Introduction B. The Story Model and Coherence-Based Reasoning C. Judicial Decision-Makers’ Heuristics and Biases 1. Context Dependence 2. Hindsight Bias 3. Omission Bias and Related Phenomena 4. Converting Qualitative into Quantitative Judgments and the Anchoring Effect 5. Conclusion D. Inadmissible Evidence and Other Irrelevant Information 1. The Challenge 2. Jury Instructions and Other Remedies E. Priming and Prejudice F. Judicial Decision-Making: Moral Judgments G. Rules versus Standards: Certainty and Predictability H. Group Decision-Making I. Judges versus Laypersons J. A General Assessment of Behavioral Research of Judicial Decision-Making
16. Evidence Law A. Introduction B. Types of Evidence and Cognitive Biases 1. Eyewitnesses (a) Eyewitness Testimony (b) Fact-Finders’ Assessment of Eyewitness Testimonies (c) Policy Implications 2. Probabilistic Evidence (a) The Wells Effect (b) Base-Rate Neglect (c) Inverse Fallacy 3. Circumstantial Evidence: The Anti-inference Bias 4. Expert Testimonies 5. Conclusion C. Burden of Proof 1. Normative and Doctrinal Background 2. Burden of Proof and the Story Model 3. Burden of Proof: A Tiebreaker or a Reference Point? 4. Loss Aversion, Omission Bias, and the Burden of Proof in Civil Litigation (a) Who Should Bear the Burden? (b) What Is the Actual Standard of Proof?
5. Protected Values, Taboo Trade-Offs, and the Burden of Proof in Criminal Litigation D. The Upside of Bounded Rationality E. Conclusion Index
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Notwithstanding the great impact behavioral law and economics has had on legal theory and policymaking in the past two decades, to date no comprehensive textbook or treatise has been written on the subject. This is the first textbook-treatise aimed at providing readers with a general overview of the field—including its economic and behavioral background, methodology, normative and policy implications, and applications in various legal fields. Our collaboration in this sphere began when, a few years ago, we were asked to co-edit The Oxford Handbook of Behavioral Economics and the Law (2014)—the first handbook in this area, whose chapters were written by some of the leading figures in the field. While we were very proud of the Handbook, we felt that there was still a need for a unified treatment of the field, for novices and experts alike. We hope that this book will introduce the fascinating world of behavioral legal studies to broader audiences, and trigger further research by jurists, psychologists, economists, and others. Each draft chapter of the book was initially written by one of us (with some sections occasionally written by the other co-author), but the outcome is a product of a truly collaborative effort and joint deliberation.* Some parts of the book draw on our previous publications, including the chapters on “Loss Aversion,” “The Hindsight Bias,” and “Judicial Decision-Making,” included in the above-mentioned handbook. We are very grateful to many colleagues with whom we had fruitful exchanges throughout the years—in particular, to Ilana Ritov and Yuval Feldman, our long-time research partners. Special thanks are also due to Ilan Benshalom, Barak Medina, and Anne-Lise
* The initial versions of Chapters 1–6, 8, 11, 13, 14, part of 15, and 16 were mostly written by Eyal Zamir. The initial versions of Chapters 7, 9, 10, 12, and part of 15 were mostly written by Doron Teichman.
Sibony, who insightfully commented on chapters of the book, and to Shmuel Baron, Inbal Elbaz, Yuval Farkash, Elisha Harlev, Carl Nathan Johnson, Ben Levko, Tal Mendelson, Tal Nisim, Elad Spiegelman, and Roi Yair, who provided excellent research assistance. Generous financial support was received from the I-CORE Program of the Planning and Budgeting Committee and the Israel Science Foundation (Grant No. 1821/12).
In recent years, the growing impact of behavioral law and economics has been accompanied by the emergence of empirical and experimental legal studies. This new paradigm has transformed the nature and scope of the research conducted by behavioral-legal scholars. Rather than just draw on the results of empirical studies conducted by non-jurists, a growing number of researchers have engaged in experimental and empirical studies of their own, designed specifically to answer distinctively legal questions. Thanks to these developments, the integration of economics, psychology, and law is breaking exciting new ground in legal theory, social sciences, and governmental policymaking. Consuming behavioral-economic scholarship—let alone producing it—requires familiarity with three different disciplines. Unfortunately, there are practically no textbooks on behavioral economics, and very few on judgment and decision-making—the primary body of psychological studies informing behavioral legal analysis. While this state of affairs has heightened the need for a textbook-treatise on behavioral law and economics, it has also made our task particularly challenging. The book comprises sixteen chapters, organized in five parts. Part I lays the groundwork for the ensuing discussion: Chapter 1 introduces the basic tenets of positive and normative economics; Chapter 2 then reviews the psychological findings that form the basis of behavioral law and economics. While focusing on studies of judgment and decision-making, Chapter 2 also draws on research in social and moral psychology, experimental game theory, and experimental philosophy. It describes in some detail numerous documented heuristics and biases, as well as issues that cut across the various phenomena— such as the effect of expertise on decision-making, group decision-making, individual and cultural differences, and debiasing. Part II consists of three chapters that provide an overview of behavioral law and economics, and discuss some general themes. These include an overview of the field, its history, methodology, and the challenges it faces (Chapter 3); a general discussion of the normative and policy implications of behavioral insights (Chapter 4); and an analysis of the intriguing correspondence between cognitive psychology, morality, and law (Chapter 5). The remaining three parts provide a critical survey of existing contributions of behavioral studies to various legal fields. Starting with private and commercial law, Part III offers five chapters (6–10) on property law (including intellectual property, and the property rules versus liability rules debate), contract law, consumer contracts, tort law, and commercial law (including corporate, securities, and antitrust law), respectively. Part IV is devoted to public law—starting with a discussion of administrative, constitutional, and international law (Chapter 11), through criminal law and enforcement (Chapter 12), and concluding with tax law (Chapter 13). Finally, Part V discusses the legal process—namely, litigants’ behavior, judicial decision-making, and the law of evidence (Chapters 14, 15, and 16, respectively). While offering a broad overview of behavioral law and economics, this book does not exhaust all contributions of behavioral insights to legal scholarship. In particular, we
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felt that in some areas, existing behavioral scholarship—as important and influential as it might be—does not yet lend itself to systematic synthesis (although it may well do so in the future). Thus, for example, the book does not include chapters on labor and employment law1 or on family law2 (although, some of the topics that would have been discussed under these headings are discussed elsewhere in the book).
1. With few exceptions, the behavioral analysis of labor and employment law focuses on two issues: insufficient saving for old age, and employment discrimination. See Deborah M. Weiss, Paternalistic Pension Policy: Psychological Evidence and Economic Theory, 58 U. Chi. L. Rev. 1275 (1991); Linda Hamilton Krieger, The Content of Our Categories: A Cognitive Bias Approach to Discrimination and Equal Employment Opportunity, 47 Stan. L. Rev. 1161 (1995); Samuel Issacharoff, Contracting for Employment: The Limited Return of the Common Law, 74 Tex. L. Rev 1783 (1996); Cass R. Sunstein, Human Behavior and the Law of Work, 87 Va. L. Rev. 205 (2001); Cass R. Sunstein, Switching the Default Rule, 77 N.Y.U. L. Rev. 106 (2002); Samuel R. Bagenstos, The Structural Turn and the Limits of Antidiscrimination Law, 94 Calif. L. Rev. 1 (2006); Linda Hamilton Krieger & Susan T. Fiske, Behavioral Realism in Employment Discrimination Law: Implicit Bias and Disparate Treatment, 94 Calif. L. Rev. 997 (2006); Christine Jolls & Cass R. Sunstein, The Law of Implicit Bias, 94 Calif. L. Rev. 969 (2006); Christine Jolls, Behavioral Economics Analysis of Employment Law, in The Behavioral Foundations of Public Policy 264 (Eldar Shafir ed., 2013). 2. Examples of the relatively scarce behavioral research in family law include: Brian Bix, Bargaining in the Shadow of Love: The Enforcement of Premarital Agreements and How We Think about Marriage, 40 Wm. & Mary L. Rev. 145, 193–200 (1998); Daphna Lewinsohn-Zamir, In Defense of Redistribution through Private Law, 91 Minn. L. Rev. 326, 385–89 (2006); Sean Hannon Williams, Postnuptial Agreements, 2007 Wis. L. Rev. 827; Tess Wilkinson-Ryan & Deborah Small, Negotiating Divorce: Gender and the Behavioral Economics of Divorce Bargaining, 26 Law & Ineq. 109 (2008); Sean Hannon Williams, Sticky Expectations: Responses to Persistent Over-Optimism in Marriage, Employment Contracts, and Credit Card Use, 84 Notre Dame L. Rev. 733 (2009).