Can behavioral economics improve law?

Q: How has economics influenced law and what impact is behavioral economics having?
Most people would agree that to decide if a particular law is good or bad, one important factor is the effects of the law. Economics has long provided a powerful tool for analyzing a law's effects. Imagine a major new piece of legislation that provides a range of protections to employees. Economics can help both to predict and to test empirically how these protections may affect employees' treatment on the job, their wages, and their chances of being hired and fired. Knowing those things helps to determine whether the new legislation is having its desired effects. Law and economics is the field that uses economic analysis to study the effects and desirability of legal rules.

But sometimes economic theory mispredicts the effects of law. This happens because traditional economics relies on highly unrealistic assumptions about human behavior. If a risk facing individuals is 1%, economic theory assumes that people will use the 1% figure in making their decisions. In fact, a large body of evidence suggests that most people will tend to think that their personal risk is far less than 1%. A wonderful illustration of "unrealistic optimism" from the business school environment is a study that asks MBA students to predict their performance in a class before the term begins. Students select the decile in which they believe their performance will fall. Necessarily only 20% of the class can be in the top two deciles, but in fact most students believe they will be in these top two deciles. Less than 5% of the class expects to perform below the median, where necessarily 50% of the students must fall. And it's not just the students: 94% of professors at one university rated themselves as above average.

If most people living under a particular legal rule — say, a rule requiring a warning statement describing the risks of a product — will tend to assume, as a result of their unrealistic optimism, that the risks are much lower for them personally, then the legal rule will not have the effects that traditional economic theory would predict.

Behavioral law and economics seeks to modify traditional law and economics by incorporating the growing body of empirical evidence on the biases and confusions that often afflict human behavior. Naturally, this approach carries strong potential to improve the predictive power of law and economics, and the success of behavioral law and economics in recent years has borne out this hope.

A simple example comes from employment law. Some critics of laws requiring specific workplace safety measures say that such laws are objectionably "paternalistic" and that it should be enough to warn workers of the risks of an unsafe workplace. Behavioral economics suggests that warnings will lead some workers to underestimate their own personal risks and, thus, accept jobs that they actually would not want to take if they didn't erroneously assume — like the business school students — that they would all prove to be "above average."

While this example is straightforward, my research has explored many diverse aspects of the relationship between employment law and behavioral economics.

Q: How does less-than-rational behavior in the legal process affect lawyers, defendants, judges, legislators, etc.?
A large body of research in behavioral law and economics explores this question. An important example is the effect of hindsight bias in the legal system. People tend to give far too much weight to outcomes of uncertain events when analyzing those events after the fact — a phenomenon common enough in sports to have a name: "Monday morning quarterbacking." Hundreds of empirical studies demonstrate the extent of the hindsight bias, and it's of particular importance to the court system because judges and juries are almost entirely in the business of assessing situations after the fact. Various measures can be, and in many instances have been, adopted to reduce "Monday morning quarterbacking" within the legal system. For instance, sometimes it is possible to keep information about how a situation ended up unfolding out of the hands of jurors, thus forcing them to confront the same uncertain decision that the defendant in the lawsuit faced.

Q: How has behavioral economics affected your thinking about antidiscrimination laws? How do the law and legal theory work through issues of implicit bias?
This is, to me, one of the most exciting areas of behavioral law and economics today. Just as people may misestimate the probability of a harm because of unrealistic optimism or hindsight bias, they may misestimate the risk of poor performance by an employee who comes from a traditionally disadvantaged racial group. The employer is not "prejudiced" against the employee in the traditional sense; instead, the employer simply undersells the employee's abilities as a factual matter. The employer has no awareness of treating members of the traditionally disadvantaged racial group any differently and in fact might be horrified to learn of such behavior. In response to this sort of "implicit racial bias," my research suggests the ways in which antidiscrimination law might, and to some degree already does, seek to reduce the level of implicit bias.

Interview conducted and edited by Ted O'Callahan.