Erin O’Hara on The Free Market Side of Behavioral Law and Economics

Behavioral law and economics (“BLE”) can influence legal policy analysis and regulation in many ways.  On balance, it is not at all clear that this new paradigm undermines a policy commitment to markets.  From one vantage point, the BLE movement can be said to help preserve markets. Importantly, those using the paradigm often start with an underlying assumption that markets are good and that regulations are appropriate only to help correct market defects.  Of course, if “defects” are defined too broadly, the default state of market activity is indeed threatened.  However, the idea that the behavioral movement threatens to erode the primacy of markets that would be achieved without the paradigm erroneously assumes that a government would ever sign onto completely unfettered market behavior.  However desirable a free market state of the world might be, the unfettered markets baseline fails to comport with political realities.  Even setting aside insights from public choice theory (which predicts policy interference with markets), there is always the sense that people aren’t the purely informed rational actors that law and economics models might assume.  Too many people we know and love—our parents, kids, cousins, even ourselves—suffer harm from their decisions as a consequence of a failure to investigate, overcome biases, properly value options etc.  Most people carry an intuition that some market taming/correcting mechanisms are appropriate, and BLE at least helps that discussion proceed rigorously. If so, behavioral law and economics might help to ensure that regulatory actions are market preserving relative to the state of government without those insights.

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