Douglas Ginsburg is Circuit Judge, U.S. Court of Appeals for the District of Columbia.
Joshua Wright is Associate Professor, George Mason University School of Law.
The behavioral economics research agenda is an ambitious one for several reasons. The first reason is that behavioral economics requires a theory “true” preferences aside from – and in opposition to — the “revealed” preferences of the decision maker. A second reason is that while collecting and documenting individual biases in an ad hoc fashion can generate interesting results, policy relevance requires an integrative theory of errors that can predict the sufficient and necessary conditions under which cognitive biases will hamper the decision-making of economic agents. A third is not unique to behavioral economics but is nonetheless significant: demonstrating that behavioral economics improves predictive power. The core methodological commitment of the behavioral economics enterprise — as with economics generally at least since Friedman (1953) — is an empirical one: predictive power. Indeed, no less than Christine Jolls, Cass Sunstein and Richard Thaler have described the behavioralist research program as the economic analysis of law “with a higher R-squared,” that is, “a greater power to explain the observed data.”
As I’ve observed previously, there are some good reasons to believe that behavioral law and economics (BLE) scholars do not share these methodological commitments. I’ve discussed previously the example of failure of BLE scholars to even cite, much less grapple with, the work of Zeiler & Plott (or here) regarding the endowment effect. Zeiler & Plott present and support the provocative claim that current evidence supporting the endowment effect is better explained by experimental procedures than cognitive biases. Proponents of regulation based on the endowment effect, in my view, need not agree with this interpretation of these findings but they ought to respond to them if they want to be taken seriously. Unfortunately, out of the 342 articles in JLR discussing the “endowment effect” from 2006 to present, only 35 cite either Zeiler and Plott article. I find that ratio discouraging for the discipline of behavioral law and economics generally and the prevailing level of discourse.
Indeed, while David Levine is not referring to the BLE literature, he might as well have been when he writes:
Behavioral economics: love it or hate it – there seems to be no middle ground. Lovers take the obvious fact people are not frictionless maximizing machines together with the false premise that economists assume that they are to conclude that all of economics must be wrong. The haters take the equally obvious fact that laboratories are not the real world to dismiss all laboratory evidence that conflicts with their pet theories as irrelevant. In the end they seem primarily to talk past each other.
How can we improve the discourse and get discussion focused on predictive power and consequences of actual behavioral policies proposed or implemented? The burden here lies with the skeptics. As Richard Epstein points out, the behavioralists’ message has been clear and effective; indeed, Bar-Gill and Warren’s article generated the Consumer Financial Protection Bureau. Behavioral skepticism has proven less effective.
Skeptics, including myself, have been decidedly less effective in convincing their respective audiences that specific behavioral proposals should be rejected and conventional economic approaches should (at least for now) prevail in the market for ideas in the academy and in the policy world. It is true that the skeptics have a number of forces working against them. One is that BLE is new and exciting. Arguing that the “conventional” approach outperforms the newest tool in the toolkit is always an uphill battle. I’ve alluded to a second reason, failure of at least some of the BLE literature to engage with opposing ideas. But perhaps most important is the failure of the skeptics to present a comprehensive and convincing case that the conventional economic approach systematically can be expected to outperform BLE when the full social benefits and costs of the various approaches and institutions are accounted for. I’ve long been of the opinion that two primary reasons for this failure are that different strands of the skeptical literature have talked past one another, and that this has led to a failure to present the “full” case against BLE on the record to be evaluated.
Consistent with this view, the goal of this post is not to present any new ideas about behavioral economics or behavioral law and economics, but catalog the various objections that have been raised in the literature, discussing their interactions, and linking to some of the leading scholarship in the area calling into question the assumed superiority of the BLE approach on a variety of grounds.