Consumer Law

Attack on Behavioral Law and Economics

By Jeff Sovern

I just finished listening to the audio version of economist Tim Harford's book The Logic of Life during my commutes.  The thesis of the book is that people are rational and so respond to incentives.  This clashes to some extent with the arguments of behavioral law and economics ("BLE") consumer law scholars, in which group I number myself, who claim that people sometimes act irrationally in systematic ways and that businesses take advantage of consumer irrationalities. Those of us who take this position generally argue for rules that provide consumers greater protection than current law supplies.  BLE scholars rely on laboratory experiments, in the main, to prove their point. One of the chapters in Harford's book, by contrast, focuses on a number of experiments that seem to rebut the existence of the endowment effect; that is, the idea that once consumers have possessed something for even a brief period, it seems more valuable to them and they are reluctant to give it up for something that they would have valued equally before they possessed the item (hence the eagerness of some sellers to get consumers to try goods under a money-back guarantee that few consumers will take advantage of).  The difference is that the experiments he discusses took place outside of the lab and in more realistic transactions; they demonstrate that while neophytes are subject to the endowment effect, more experienced traders tend to be immune to it.  I'm afraid I can't yet cite to the papers on which the experiments are based; it's hard to take notes while you're driving and I haven't yet obtained a copy of the print version.  Though I still very much believe that BLE has valuable lessons for consumer protection, the chapter raises questions about some of the work on which we depend and is worth a read (or a listen) if you use BLE.  Harford, I should note, does not take on most of the systematic irrationalities on which much BLE work is based.  I found the remaining chapters quite interesting as well, even the ones that range far beyond consumer protection.

Full post as published by CL&P Blog on June 02, 2008 (boomark / email).