Working Paper No. 04-16:
The Law and Economics of Irrational Behavior: An Introduction

Author(s):

Francesco Parisi, Vernon Smith

Date Posted: 2004

Availability:
Abstract (below) | Full text (most recent) on SSRN

Abstract:

Behavioral economists accept many of the premises of traditional economic thought; that situational outcomes are the result of individual decisions, taking place in a particular economic environment. But behavioral economists go a step further, arguing that the human action is shaped not only by relevant economic constraints, but is highly affected by people's endogenous preferences, knowledge, skills, endowments and a variety of psychological and physical constraints. Incentives matter and incentives drive human behavior, but incentives are often more than simple monetary gain. The rise of behavioral economics and the findings of experimental economics however, have led to a clash between the theory of rational-choice and those who believe that this idea does not properly account for the montage of human emotions, biology and attitudes. However, it may be possible to end the intellectual tug of war between rational choice theorists and behavioralists without turning it into a zero-sum game. In this Introduction we consider the contributions of twenty-eight authors have joined together to present such a possibility. Covering a wide range of fields from neuroscience, to economics, to law and sociology, these distinguished academics have presented an array of valuable contributions that, aware in their own application that rational choice theory can no longer be bought in a wholesale fashion, aims at revisiting its basic premises in such a way as to ensure a more rigorous analytical model. These authors then proceed to offer a practical application of this modified theory to a variety of economic and legal problems that have bedeviled traditional economic thought.