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From Rational Choice to Behavioural Economics

Theoretical Foundations, Empirical Findings and Legal Implications

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Book cover European Perspectives on Behavioural Law and Economics

Part of the book series: Economic Analysis of Law in European Legal Scholarship ((EALELS,volume 2))

Abstract

This article considers how individual decision making is explained in rational choice, on the one hand, and in behavioural economics, on the other hand, and analyses the corresponding implications for the maximization of individual and social utility. Special emphasis is placed on whether and how the law can and shall positively influence non-utility-maximizing behaviour resulting from cognitive heuristics and biases.

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Notes

  1. 1.

    Posner 2013, p. 212.

  2. 2.

    Mathis 2009, p. 21 et seqq.

  3. 3.

    Kirchgässner 1988, p. 111 et seqq.

  4. 4.

    Homann and Suchanek 2000, p. 392.

  5. 5.

    See also below, sect. 3.3.

  6. 6.

    Frank 1976, p. 19.

  7. 7.

    Friedman 1953, p. 14.

  8. 8.

    Hotz 1982, p. 304.

  9. 9.

    Posner 1998, p. 18.

  10. 10.

    Posner 1998, p. 18.

  11. 11.

    See Pheby 1988, p. 83.

  12. 12.

    Scriven 1962, p. 176 et seqq.

  13. 13.

    Homann and Suchanek 2000, p. 422.

  14. 14.

    Meyer 1978, p. 41. On Adam Smith’s market optimism see Mathis 2009, p. 108 et seqq.

  15. 15.

    On the efficiency criteria and their philosophical foundations, see Mathis 2009; see also Eidenmüller 2005.

  16. 16.

    Fletcher 1996, p. 158.

  17. 17.

    Baumol 1972, p. 402.

  18. 18.

    See contra Mathis 2009, p. 47 et seqq.

  19. 19.

    Mathis 2007b, p. 1545.

  20. 20.

    For an overview see Mathis 2007a, p. 118–120.

  21. 21.

    This also makes it possible to refute more effectively the objection that economists frequently dedicate their efforts to constructing abstract models in their ivory towers.

  22. 22.

    See e.g. the volume by Camerer, Loewenstein and Rabin 2003; a good overview is also provided by Kahneman 2011.

  23. 23.

    Simon 1979, p. 510.

  24. 24.

    See overall Kahneman and Tversky 1979, p. 263–292.

  25. 25.

    In their paper published in 1974 entitled “Judgement under Uncertainty: Heuristics and Biases”, Amon Tversky and Daniel Kahneman demonstrated that people rely on mental heuristics in complex decision-making scenarios (this paper is also reproduced in the annex to the book “Thinking, Fast and Slow”).

  26. 26.

    Kahneman 2011, p. 20.

  27. 27.

    Kahneman 2011, p. 21.

  28. 28.

    Tversky and Kahneman 1974, p. 1124.

  29. 29.

    Guthrie, Rachlinski and Wistrich 2001, p. 780.

  30. 30.

    See e.g. Fehr and Fischbacher 2002, C1-C33; Gintis, Bowles, Boyd and Fehr 2005.

  31. 31.

    See Loewenstein 2000, p. 51–76.

  32. 32.

    Tversky and Kahneman 1974, p. 1127.

  33. 33.

    Jolls 2009, p. 77.

  34. 34.

    Jungermann, Pfister and Fischer 2010, p. 173.

  35. 35.

    Jungermann, Pfister and Fischer 2010, p. 174.

  36. 36.

    Jungermann, Pfister and Fischer 2010, p. 174.

  37. 37.

    Fischhoff 1975, p. 292.

  38. 38.

    Fischhoff 1975, p. 288.

  39. 39.

    See Christensen-Szalanski and Fobian-Willham 1991.

  40. 40.

    Rachlinski 2000, p. 97.

  41. 41.

    Rachlinski 2000, p. 97 et seqq.

  42. 42.

    Tversky and Kahneman 1974, p. 1128; Jungermann, Pfister and Fischer 2010, p. 174 et seqq.

  43. 43.

    Tversky and Kahneman 1974, p. 1128.

  44. 44.

    Guthrie, Rachlinski and Wistrich 2001, p. 788.

  45. 45.

    Cf. Jungermann, Pfister and Fischer 2010, p. 175.

  46. 46.

    Schweizer 2005, p. 178.

  47. 47.

    Guthrie, Rachlinski and Wistrich 2001, p. 811 et seqq.

  48. 48.

    Englerth 2007, p. 95.

  49. 49.

    Kahneman and Tversky 1979.

  50. 50.

    A fundamental definition of risk goes back to Frank H. Knight’s paper “Risk, Uncertainty and Profit”. Knight differentiates between the term “risk” as quantitatively measurable uncertainty and the term “uncertainty” for all non-quantifiable uncertainties. Accordingly, a decision will always involve risk if the probability of occurrence is known. By the same token, if the probability of occurrence is unknown, the decision will involve uncertainty (see Knight 1964, p. 19 et seqq.). People react more sensitively to risk than to uncertainty and to events that turn the impossible into the possible or the possible into the certain than to mere increases in likelihood (see Tversky and Fox 1995, p. 269 and 281).

  51. 51.

    Cf. Kahneman und Tversky 1979.

  52. 52.

    Both the endowment effect and the status quo preference are based on loss aversion (cf. Kahneman, Knetsch and Thaler 1991, p. 199).

  53. 53.

    Kahneman, Knetsch and Thaler 1990.

  54. 54.

    Kahneman and Tversky 1981.

  55. 55.

    See e.g. Jolls and Sunstein 2006.

  56. 56.

    On the law and economics analysis in conjunction with bounded rationality overall, see inter alia Jolls, Sunstein and Thaler 1998, Korobkin and Ulen 2000, Parisi and Smith 2004 and Sunstein 2000.

  57. 57.

    See Rachlinski 2003, p. 1168.

  58. 58.

    Cf. Thaler and Sunstein 2008.

  59. 59.

    Thaler and Sunstein 2008, p. 81 et seqq.

  60. 60.

    However, such an instrument may also be used in order to steer individuals in a politically desirable direction, which may involve more than mere debiasing.

  61. 61.

    Cf. Thaler and Sunstein 2008.

  62. 62.

    See Jolls and Sunstein 2006.

  63. 63.

    See e.g. Stiglitz 1986, p. 90–91.

  64. 64.

    Inter alia, Latin 1994, p. 1243–1244.

  65. 65.

    See e.g. Prentice and Roszkowski 1991–1992.

  66. 66.

    Cf. e.g. Schwartz 1988.

  67. 67.

    Jolls and Sunstein 2006, p. 209–210.

  68. 68.

    Jolls and Sunstein 2006, 216.

  69. 69.

    See e.g. Craig, Sternthal and Leavitt 1976.

  70. 70.

    See e.g. Thomas and Millar 2011, p. 139–149.

  71. 71.

    In actual fact, a study on breast cancer prophylaxis by self-examination showed that stressing the negative effects of failing to carry out self-prophylaxis had a significantly greater impact on behaviour than stressing the positive effects (see Meyerowitz and Chaiken 1987, p. 505).

  72. 72.

    Cf. Jolls and Sunstein 2006.

  73. 73.

    See http://women.americanlegacy.org/about/ads.cfm (visited on 20 April 2014).

  74. 74.

    See e.g. Jolls and Sunstein 2006.

  75. 75.

    Sunstein 2002.

  76. 76.

    Rachlinski 2003, p. 1224.

  77. 77.

    Jolls and Sunstein 2006, p. 225 and 234.

  78. 78.

    Jolls and Sunstein 2006, p. 230.

  79. 79.

    Cf. Jolls and Sunstein 2006, p. 226, see also Rachlinski 2003, p. 1206–1219 and Rasmussen 1998, p. 1697–1698.

  80. 80.

    However, Jolls and Sunstein 2006, p. 232 correctly point out that information can never be entirely neutral since it is inevitable to make linguistic choices when putting thoughts into words. This means that it is virtually impossible to draw a clear line between “neutral information” and “steering manipulation”.

  81. 81.

    Sunstein 2014, p. 158.

  82. 82.

    Cf. Sunstein and Thaler 2003; also see Mitchell 2005.

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Acknowledgements

We would like to sincerely thank Thomas Roberts for his translation as well as Julia Wetzel, MLaw, Luca Langensand, MLaw, and Philipp Anton Burri for their careful proofreading.

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  1. Faculty of Law, University of Lucerne, Frohburgstrasse 3, 6002, Lucerne, Switzerland

    Prof. Dr. Klaus Mathis & lic. phil. Ariel David Steffen

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    Klaus Mathis

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Mathis, K., Steffen, A. (2015). From Rational Choice to Behavioural Economics. In: Mathis, K. (eds) European Perspectives on Behavioural Law and Economics. Economic Analysis of Law in European Legal Scholarship, vol 2. Springer, Cham. https://doi.org/10.1007/978-3-319-11635-8_3

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