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The Behavioural Turn in Law and Economics

Behavioural Law and Economics as Litmus Test

L’économie du droit comportementale comme test décisif
Péter Cserne
p. 305-329

Résumés

Cet article discute de plusieurs questions métathéoriques sur l’économie du droit comportementale afin de mieux comprendre sa popularité et les critiques dont elle a fait l’objet. L’article défend l’idée que l’économie du droit comportementale présente un test décisif entre plusieurs postures méthodologiques. Ce test révèle les lignes de fracture, met au jour des tensions latentes et polarise les débats entre plusieurs camps ou traditions, à la fois en économie (du droit) positive et normative. Il rend ainsi plus visibles les positions épistémologiques des économistes. Parmi ces lignes de partage, on compte la nature des hypothèses de rationalité, les modèles naturalistes et mentalistes du comportement humain, ainsi que la force normative et la pertinence des préférences individuelles, l’autonomie et des mesures objectives de bien-être.

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  • 1 Jolls, Sunstein, and Thaler (1998) is a programmatic overview. Useful surveys of BLE include Korobk (...)

1Behavioural Law and Economics (BLE), now almost twenty years old, is roughly and easily characterized as “both the development and the incorporation within law and economics of behavioural insights drawn from various fields of psychology” (Jolls, 2006, 3). BLE has been growing rapidly while its academic reception has been mixed.1 Indeed, even the proper term for this field of research is disputed, some suggesting “behavioural analysis of law”, “legal decision theory”, or “new law and psychology” instead (Tor, 2008, 241, note 13). It seems that by now, in spite of many imprecisions, the term BLE is well-established enough so that it is generally recognised if not generally accepted. This paper discusses a few meta-theoretical questions about BLE in order to better understand both its popularity and the criticisms it has received. The aim of this paper is, however, not to provide a historical or sociological account of the inception and reception of BLE. Rather, it is to account for BLE at a meta-theoretical level, focusing on some of its philosophical and methodological assumptions.

  • 2 I have discussed the issues under (1) and (2) in Cserne (2015).

2When talking about BLE, all three words are relevant. It surely matters how we understand ‘behavioural’. Yet, we can only fully appreciate the changes that this sub-discipline has generated and is likely to generate both in academia and in the real world if we look at ‘law’ and ‘economics’ as well. In particular, the degree of academic and practical openness or the strength of academic and practical resistance to BLE not only depends on (1) whether the behavioural insights, i.e. the findings of empirical research about legally relevant human judgement and decision making are framed as ingredients of an empirically informed policy science, as a branch of psychology or as cognitive neuro-science applied to legal phenomena, but also on (2) whether law is seen as an autonomous or an instrumental social practice, and (3) on how economics is seen in relation to empirical and theoretical knowledge as well as to policy. These distinctions are rarely made explicit and the implications of the various understandings are rarely discussed in the literature on BLE. This paper is an attempt to improve on this situation in some respects. In particular, given the disciplinary focus of this journal, I shall concentrate on the third issue, i.e. on how BLE connects to and provokes economics.2 The main claim of this paper is that the rise of BLE provides a litmus test: it reveals methodological and substantive dividing lines in both positive and normative economics.

  • 3 Thanks to Magdalena Małecka for drawing my attention to this distinction.

3To be sure, BLE is linked to economics not in one but in two steps, mediated by Behavioural Economics and Law and Economics. Given the relative disciplinary autonomy of Law and Economics with respect to economics, the methodological and substantive claims of Behavioural Economics may play out somewhat differently in Law and Economics than in other areas of economics. So when in the following I talk about economics, it is a somewhat simplified way of talking about “economics as understood within Law and Economics”.3 Strictly speaking, this component is not identical with economics tout court. What is metaphorically called a litmus test concerns the way BLE challenges the economic component of Law and Economics.

4The rest of the paper is structured as follows. Section 1 discusses the relation of BLE to psychology, economics and law and economics. Section 2 distinguishes BLE from libertarian paternalism and nudges. In section 3, I discuss which aspects of economic theory can be challenged by BLE. Section 4 focuses on economics as an explanatory project, in particular the epistemic and methodological status of the rationality assumption and the relation of theoretical and practical projects within (law and) economics. Section 5 discusses economics as a normative project, suggesting two points: revealed preferences are unsuitable as a normative foundation of practical or policy-oriented claims in mainstream (law and) economics and behavioural findings also undermine the overlapping consensus of autonomy-based and welfarist arguments as providing such a foundation. Section 6 concludes.

1. What Is BLE? How Did It Come About?

5As for its epistemic or methodological status, BLE is an ill-defined hybrid of theory and practice, science and policy, or in standard parlance, of positive and normative claims. Formally, its connection to economics can be reconstructed in at least two ways.

  • 4 Law and Economics is a sub-discipline of legal studies as well but this is not our concern in this (...)
  • 5 For a broad understanding of schools of Law and Economics see Mercuro and Medema (2006), discussing (...)

6First, BLE can be seen as a sub-discipline of Law and Economics, itself being a thematic area of economics (canonically recognised by the JEL code K).4 Thus, BLE can be characterised by its aim, with respect to the enterprise of Law and Economics: “Behavioural law and economics attempts to improve the predictive power of law and economics by building in more realistic accounts of actors’ behaviour” (Jolls, 2006, 3). This characterisation suggests that BLE is an improved version of Law and Economics, i.e. the term ‘behavioural’ serves as a qualifier to ‘law and economics’. This implies a certain starting point regarding the kind of economics and the approach to law which are to be “improved”, at least insofar as mainstream Law and Economics can be plausibly considered a homogeneous endeavour with a well-defined epistemic and methodological character. However, at closer look one can observe much heterogeneity within Law and Economics.5 Some of these dividing lines are accentuated by BLE, as I will discuss below in detail.

7Alternatively, one can see ‘behavioural’ as a qualifier of ‘economics’, in other words, describe BLE as a thematic subfield of behavioural economics, itself a “bona fide subdiscipline of economics” (Angner and Loewenstein, 2012, 641), distinguished by its methodological and substantive claims, rather than a thematic focus or subject matter. This alternative reconstruction allows one to see BLE as an attempt to bring about a behavioural turn or methodological paradigm shift in Law and Economics. Economics is a broad and increasingly specialised discipline where it is almost impossible for an individual researcher to have an overview of even the main developments. At any rate, in this view, BLE is one among the applied areas of (behavioural) economics, along with behavioural finance or behavioural industrial organisation.

8These alternative “genealogies” can be pragmatically combined. For instance, White (2010, 1) states that “[t]he field of … BLE resulted from the merger of two successful interdisciplinary ventures in economics. One is behavioural economics, itself a combination of psychology and economics. The other is law and economics. … Behavioural economics strives to examine how persons actually behave, versus how mainstream economic models predict they will (or should) act. Law and economics seeks to use economic theory to predict the effects of laws (its positive side) and to recommend reform to law based on this theory (its normative side). BLE, therefore, uses behavioural insights to improve our understanding of how persons react to laws and to recommend reforms based on this improved understanding.”

  • 6 Parts of criminology or forensic psychology could serve as examples. Zamir (2016, 4) also lists soc (...)
  • 7 Zamir (2016, 1-3) provides a succinct summary and references. On the problem of overreliance on a p (...)
  • 8 See also Zamir (2016, 4): “Behavioural insights pose a major challenge to standard economic analysi (...)
  • 9 The reasons for this development raise historical or sociological questions which are interesting i (...)

9Whether one or the other genealogy is more persuasive, there is no doubt that BLE is linked to economics. In fact, at least in the last decades, the findings of behavioural sciences have often come into the view of legal scholars and practitioners through economics, rather than directly from psychology and cognitive science. To be sure, there have been many interdisciplinary connections between psychology and law as well, often with no involvement of economics or economists. 6 Not all transfer routes start from judgment and decision making research (the sort of psychological research most closely associated with behavioural economists)7 and not all lead through economics.8 As Zamir (2016, 4) pointed out, “the association of behavioural studies with economic analysis of law—rather than with legal analysis in general—is largely an artefact of historical development, rather than an analytical truth.”9

10Even the term “behavioural” is not uniformly interpreted across the discipline. Sometimes it simply refers to the increasing use of experiments and other related empirical methods. For instance, this seems to be its sense in terms such as “behavioural game theory” (Camerer, 2003; Cooper, 2007). Sometimes the term refers more specifically to the line of research on judgement and decision-making pioneered by Kahneman, Tversky, Thaler and others: dual process or two-system theories. This is one of the possible approaches in psychology and, given the plurality of approaches and the controversies in psychology about dual process theories (e.g. Keren and Schul, 2009), it is not a straightforward choice within economics. Yet when it comes to legal applications via economics, this line of research seems to be dominant. A possible consequence of the relative autonomy of Law and Economics is that the methodological pluralism of behavioural sciences or economics gets reduced in the new context. In the way interdisciplinary transfers work, intra-disciplinary controversies carry over selectively to the new context.

  • 10 The first step of this transfer has been discussed, analytically in the encyclopaedia entry by Angn (...)

11In sum, BLE is the result of a double interdisciplinary transfer. First, insights from psychology have been taken seriously by economists, giving rise to behavioural economics, and second, in response to both theoretical and practical impulses, Law and Economics has been transforming into BLE and/or Empirical Legal Studies.10 These transfers have brought about BLE, this somewhat strange interdisciplinary subfield, with its perceived in-between status between empirical research and policy, and hybridity of positive and normative analysis.

2. BLE, Libertarian Paternalism and Nudges

12Further confusion may arise when BLE is used in one breath with libertarian paternalism and/or nudges, the last two terms being made popular in joint publications by Cass Sunstein and Richard Thaler (2001, 2003, 2008). At the risk of belabouring the obvious let me emphasise the distinctness of these three categories. While BLE is primarily an academic sub-discipline, libertarian paternalism is best seen as a normative political theory or an ideological project, limited in both scope and ambition. Nudges belong to a third category, that of regulatory tools or techniques.

  • 11 The idea that libertarians and dirigistes can agree on particular policies is in line with Sunstein (...)
  • 12 Their most elaborate joint discussion of the underpinning conceptual and normative ideas is Sunstei (...)

13Behavioural Economics as an academic field is much broader than what policymakers or law professors have picked up from it. Many empirical researchers are cautious, and rightly so, not to draw far-reaching policy conclusions from their findings, and when they do, these depend on normative premises. Especially in the US, libertarian paternalism has often been expected and promised as a “third way”, a catholic i.e. politically all-encompassing pulling together of opposed political ideological factions —hence the seemingly oxymoronic term.11 A key characteristic of libertarian paternalism is that it provides a normative benchmark or regulatory idea on how and through which means substantive goals can be pursued, namely, at least formally preserving individuals’ freedom to opt out. Reading through their various relevant publications, Sunstein and Thaler are, perhaps deliberately, never very precise about the substantive goals the government or “we” collectively should follow.12 On some occasions, they tend to restrict their proposals to supporting individuals in reaching their goals, as the individuals themselves perceive it; on other occasions, they seem ready to accept social welfare as a collective normative goal overriding individual choice. On still other occasions, Sunstein (2013; 2014) refers to Mill’s harm principle as an imperfect way of drawing the boundaries of the domain of individual freedom of choice which can be corrected in light of our knowledge of human decision making and judgement. All in all, the normative claims associated with either BLE or libertarian paternalism do not amount to a full-fledged moral or political theory. While they contribute quantitatively new arguments to policy debates, the normative conclusions are not qualitatively new. Similar claims have been made for long, admittedly with little or at least different empirical backing than after the “behavioural turn”. Additional empirical claims about human frailties still do not commit one to a single standpoint in old oppositions, such as autonomy vs. paternalism, liberalism vs. communitarianism, or laissez-faire and regulation.

14Nudges are often discussed, rightly, within comprehensive regulatory programs which implement findings of behavioural economics or cognitive psychology into public policy. Combined with libertarian paternalism, behavioural economics has inspired a number of nudge proposals from default enrolment to pension funds through smart design of our urban choice architecture to mandatory choice about post-mortem organ donation, all at least superficially associated with BLE. Typically, and in Thaler and Sunstein’s eponymous book (2008), nudges are in between two reputable categories: they rely on empirical findings of behavioural economics, and are meant to promote or achieve policy goals which are regarded as being capable of generating consensus or at least wide ranging support across the political spectrum. To simplify it somewhat: on the one hand there is empirical behavioural research, conducted by scientists, economists, psychologist, legal scholars, or any combinations of these, providing empirical knowledge. On the other hand, there are various policy goals, better or worse, justified or unjustified, proposed by politicians, policymakers, citizens, ethicists etc. But what makes an intervention a nudge is not the empirical research that may underlie its introduction, nor the normative goals that may justify it.

  • 13 In a recent paper, Hansen (2016) discussed extensively the various definitions and characterisation (...)

15Nudge as a regulatory technique may or may not be informed by empirical research and guided by libertarian paternalism.13 As a conceptual matter, it is possible to have nudges which are introduced in a scientifically uninformed way and/or implemented in the service of any, perhaps sinister, goal. Also, under different normative premises behavioural economics may lead to policy implications very different from nudging. Our everyday experience shows that we routinely find ways to manipulate others (family members, colleagues, customers, etc.) in certain directions, without relying on their full cognitive and deliberative capacities. In doing this, we may be completely unreflective; or we may rely on behavioural assumptions, derived from sources as diverse as common sense, folk psychology or marketing research.

  • 14 Cf. the remarks by Daniel Kahneman: “Actually, I think behavioural economics is the only hope for h (...)

16The regulatory techniques suggested by BLE are also not new in kind—we have all used menus and sticky defaults for long, marketing and business studies have analysed, and in fact advised clients on how to optimally design, choice architectures for consumers and firms. The techniques are new in that they are now suggested as policy tools for governments, thus presented in the main mode in which much of economics has been operating, at least implicitly: whispering advice in the prince’s ear (Sugden, 1986, 6-8). Policymakers provide a market for applied or potentially applicable empirical, especially experimental research that promises new results on processes of human cognition and decision-making in politically or legally relevant contexts.14

  • 15 On evidence-based regulation see Cartwright—Hardie (2012), Sunstein (2011). See also Tor (2008, 291 (...)

17Practical problems and/or legal phenomena confront behavioural economics with different disciplinary cultures or more broadly, different standards as to what counts as an acceptable or convincing argument. Whether behaviourally informed policy proposals are taken up by governments and their advisors depends on a number of factors. One reason for openness may be that behavioural studies are expected to provide scientific backing for common sense ideas and intuitions about how “real people” behave, as opposed to the rational self-interested agents in standard economic models. This may turn critics of orthodox economic analysis into enthusiasts of behavioural economics. The high expectations about what empirical research can provide are in part based on misperceptions of how evidence based policy is made, disregarding many distortions during the long and complicated knowledge transfer and translation process from laboratory to regulation.15

3. Old and New in BLE

  • 16 While Katz (1998, 3-5) characterises the economic approach to law, he discusses these three premise (...)

18So far, I have only demarcated BLE from libertarian paternalism and nudges. Now the central question of this paper start to come into focus: how does BLE relate to economics? Take a stylized description of standard (law and) economics as a starting point. It is not too controversial that what distinguishes the economic approach to law is that it combines (1) positive economics (a particular descriptive theory of human behaviour based on rational choice theory), (2) normative economics (“a particular set of moral and ethical principles, which it uses to evaluate existing institutions and to recommend reforms”, Katz, 1998, 3), and (3) it “follows a particular methodological program in pursuing its aims—one grounded in the separation of positive and normative issues and focused on the construction of abstract models of empirical reality” (ibid.).16 Is BLE different from standard Law and Economics in any of these dimensions?

  • 17 Tor (2008, 243) defines behavioural analysis of law as “the application of empirical behavioural ev (...)

19In an (otherwise) exemplarily clear and useful paper, Avishalom Tor (2008, 241, note 13) suggests that BLE “may be viewed as a combination of the behavioural analysis of law with the normative foundations of law and economics.”17 Tor’s formulation provides a useful starting point inasmuch as it focuses our attention on how BLE relates to both the explanatory and the normative projects of Law and Economics. It suggests a radical difference in the first (positive), complete continuity in the second (normative), and a more mixed picture in the third (methodological) dimension.

  • 18 On the normative character of rationality and its use as an assumption in positive theory, see Elst (...)
  • 19 For critical views on this link between behavioural and standard economics, see e.g. Gigerenzer and (...)
  • 20 “Long before the contemporary behavioural economics program came to prominence, the economics disci (...)

20There is indeed clear difference in the first dimension: although rational choice theory still provides a normative or a heuristic benchmark,18 and so-called biases are often defined with reference to this benchmark,19 BLE pursues an agenda of constructing a theory of human behaviour based on empirical research. In crucial respects, this theory is markedly different from homo oeconomicus or even O.W. Holmes’s bad man, even though there are overlaps in certain domains. The fact that humans behave systematically different from what simple economic models assume is a commonplace, recognised in economics as well as in law, long before the emergence of BLE.20 Yet, as I shall argue in section 5, it is not clear whether (law and) economics should completely reject or overhaul its rational choice-based behavioural models. In particular, the epistemic and methodological character of these models requires close scrutiny in order to establish if it is advisable to reject them or they should be left unchanged, improved or replaced.

  • 21 See Posner’s revealing remarks (1983, vi): “Ethical theories seem to invite and receive shocking ap (...)

21As for the second dimension, it is only plausible to link BLE to a particular normative agenda if Law and Economics has or implies one. Arguably there has never been even an apparent disciplinary consensus about the “normative foundations” of (law and) economics, in the sense of a philosophical grounding for the less abstract policy arguments couched in terms of efficiency, welfare or cost-benefit analysis (Kornhauser, 1980; 1998). Even though the normative relevance of individual well-being (normative individualism) has been acknowledged quite broadly, neither utilitarianism, wealth-maximisation, nor any other welfarist or non-welfarist substantive goal, nor a procedural criterion such as consent has been generally accepted as a “normative foundation”. There have been typical viewpoints yet never articulated with much clarity. The suggestions for alternative normative foundations have also remained just as controversial as libertarian paternalism, social welfare or wealth maximization.21 As I shall argue in section 5, it is at least questionable whether the “normative foundations” of the discipline are well-identified or even identifiable. Furthermore, and somewhat ironically, empirical research raises doubts about the theoretical and practical usefulness of the construct of “revealed preferences” that could serve as a benchmark. Like a litmus test, BLE helps to make the contended nature of normative foundations (more) visible.

22To assume the opposite, as Tor’s above formulation does, is potentially restrictive, uninformative and confusing at the same time. If Tor means that BLE combines behavioural analysis with the normative goal of efficiency or welfare-maximization, this is too restrictive; if he means that BLE accepts normative individualism, this is uninformative; if he means that BLE accepts revealed preferences as normative standards, this is confusing. As it will turn out, the confusion characterises the normative project of (law and) economics itself. These issues are discussed below in section 5.

23Finally, as far as the two elements of the methodological program are concerned, they seem to be taken up in BLE quite differently. There is little explicit argument to overhaul the positive-normative distinction, although, as I suggest below in section 4, there are claims to reduce normative claims to positive ones (naturalism) or vice versa, positive claims to normative ones (pragmatism, rhetoric).

  • 22 This is at least my impression in comparing the ratio of empirical papers presented at annual confe (...)

24As for research methods and the relation of theoretical and empirical approaches, the practice has changed quite significantly in the last decades but there does not seem to emerge any serious argument, let alone a consensus for rejecting abstract modelling. After all, non-maximising or non-selfish behaviour is just as amenable to formal models as the interactions of homines oeconomici (Posner, 1998). Rather, what is observable is that due to improvements in data and development in methods, BLE has brought more and at its best, more sophisticated, empirical (both experimental and field) research to Law and Economics. This brings about a change of disciplinary culture within Law and Economics, with increasing prestige of empirical research and more training in empirical methods in study programs.22

25In sum, the responses to behavioural findings are far from uniform. They differ in a number of dimensions, according to how the role of abstract models and the status of behavioural assumptions is seen, how close BLE comes to naturalisation and how the positive/normative divide is conceived. Instead of a complete analysis of all these issues, in the next sections I discuss a number of examples and tendencies in positive, and then normative (law and) economics.

4. Reactions to Behavioural Economics in Positive Economics: Elegance and Imperialism Versus Truth and Colonial Guilt?

26As far as the positive (explanatory) project of economics is concerned, BLE poses a number of challenges to positive economics. These concern both conceptual and methodological issues (what are, and how to measure preferences; what is the methodological status of rationality assumptions) and substantive explanatory questions (how do markets and firms populated by boundedly rational agents operate).

  • 23 BLE normally focuses on the “identification of a departure from unbounded rationality, willpower or (...)
  • 24 Jolls calls the latter approach “debiasing through law”. See also Jolls and Sunstein 2006.

27BLE is sometimes seen as continuous with standard Law and Economics. Just like standard Law and Economics has a combination of enabling and interventionist implications (to wit, depending on transaction costs, it suggests “lubricating” or “mimicking” markets; Katz, 1998, 39-42), BLE responds to biases either by “taking people’s natural tendencies as given and shaping law around them” (Jolls, 2006, 18-19)23 or by “attempting to reduce or eliminate such human tendencies through the legal structure” (Jolls, 2006, 19, emphasis in the original).24 A related narrative is that BLE provides a corrective to but is continuous with standard (law and) economics. Empirical Legal Studies indicate a quantitatively but not qualitatively new phase in the maturation of Law and Economics into what Cooter (2011) somewhat imprecisely calls „normal science”: BLE does not overhaul but supplement standard Law and Economics. Not all economists consider these developments unproblematic. The vivid language quoted below suggests that the issue of continuity is highly relevant but commentators do not always find sober rational arguments sufficient or available.

28Richard Thaler (1992, 198), one of the fathers of behavioural economics remarked more than two decades ago that devising accurately descriptive models of human behaviour is difficult because many theorists have a “strong allergic reaction to data.” Moreover, economic models based on the rationality premise are “elegant with precise predictions,” while behavioural work tends to be “messy, with much vaguer predictions.” He then asks a rhetorical question: “would you rather be elegant and precisely wrong, or messy and vaguely right?” (ibid.) This suggests that there are two important dimensions in which to compare theories and truth is more important than elegance.

29Other commentators describe the smooth and sometimes enthusiastic transition from mainstream to behavioural economics as the “imperialism of economics” turning into “post-colonial guilt”. As Don Ross (2012, 704) argues: “in my experience, no small number of economists suffer from an analogue to post-colonial guilt over their discipline’s perceived arrogance as self-nominated ‘queen of the social sciences’. The less nuanced BE manifestos tend to have a populist air; allowing that psychology might partly re-write basic economic theory is an obvious way to send a clear signal that economists have put imperialism behind them.”

30The meta-theoretical discourse is often stuck at this rather unsatisfactory stage, where the claim seems to be that if economists happen to reject behavioural findings, they prefer elegance to truth, and if economists happen to adopt them, this must have a bizarre psychological reason.

31When findings of behavioural economics are assessed in a more serious way, the discussion usually concerns the external validity of empirical findings, criteria for comparing models or the role of empirical data in testing various assumptions. One particular argument often put forward by mainstream economists is that critics of rational-agent models do not adequately capture or represent what economic theory or, more broadly, rational choice theory is about. Theorists such as Boland (1981), Musgrave (1981), MacKenzie (2010), or Foka-Kavalieraki and Hatzis (2011) claim that the critics get it wrong because they misunderstand what theory is about.

  • 25 Uskali Mäki (2003) makes a similar point about the notion of scientific imperialism. Thanks to Magd (...)

32This point is worth elaborating. I shall discuss it in terms of ‘economic imperialism’. The term imperialism, as used here, is not pejorative.25 It simply refers to the expansion of the domain of economics, and rational choice theory more generally, beyond markets and other substantively economic phenomena. Law is such a non-market phenomenon, so Law and Economics is clearly a result of this imperialism of economics. Yet, the methodological underpinnings of this imperialistic view of economics are far from uniform.

33In explanatory economics one can distinguish two versions of imperialism, empirical and non-empirical, which correspond to two different understandings of the methodological status of the homo oeconomicus model. Correspondingly, there are two main ways to attack and/or defend rationality assumptions within the explanatory project of economics, depending on the character of these assumptions.

34In the first, empiricist version of “imperialism”, rationality is seen as a generalisation from the empirical behaviour of economic agents in certain market contexts. The assumptions of perfect information, complete and transitive preference ordering, etc. are potentially subject to empirical testing. Behavioural findings suggesting that a strong or thick version of rationality is false in many market and non-market situations will have the effect that the domain of empirical phenomena where homo oeconomicus models are adequate shrinks. The contexts where at least some of the rationality assumptions hold will perhaps include interactions of experienced professionals, facing high stakes and monetary incentives.

35The second version of “imperialism” is based on non-empirical arguments. In this view, empirical findings themselves will not change the nature of economics as an explanatory project. The use of rational choice explanation or at least a thin or minimal version of the rationality assumption may be justified or even required for (methodo)logical reasons. This argument, in turn, can take at least two forms, depending on whether these non-empirical reasons are (a) more pragmatic considerations of theory construction or (b) concern the need to maintain the distinctness of an interpretive account of intentional human action against a naturalistic scientific account of behaviour.

36The first variant of non-empirical imperialism is then based on the methodological claim that for pragmatic reasons of theory construction, explanation of social phenomena in terms of rational, intentional individual actions should enjoy heuristic primacy (Elster 1989). This suggests prioritising homo oeconomicus in the sequence of enquiry (irrational and non-selfish actions are better understood in contrast to rational and self-interested action) and some phenomena can only be adequately explained if one or more of the rationality assumptions are relaxed. This argument which takes rational self-interested action as a simpler and in the sequence of enquiry, primary type but also accounts for irrational behaviour as such, is somewhat similar to behavioural analysis which accounts for actions deviating from the homo oeconomicus model in terms of errors, biases and anomalies: a feature of BLE criticised by those who suggest replacing “constructivist” with “ecological” or “adaptive” conceptions of rationality (Gigerenzer and Selten, 2001; Smith, 2008; Gigerenzer, 2008).

  • 26 Versions of this non-empirical arguments for rationality assumptions have been expressed by many ec (...)

37The second non-empirical reason for economic imperialism, based on the argument about “minimal rationality” as a logical necessity or a metaphysical assumption, has been itself formulated in different versions.26 This view of the rationality assumption seems to follow from Popper’s philosophy of social science. Popper’s model of the social sciences was inspired by and explicitly refers to economic theory. Situational logic and the principle of rationality are building blocks of a model for the social sciences which is distinct from and somewhat in tension with Popper’s philosophy of the natural sciences (Hands 1985). Similar arguments have been formulated by Gary Becker (1976) in building a purportedly universal model for human behaviour, based on the three assumptions of rational maximisation, stable preferences and equilibrium. Philosophically minded interpreters of Becker such as Ingo Pies (1993) suggest that his version of economic imperialism comes close to apriorism, which has been often associated with Austrian economics and Mises in particular. In this Popperian–Beckerian–Misesian view, what economists call the maximization hypothesis, and philosophers call the rationality principle is “a nonfalsifiable, yet a useful and nontautological metaphysical presupposition of the neoclassical research program” (Hands, 1985, 93) in economics. If human action is assumed or defined as rational in an aprioristic way, then at least a certain minimal version of the rationality assumption is not subject to empirical testing. “Minimal rationality” is a non-empirical assumption in explanatory accounts for purposeful human action. This is required in economic explanations for logical reasons, in order to account for human action, rather than mere behaviour.

38Whether BLE is compatible with this version of minimal rationality will crucially depend on whether the empirical findings about human behaviour are considered within a naturalistic or a non-naturalistic (“mentalist”) framework. This suggests an important methodological dividing line within economics which has been made (more) visible by the growth of empirical research or, as it were, the litmus test of BLE.

39As mentioned in the introduction, BLE can be seen as continuous with economics and thus provide a non-naturalistic account of boundedly rational action. But BLE may also be seen as closer to psychology or even neuro-science. The adoption of the latter view may either move the entire discipline of economics into a naturalistic direction, i.e. closer to an explanatory enterprise that gives up the minimal rationality assumption or may simply circumvent economics and provide a superior empirically based descriptive theory of human behaviour for practical policy purposes.

40Such a view of BLE combining a natural(istic) science with law is not entirely implausible. It is in line with the standard modern understanding of how facts and values or the positive and the normative are distinct but related. Avishalom Tor’s argument (2008, 314–325) on the “normative neutrality” and “normative relevance” of behavioural analysis of law provides a good example of this view. This allows a methodological separation and practical division of labour between scientists on the one hand and politicians or lawyers on the other.

41In his illuminating handbook entry on the “economic agent”, Don Ross (2012, 731) calls economics “both objective science and normatively helpful engineering”. Economics can realise its double nature in various ways. The priority between the theoretical (scientistic) and the practical (policy oriented) modes can go either way or a balanced view is also possible (Varian 1989). Some economists blur the theoretical/practical divide or suggest clearly locating economics on the practical or rhetorical side. Yet they also tend to object when others do the same, although not openly or not even consciously.

42The following argument by McCloskey (1998, 244), with a quote from a critical paper by psychologist Lola Lopes (1991, 78) in the middle, provides a vivid illustration of this non-naturalistic or pragmatic view of economics: “The main error was to ask a question [in their experiments] in ways that forced people to use rules of thumb, and then triumphantly conclude that in fact people are stupid because they use rules of thumb. ‘The idea that people-are-irrational-and-science-has-proved-it is useful propaganda for anyone who has rationality to sell.’ … [F]ixing up modern economics by tweaking the assumptions about maximization is not Coasean.”

  • 27 See note 14 above.

43McCloskey has been a powerful advocate of a rhetorical or humanistic understanding of economics. Here she argues that the behavioural economics of Kahneman and Tversky is deeply flawed and should not be seen as the way forward for economics. Yet Kahneman’s remark quoted above27 suggests that he is open and affirmative about behavioural economics striving for practical impact by proposing policy reforms. These represent two different versions of crossing the positive/normative divide. This already takes us easily to the next topic, the impact of BLE on normative economics.

5. Responses to BLE in Normative Economics

44In this section I shall argue that rather than BLE being able to simply build on the normative foundations of law and economics, it helps to manifest latent tensions and polarize debates between various camps or traditions in normative (law and) economics. When these disagreements about the normative foundations of (law and) economics are better understood, the potential and limits of BLE also come into perspective.

45There are two considerations in the background of this litmus test effect which I will explain here in more detail. First, it is not obvious that behavioural research can relate to normative economics in the simple engineering or technological mode suggested in the previous sections. Empirical research on human decision-making and judgement relies on normative assumptions through and through. Second, a key generalisation of the findings of this empirical research is the unreliability of individual preferences as normative foundation for public policy. As BLE by its nature is only able to problematise these normative foundations, rather than providing alternatives, this makes it even less plausible that BLE could rely on solid normative foundations.

  • 28 On relevant considerations about behavioural assumptions in institutional design see Kornhauser (20 (...)

46While empirical research is important for reasonable and effective regulatory design, it is just one ingredient. Empirical knowledge is not decisive on the normative question whether institutional designers or policymakers and those responsible for legal design at various levels of decision-making should base their models, recommendations and regulatory instruments on ‘true’ assumptions about human behaviour or rather on ‘false’, that is counterfactual assumptions. Institutional design also requires non-empirical criteria to determine the ‘model’ of human behaviour (a characterisation of the agents populating the institution in terms of their motives, capabilities, etc.) underlying (supporting) various policies. In this respect, the entire exercise is inevitably, though not exclusively, value-driven.28

47Normative questions are at the core of behavioural economics in another sense as well. When researchers discover and conceptualise a so-called behavioural bias, it is not always easy to tell which features belong to the autonomous or rational self and what counts as a bias or an anomaly that potentially requires or justifies regulatory correction. We can only tell whether a certain behavioural pattern is biased if we have a normative benchmark. But what should that benchmark be? For instance, whether short-term or long-term preferences should be respected, or how much risk-aversion or risk-seeking is considered a bias requires a baseline. Should inter-temporal preferences or observed risk-attitudes be respected as reflecting individual values and choices or should they be considered as biases in need of correction? Questions like these indicate that the conceptual groundwork of behavioural research unavoidably relies on normative assumptions about the nature of human well-being (welfare, interests, happiness, etc.), whether these assumptions are implicit or explicit.

  • 29 Behavioural economists, even when reflecting on difficulties in linking empirical findings and poli (...)

48The obvious first candidate for a normative benchmark would be revealed preferences.29 Yet one of the general empirical findings of behavioural analysis is exactly the inadequacy of revealed preferences as the foundation of normative analysis. If preferences are, in contrast to standard assumptions of economic theory (Becker, 1976, chapter 1), empirically unstable, radically context-dependent and subject to framing effects and manipulation, how could they serve as a normative benchmark? Alternatively, should perhaps preferences not only be ‘laundered’ (Goodin, 1986, 73), but corrected by policymakers?

49Another obvious benchmark could be the theoretical model of rational choice. But in many cases, rational choice theory is indeterminate (Fennell 2009). For instance, should short-term or long-term interests matter? When conceptualising dynamic inconsistency or self-control problems, behavioural economics implicitly assumes that such biases occur against the background of something real and unbiased that can be described in terms of a well-defined normative baseline. However, any such baseline, like the rational decision-making self, is both controversial and again normatively loaded. While empirical findings may provide relevant arguments in philosophical debates about the self and autonomy, empirical research is not self-standing: it cannot clarify such conceptual issues on its own or without evaluative choices.

50In sum, there is no normatively neutral way to define a baseline for conceptualising biases. This lack of conceptual clarity surrounding biases or human errors has important consequences, both theoretical and practical. Behavioural research cannot explicate what counts as a bias without normatively loaded conceptual choices and cannot contribute to policy-making without taking sides in normative debates. In light of this dependence of behavioural economics on normative assumptions, it is highly relevant how behavioural research relates to normative economics. Disagreements about the normative foundations of (law and) economics and the potential and limits of BLE mutually shed light on each other.

  • 30 I used this term here, inspired by but more loosely than Rawls (1987).

51In this light, the main impact of the growth of BLE on normative economics seems to be the following. Economists increasingly come to realise that the domain of overlapping consensus30 between what autonomy requires and what welfare suggests is much smaller than previously thought. Under the assumption of individual rational choice, it is likely that what individuals would freely choose and what is in their interest largely overlap. This is the basis for economists’ notorious insistence on “consumer sovereignty” (Persky, 1993). If, however, as a matter of fact, individuals cannot be generally considered the best judges of their own interest, the right course of collective action, even for a normative individualist, becomes harder to determine. From this point, theorists have moved in different directions. Hence another litmus test effect of BLE.

52My claim is that while BLE as a practical strategy of social engineering aims, not unsuccessfully, at a broad political or ideological consensus, on the theoretical plan it has generated more disagreement, forcing a choice between two approaches in normative (law and) economics which previously tended to form a kind of overlapping consensus. While this is not the only or even the most important effect of the rise of BLE, it is a relevant and understudied one.

  • 31 To be sure, historically there have been many connections between these two versions of normative e (...)
  • 32 On one version of this opposition see Marciano (2007).

53The opposition can be seen in various forms: between normative views focusing on outcome and those focusing on process; between “American” and “European” style of Law and Economics (Posner 2003, chapter 7), the first being interested in micro or middle theorizing, the second in more systemic questions;31 or finally and perhaps most importantly, the opposition between, one the one hand, a utilitarian or Benthamite version of Law and Economics committed to or at least not in principle objecting to grand-scale social planning and engineering in a rationalist manner; and a libertarian version, more in line with Hayek, Austrian economics or contractarianism.32

  • 33 For attempts to rephrase paternalism in terms of merit goods, see Cserne (2012, 36-37).

54As a welfarist project, normative economics is not categorically opposed to collective decisions overriding individual choice if this is expected to bring about good consequences in terms of some metric of welfare. Overriding individual choice is, however, not a principle but (subject to transaction costs) a piecemeal decision. It should be noted that in some areas of normative economics such as public finance, similar ideas have been present well before the current wave of behavioural economics, e.g. under the terminology of merit goods, originally coined by Richard Musgrave.33 For instance, in an early paper, mainly based on common sense observations about consumer behaviour, John Head (1966) argued for the public provision of certain goods in terms of behavioural patterns of consumers.

  • 34 On further economic models of freedom of choice see Dowding and van Hees (2009).

55Others concluded that if preferences are incoherent or indeterminate, and welfarism based on some objective metric of well-being is paternalistic, then welfare economics should adopt new normative standards which are likely to be radically different from those familiar from a long tradition of consequentialist and welfarist reasoning in normative economics. Robert Sugden’s work is a good example of this approach. Already in the 1980s Sugden has sharply criticized the general idea of economists whispering advice in the ear of governments how to govern society. Around the same time, he has got involved in empirical research as well as theoretical modelling of bounded rationality. In the next stage and explicitly as a response to empirical findings about the instability of preferences, he has argued that unstable or incoherent preferences do not in themselves justify paternalism and suggested the so-called opportunity criterion as a normative measure for economics (Sugden 1998 and 2007).34

  • 35 This is, after all, what Tor (2008, 314-325) meant by “normative neutrality” and “normative relevan (...)

56Of course, welfare and autonomy do not exhaust the domain of values actually or potentially guiding normative economics. The growth of BLE may also raise awareness of this plurality of values. In principle behavioural findings can be combined with normative foundations altogether different from the currently dominant ones.35

Conclusion

57The main argument of this paper has been that the rise of BLE provides a litmus test making epistemic and methodological commitments in economics more visible. In particular, I tried to show how the relevance of the findings of BLE play out differently in different schools of positive and normative economics. Positive economics is compelled to choose between naturalistic and non-naturalistic explanations, and reflect on the empirical, methodological or metaphysical character of rationality in explanatory models. Normative economics is compelled to give up on revealed preferences as a benchmark for evaluating or proposing policies and engage in reflection on its value-based premises. Overall, the reception of BLE will be different depending on how one understands the relationship of the practical and the theoretical.

58To the extent that the emergence and growth of BLE renders these dividing lines also more pronounced, one could borrow another chemical metaphor and call BLE a catalyst. However, the main goal of this paper has not been to suggest metaphors for a secondary discourse in the sociology of knowledge but to contribute to a better understanding of the underlying primary question—how empirical findings challenge certain epistemic and methodological assumptions of economic theory. A proper understanding of this relationship is of key importance to a better understanding of what behavioural law and economics is about and what we can (hope to) achieve with it.

I would like to thank Magdalena Małecka and Alain Marciano, the co-editors of this special issue for inviting me to contribute to this project, and Magdalena Małecka and Vesco Paskalev for their insightful comments.

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Notes

1 Jolls, Sunstein, and Thaler (1998) is a programmatic overview. Useful surveys of BLE include Korobkin and Ulen (2000), Sunstein et al (2000), Symposium (1998), Symposium (2003), Parisi and Smith (2005), Zamir and Teichman (2014). For criticisms see e.g. Posner (1998), Mitchell (2002; 2005), Whitman (2006), White (2010; 2013).

2 I have discussed the issues under (1) and (2) in Cserne (2015).

3 Thanks to Magdalena Małecka for drawing my attention to this distinction.

4 Law and Economics is a sub-discipline of legal studies as well but this is not our concern in this paper.

5 For a broad understanding of schools of Law and Economics see Mercuro and Medema (2006), discussing Chicago Law and Economics, Public Choice Theory, Institutional Law and Economics, New Institutional Economics, New Haven, Modern Civic Republican, and Austrian Approaches as well as BLE under the rubric of ‘Social Norms’. Other important dividing lines concern the behavioural and motivational assumptions about the officials of the legal system (see Kornhauser, 2011, distinguishing two strands of thought: ‘policy analysis’ and ‘political economy’) and the relationship to legal doctrine (explanation or justification, see Kraus, 2007). See also Katz (1998, 39-42), distinguishing a Pigouvian market failure and a Coasean private cooperation approach); Harnay and Marciano (2011), contrasting economic analysis of law and law and economics; Calabresi (2016, chapter 1), characterising Law and Economics as an approach where not only is law evaluated in light of a narrow traditional economic theory but hitherto unexplained facts about law may lead to improvements in economic theory. Calabresi sees this kind of Law and Economics as analogous to behavioural economics which also corrects economic theory in light of empirical findings. As it is often the case, these terminological differences, e.g. when “economic analysis of law” is contrasted with “law and economics” suggest (reveal or hide) more or less subtle substantive disagreements.

6 Parts of criminology or forensic psychology could serve as examples. Zamir (2016, 4) also lists social and moral psychology. Tor (2008) briefly discusses “old” law and psychology.

7 Zamir (2016, 1-3) provides a succinct summary and references. On the problem of overreliance on a particular approach in psychology see Cserne (2015, 286, note 24).

8 See also Zamir (2016, 4): “Behavioural insights pose a major challenge to standard economic analysis, but are just as vital to any other interpretative or normative theory of law.”

9 The reasons for this development raise historical or sociological questions which are interesting in their own right but cannot be discussed here.

10 The first step of this transfer has been discussed, analytically in the encyclopaedia entry by Angner and Loewenstein (2012), monographically and historically by Heukelom (2014) and autobiographically in Thaler (2015). The second step has been initiated and programmatically discussed in Jolls, Sunstein, and Thaler (1998); see further references in note 1 above.

11 The idea that libertarians and dirigistes can agree on particular policies is in line with Sunstein’s earlier ideas about reasoning in public law in the context of social pluralism: incompletely theorised arguments (Sunstein, 1995).

12 Their most elaborate joint discussion of the underpinning conceptual and normative ideas is Sunstein and Thaler (2006).

13 In a recent paper, Hansen (2016) discussed extensively the various definitions and characterisations of nudge suggested in the literature, pointing out some of their shortcomings.

14 Cf. the remarks by Daniel Kahneman: “Actually, I think behavioural economics is the only hope for having psychology gain influence on policy. It is perhaps different in Europe, but in the United States, the gatekeepers who control academic input into policy are economists and lawyers. You can’t do anything except through economists and lawyers” (Zeelenberg, 2008, 12-13). It seems that by “doing something”, Kahneman means for his profession to have an impact on policymaking.

15 On evidence-based regulation see Cartwright—Hardie (2012), Sunstein (2011). See also Tor (2008, 291) on “application gaps” or “research gaps” between “basic research findings and some of the empirical evidence needed for a fully effective legal analysis.” Tor also argues that there are advantages to empirical research which is driven by legal questions and potentially carried out by legal scholars, rather than invoking general theories or referring to phenomena identified in non-legal contexts.

16 While Katz (1998, 3-5) characterises the economic approach to law, he discusses these three premises as belonging to economics. It is these philosophical and methodological premises of economics that make Law and Economics a distinct approach to law.

17 Tor (2008, 243) defines behavioural analysis of law as “the application of empirical behavioural evidence to the analysis of legal rules and institutions.”

18 On the normative character of rationality and its use as an assumption in positive theory, see Elster (2009).

19 For critical views on this link between behavioural and standard economics, see e.g. Gigerenzer and Selten (2001), Gigerenzer (2008), Berg and Gigerenzer (2010).

20 “Long before the contemporary behavioural economics program came to prominence, the economics discipline saw a good deal of complaining about the strictures of rationality assumptions—especially the ones required to rationalize a utility function representation of a preference ordering, and the self-interested rational actor model—long before Herbert Simon or the current leaders of the behavioural economics program began writing. One recalls Veblen‘s conspicuous consumption in The Theory of the Working Class (1899), Keynes’s “animal spirits” in the general theory (1936), Galbraith’s “Rational and Irrational Consumer Preference” (1938), and Hayek‘s (1945) critique of the disconnect between maximization of given preferences over known choice sets versus “the economic problem which society faces,” which rests on the radical limitations on economic actors’ knowledge.” (Berg—Gigerenzer, 2010, 156)

21 See Posner’s revealing remarks (1983, vi): “Ethical theories seem to invite and receive shocking applications, yet I hope the ethical theory propounded in Part I of this book [The Economics of Justice; Part I defending wealth maximisation as the ethical basis of normative law and economics] will be taken in the spirit in which it was intended: as a subject of speculation rather than a blueprint for social action.” See also Posner (1996, 101, note 6 and 2007, 11-12). Cf. also the diversity of responses, most of them highly critical, to Kaplow and Shavell’s Fairness vs Welfare (2002) among law and economics scholars. For an overview of possible non-welfarist foundations of normative economics in terms of justice, rights, equality and justice, see Hausman, McPherson, and Satz (2017, Part III).

22 This is at least my impression in comparing the ratio of empirical papers presented at annual conferences of the European Association of Law and Economics in the last 12 years and looking at the curriculum of the European Master in Law and Economics program. In a more sociological paper this anecdotal evidence would need to be supported by statistical data or other kinds of evidence.

23 BLE normally focuses on the “identification of a departure from unbounded rationality, willpower or self-interest, followed by either an account of existing law or a proposed legal reform that takes as a fixed point the identified departure from unbounded rationality, willpower or self-interest.” (Jolls, 2006, 18-19).

24 Jolls calls the latter approach “debiasing through law”. See also Jolls and Sunstein 2006.

25 Uskali Mäki (2003) makes a similar point about the notion of scientific imperialism. Thanks to Magdalena Małecka for drawing my attention to this paper.

26 Versions of this non-empirical arguments for rationality assumptions have been expressed by many economists and philosophers, at various levels of sophistication, including Philip Pettit (1995), Karl Popper (see Hands, 1985), Gary Becker (1976, chapter 1; see also Pies, 1993, chapter 3), Walter Eucken (1992 [1950], 281-282), and Gebhard Kirchgässner (2008).

27 See note 14 above.

28 On relevant considerations about behavioural assumptions in institutional design see Kornhauser (2002).

29 Behavioural economists, even when reflecting on difficulties in linking empirical findings and policy, tend to take preferences as a normative benchmark. See e.g. Tor (2008, 302, note 278): “both probability judgement errors and risk-seeking preferences may cause excessive risk-taking. Nevertheless, the error-based account, but not the preference-based one, may justify intervention.” Note also the lack of reflection on what counts as “excessive”.

30 I used this term here, inspired by but more loosely than Rawls (1987).

31 To be sure, historically there have been many connections between these two versions of normative economic thought about the law. In an otherwise deeply problematic monograph, Hackney (2006, 89-90) provides an overview of the links between Hayek and the University of Chicago, including the practical details of the American publication of The Road to Serfdom but also referring to the intellectual or rather ideological affinity between these free-market advocate economists. This suggests that at least historically, there were more links between Chicago and Hayek, based on common ideological grounds, than what Posner’s opposition suggests. I have discussed this in Cserne (2008).

32 On one version of this opposition see Marciano (2007).

33 For attempts to rephrase paternalism in terms of merit goods, see Cserne (2012, 36-37).

34 On further economic models of freedom of choice see Dowding and van Hees (2009).

35 This is, after all, what Tor (2008, 314-325) meant by “normative neutrality” and “normative relevance.”

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