Behavioural Economics and Contract Law

Abstract

Individuals make economic decisions on a daily basis that do not look rational and that sometimes turn out to be mistakes. This behaviour has a cost for each individual and for society as a whole. Behavioural law and economics identifies which mental shortcuts used by individuals in decision making are behind those mistakes. Once cognitive biases affecting people are determined, behavioural law and economics propose to use the information gathered to design a set of rules that reduces individual and collective losses. This set of rules would steer people to rational choices that set them better-off and produce social welfare, but this would be done without banning or blocking choices; each individual would be free to choose an action which goes against the socially good for behavioural economists. Therefore, behavioural law and economics might be a new approach to be taken when dealing with contract law situations where intervention is considered necessary. This short paper, presented at the International Conference of PhD Students and Young Researchers held in Vilnius on 10-11 April 2014, tries to explain the main features of behavioural law and economics while questioning the validity of its assumption that people are not rational. In addition, this paper addresses the problem of intervention in some grounds of contract law and takes a stand on whether it is desirable a strong intervention, a lighter one based on behavioural law and economics, or a neoclassical approach in favour of free market and freedom of contract with restrictions on them being an exception.

Keywords: behavioural law and economics, rationality, cognitive biases, contract law