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Abstract:
As legal scholarship has come to rely more on economic analysis, the foundational questions of economics have become important questions for legal analysis as well. One of the key foundational elements of modern economics is the assumption of the rational utility maximizing individual. While this assumption has often been questioned, until recently, it was not possible to actually examine the brain mechanisms that individuals use to process the economic problems they face. As a result of the increasing abilities to explore the brain as individuals engage in economic activity, this article calls for a new approach to the study of law which incorporates the findings from the emerging area of neuroeconomics. We call this approach law and neuroeconomics. We argue that this research can help us understand what is occurring in the brains of the individuals and knowledge gained thereby can greatly aid both in understanding the process of creation and development of law as well as its effects on human behavior. The article discusses this research and begins the analysis of applying these findings the study of law.

Law & Finance, Property, Corporate Law, Land Use

Abstract:
The assumption of rationality is both one of the most important and most controversial assumptions of modern economics. This article discusses what current experimental economic as well as neuroscience research tells us about the relationship between rationality and the mechanisms of human decision-making. The article explores the meaning of rationality, with a discussion of the distinction between traditional constructivist rationality and more ecological concepts of rationality. The article argues that ecological notions of rationality more accurately describe both human neural mechanisms as well as a wider variety of human behavior than do constructivist notions of rationality.

Rationality, Law and economics

Abstract:
Much has been written about how law as an institution has developed to solve many problems that human societies face. Inherent in all of these explanations are models of how humans make decisions. This article discusses what current neuroscience research tells us about the mechanisms of human decision-making of particular relevance to law. This research indicates that humans are both more capable of solving many problems than standard economic models predict, but also limited in ways those models ignore. This article discusses how law is both shaped by our cognitive processes and also shapes them. The article considers some of the implications of this research for improving our understanding of how our current legal regimes operate and how the law can be structured to take advantage of our neural mechanisms to improve social welfare.

Corporate Law, Criminal Law & Procedure

Abstract:
We develop the hypothesis that culturally evolved accounting principles (e.g., Objectivity) have their roots in how the biologically evolved human brain evaluates the desirability of reciprocal exchange. Our analysis is communicated in two related parts. In this first essay, Part I, we provide background on the structure and evolution of the brain, the measurement of brain activity during economic decision-making using neuroscientific methods, and the brain's central role in building economic institutions. In the second essay, Part II, we describe the emergence of modern accounting principles and review the neuroscientific evidence suggesting a mapping from brain function to the principles of modern accounting. Our analysis of NeuroAccounting is important because it extends Basu and Waymire (2006) to provide a new way to scientifically view accounting, which can prove useful for evaluating the desirability of implementing new policies that run contrary to long-established accounting principles.

Accounting principles, economic exchange, neuroeconomics, primate brain

Abstract:
We develop the hypothesis that culturally evolved accounting principles are ultimately explained by their consilience with how the human brain has biologically evolved to evaluate opportunities for exchange. The primary function of accounting in evaluating exchange is providing information on the net benefits of past exchanges. Accounting's comparative advantage arises because it provides information based on reliable quantified data that is well suited to multi-period settings where reputation and trust are of first-order importance. We review evidence documented by neuroscientists that is consistent with the hypothesis that longstanding accounting principles such as Revenue Realization, Expense Matching, Objectivity, Historical Cost, Going Concern and Conservatism have distinct parallels in brain behaviors. We conclude that NeuroAccounting has important implications for how we think about accounting principles and the ultimate forces behind their emergence and persistence.

Accounting principles, economic exchange, neuroeconomics, primate brain

Abstract:
People can become less cooperative when threatened with sanctions, and previous research has pointed to both intentions and incentives as sources of this effect. This paper reports data from a novel experiment aimed at determining the relative importance of intentions and incentives in producing non-cooperative behavior in a personal exchange environment. Subjects play a one-shot investment game in pairs. Investors send an amount to trustees and request a return on this investment and, in some treatments, are given the option to threaten sanctions to enforce this return request. The decisions of trustees who face credible threats intentionally imposed (or not) by their investors are compared to the decisions of trustees who face credible threats randomly imposed (or not) by nature. When not threatened, trustees typically decide to return a positive amount that is less than the investor requested. When threatened with sanctions this decision becomes least common. In particular, under severe sanction threats most trustees return the desired amount, while under weak threats the most common decision is to return nothing. These results do not depend on whether trustees are threatened intentionally by their investors or randomly by nature. We suggest that credible sanction threats generate a "cognitive shift" that crowd-out norm-based social behaviors and increase the likelihood of income-maximizing decisions.

experiment, intentions, sanctions, trust, cooperation

Abstract:
It is well known in evolutionary game theory that population clustering in Prisoner's Dilemma games allows some cooperative strategies to invade populations of stable defecting strategies. We adapt this idea of population clustering to a two-person trust game. Without knowing it, players are typed based on their recent track record as to whether or not they are trusting (Players 1) and whether or not they are trustworthy (Players 2). They are then paired according to those types: trustors with trustworthy types, and similarly non-trustors with untrustworthy types. In the control comparisons, Players 1 are randomly repaired with Players 2 without regard to type. We ask: are there natural tendencies for people to cooperate more frequently in environments in which they experience more cooperation in comparison with controls?

Abstract:
We examine theoretically and experimentally how a society's grouping and stratification rules affect incentives and efficiency, and compare meritocratic and ascriptive grouping. We present a multi-level model of social production, and extend the usual single-group-level analysis of cooperation to a broadly defined system, in which individuals compete for inclusion in stratified groups based on the contributions they make. Group members share their collective output equally amongst themselves. The mechanism has two pure strategy Nash equilibria, one close to Pareto optimal. The latter equilibrium is asymmetric and rather complex for experimental subjects. Nonetheless, subjects tacitly coordinate this equilibrium very reliably, demonstrating equilibrium's predictive power and providing empirical support for payoff dominance. Our behavioral findings also point to a meritocracy's "naturalness" and effectiveness in eliciting high social contributions. The results make a theoretical and empirical case for why social organization should be based on contribution rather than privilege. They also indicate why societies are increasingly becoming performance-based meritocracies, and are relevant to many forms of contemporary social organization.

social stratification, meritocracies, mechanism design, non-cooperative games, experiment, team production

Abstract:
Human decision making under risk and uncertainty may depend on individual involvement in the outcome-generating process. Expected utility theory is silent on this issue. Prospect theory in its current form offers little, if any, prediction of how or why involvement in a process should matter, although it may offer ex post interpretations of empirical findings. Well-known findings in psychology demonstrate that when subjects exercise more involvement or choice in lottery procedures, they value their lottery tickets more highly. This often is interpreted as an illusion of control, meaning that when subjects are more involved in a lottery, they may believe they are more likely to win, perhaps because they perceive that they have more control over the outcome. Our experimental design eliminates several possible alternative explanations for the results of previous studies in an experiment that varies the degree and type of involvement in lottery procedures. We find that in treatments with more involvement subjects on average place less rather than more value on their lottery tickets. One possible explanation for this is that involvement interacts with loss aversion by causing subjects to weigh losses more heavily than they would otherwise. One implication of our study is that involvement, either independently or in interaction with myopic loss aversion, may help explain the extreme risk aversion of bond investors.