Behavior and Contract

Abstract:     
The law of contracts and consumer protection has been dominated in the recent past by the ideology of rational choice theory. As a descriptive project, rational choice theory holds that consumers express their preferences and maximize their expected utility by making choices in the marketplace. As a normative project, rational choice theory has promoted deregulation of contract terms, based on underlying values of utilitarianism and autonomy. Legislators, judges and agencies have internalized these norms and adopted the deregulation program.

The behavioral economics literature has seriously undermined rational choice theory as a description of consumer and seller behavior. In the real world, consumers use abbreviated and biased reasoning and short cuts, are heavily influenced by affect and channeling factors, and respond to framing and endowment effects. Sellers study and understand consumer behavior, and exploit this knowledge. The result in a deregulated marketplace is seller exploitation and consumer harm. Numerous empirical examples of “irrational" consumer behavior and seller exploitation are explored.

Law and economics scholarship has been reluctant to face the normative implications of the improved understanding of consumer and seller behavior. “Soft paternalism" seeks to retain the ideal of a perfect market by fixing the information and bias problems, clinging to the values of utilitarianism and autonomy. The insights of behavioral economics may enlighten lawmakers as to how better to strive for genuine autonomy, and genuine utility maximization. Viewing contract law as a tool for justice, however, requires doing more than improving the means without rethinking the ends. A deeper notion of justice requires that we return to the prevention of exploitation of the weak by the powerful, an equity-based value, as one of lodestars for what the law of contracts ought to be.

Working Paper Series