Loss Aversion and the Law

66 Pages Posted: 31 Aug 2011 Last revised: 15 Apr 2015

See all articles by Eyal Zamir

Eyal Zamir

Hebrew University of Jerusalem - Faculty of Law

Date Written: August 30, 2011

Abstract

Why is tort law much more developed than unjust enrichment law? Is there a reason for the very different legal treatment of governmental takings and governmental givings? Why are contract remedies structured around the four ‘interests’ and why is the disgorgement interest only marginally protected? What might explain the much greater constitutional protection of civil and political rights, compared to social and economic ones?

This Article suggests that there is a common denominator to these and other puzzles: they are all best answered on the basis of loss aversion. Psychological studies have established that people do not perceive outcomes as final states of wealth or welfare. Rather, they perceive them as gains and losses, and losses ordinarily loom larger than gains. Loss aversion is thus related to fundamental characteristics of entire legal fields and their relative importance.

The Article also strives to explain the compatibility between loss aversion and the law. According to an evolutionary theory, since losses are more painful than unattained gains, people file lawsuits for recovery of losses much more often than for unattained gains. Consequently, legal doctrines dealing with the former are much more developed. Another theory focuses on the mindset of legal policymakers. Legal thinking largely follows deontological morality. As such, it distinguishes between harming people and not aiding them. This theory highlights an important correspondence between psychology, morality, and law.

Finally, the article explores various normative implications of loss aversion. Among other things, it argues that, ceteris paribus, the law should favor not-giving over taking. Lawmakers should consider the framing effect of legal norms and the impact of loss aversion on policymaking.

Keywords: Prospect Theory, Loss Aversion, Reference Points, Behavioral Law And Economics, Contract Remedies, Disgorgement, Tort Law, Unjust Enrichment, Restitution, Takings, Affirmative Action, Efficiency of the Common Law, Moral Psychology, Commonsense Morality, Deontology

JEL Classification: A12, D61, D81, K00, K11, K12, K13

Suggested Citation

Zamir, Eyal, Loss Aversion and the Law (August 30, 2011). Vanderbilt Law Review, Vol. 65, p. 829, 2012, Available at SSRN: https://ssrn.com/abstract=1919642

Eyal Zamir (Contact Author)

Hebrew University of Jerusalem - Faculty of Law ( email )

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