Behavioural Accident Law and Economics
Journal of Applied Economy, Vol. 12, 2010
59 Pages Posted: 7 Mar 2011
The traditional economic analysis of tort and insurance has for a long time assumed rationality on the side of persons involved in the accident situation: victims and injurers were assumed to base their decision on e.g. the care levels to adopt on a weighing of cost and benefits of that action. Also judges were assumed to rationally determine the optimal care level to be followed by a defendent in a tort case and e.g. to abstain from ex post knowledge, i.e. after the accident occurred. For a long time, these economic models of tort law had already been critized by lawyers, but recently, this criticism seems to have received important support from the findings of behavioural economics. Indeed, studies in social psychology, both empirical and experimental, have shown how individuals actually behave. This so-called behavioural literature shows that actual behaviour of individuals is to a large extent different than assumed by the so-called rational actor model. Individuals appear, in fact, to be subject to a large amount of so-called heuristics and biases. The literature identifying these heuristics and biases has now also been incorporated into the law and economics literature, leading to a new domain of so-called behavioural law and economics. However, so far, the consequences of this behavioural literature for the domain of economics of accident law have not been identified. That is precisely what this article aims to do. First, a few examples are presented of accident situations, discussing how these cases would be dealt with based on the assumptions of the economics of accident law. Then, it is made clear that when the lessons from cognitive psychology are taken into account, the outcomes may be totally different than those predicted by the traditional models. Therefore, the assumptions of the traditional economic models of tort and insurance are discussed as well as the main findings of behavioural law and economics. Next, the implications of the behavioural literature for liability law and insurance are discussed and a few concluding remarks address what the most important lessons are of the behavioural literature for the economics of accident law and for torts and insurance in particular. Even though in some articles (discussed in this paper) some attention is paid to (specific aspects of) behavioural literature for accident law, this article is the first to provide an integrated overview of the implications of the behavioural literature for the economic analysis of accident law. Hence, the title is behavioural accident law and economics, which in fact provides an integrated approach of behavioural law and economics on the one hand and economic analysis of accident law on the other hand.
Keywords: behavioural law and economics, bounded rationality, probability neglect, availability heuristic, status quo bias, selective optimism, liability law, strict liability, negligence, over-deterrence, under-deterrence, insurance theory, comprehensive insurance, safety regulation
JEL Classification: K13, K32
Suggested Citation: Suggested Citation