Saturday, 21 February 2004

Rational choice, psychology, economics, and the law

Greg Goelzhauser at Crescat Sententia considers the use and abuse of behavioral economics by legal scholars, jumping off from this interview with Berkeley economist Matthew Rabin. Greg writes:

That humans fall prey to a variety of heuristics is nothing new or extraordinary. What is important for law and economics is if some of these heuristics lead the relevant actors to systematically err in their decisionmaking. Unfortunately, many of those writing in the behavioral law and economics field care little about whether the actors they are concerned with actually rely on the heuristics attributed to them or, if they do so happen to rely, whether reliance actually leads to systematic error. The reason? These are often difficult empirical questions.

I’m not sure that this is an accurate characterization of what a heuristic is; it’s not simply a matter of “falling prey” to them, as many are reasonable shortcuts. You assume that the store with the cheapest price on a product is advertising it, rather than calling every store in town. Instead of digging through the platforms to find the most stridently anti-war presidential candidate, you assume the candidate making the most noise about the war is that candidate.

Now, as Tversky and Kahneman have pointed out, some heuristics do lead to systematic, non-random error. And some of those errors are big enough that the cost associated with the error is larger than the deadweight loss of not using the heuristic (calling every store in the world or spending hours reading the minutae of Lyndon LaRouche’s campaign platform).

Greg’s larger point—that social scientists and legal scholars often assume away the “difficult empirical questions” associated with determining whether systematic error exists—is well-taken, but I think characterizing heuristics as something we “fall prey” to assumes away the more important question of whether the systematic error involved in using heuristics outweighs the costs we avoid by using them.