DOC PREVIEW
UW-Madison ECON 522 - Lecture 24 Notes

This preview shows page 1-2-3-4 out of 13 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 13 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 13 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 13 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 13 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 13 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

Econ 522 – Lecture 24 (Dec 9 2008)Today’s material is not on the final.Pretty much everything we’ve done this semester has assumed that people are perfectly rational, and respond to incentives according to what they correctly perceive to be their own best-interest.- Property and nuisance law: people can bargain with each other to get entitlements to the owners who value them most- Contract law: parties can negotiate efficient contracts, courts can enforce them correctly- Tort law: people react rationally to incentives; courts can assign liability and damages correctly- Criminal law: even criminals react rationally to incentives, commit crimes when benefit outweighs expected costs- These are strong assumptions- They are useful assumptions – they gave us a lot of predictions about how laws would affect behavior, and therefore what laws would lead to efficiency- But the question remains whether they’re valid assumptions.- In the last decade or two, there’s been huge growth in the field of behavioral economics- Behavioral economics studies how peoples’ actual behavior differs from the predictions of the standard model- We mentioned a couple examples over the course of the semestero for example, we mentioned that people don’t react to probabilistic risks the way expected-utility theory would suggest.- Behavioral economics started out as a fairly ad-hoc disciplineo someone would pick a prediction of the standard model – for instance, expected-utility-maximizing under uncertainty, or discounting future payoffs by a consistent per-period discount rate, or maximizing only one’s own payoff in a multi-player settingo Then they would do experiments – have a bunch of undergraduates play games in a lab – or look for instances in the real world where the prediction was violated.- Over time, behavioral economics has generated some fairly robust conclusions about systematic ways in which peoples’ behavior differs from the standard modelof perfect rationality.- What’s important is that the way peoples’ behavior deviates from the standard predictions is not random- If it was, we could explain it simply as random errors – people aren’t necessarily infinitely wise, so they sometimes make mistakes in calculating the right behavior, and these mistakes can go in any direction- Instead, we find that peoples’ behavior seems to have consistent biaseso that is, in many situations, deviations from perfect rationality all seem to go in the same direction.- At its best, behavioral economics also holds itself to a sort of a “higher standard” than traditional economics- Traditional economics makes assumptions (basically, rationality and optimization), derives predictions, and then asks whether the predictions seem to be right, but doesn’t spend that much time questioning the assumptions themselves- Behavioral economics tries to justify the assumptions as well.The paper on the syllabus by Jolls, Sunstein, and Thaler, “A Behavioral Approach to Law and Economics,” discusses some of these biases observed by behavioral economists; and proposes how these more complicated (and therefore more accurate) views of human behavior could be incorporated into law and economics.How people actually behave, and how this differs from the standard model, has implications for every use of law and economics:- The positive parto “Positive” sometimes means “descriptive”, but here it means “predictive” – making predictions about how people will respond to particular lawso The positive approach also allows us to predict (or explain) the laws that do exist – as outcomes of some process (either the common law “evolving” toward efficiency, as we’ve discussed in class; or as the outcome of a legislative process)o (Positive statements are things like, “an increase in expected punishment will lead to a decrease in crime”)- The prescriptive parto Once we know how people react to a given law, we can make prescriptions about how the law should be designed to achieve particular goalso (Prescriptive statements are things like, “to achieve efficiency, the law should specify injunctive relief when transaction costs are low, and damages when transaction costs are high”)o If people behave differently than the standard model, than the law should be designed to take this into account- The normative parto The normative question is, what should the goal of the legal system be?o Throughout this class, we’ve mostly assumed that the goal of the law is economic efficiency – we gave a number of arguments to defend thiso This gets much trickier when a behavioral approach is usedo One of the observations of behavioral economics is that peoples’ preferences are not as well-defined and stable as the standard model assumeso But this makes even measuring efficiency hard, since we don’t know what preferences to use An example: one of the findings of behavioral economics is that people value things more once they have them So if I gave one of you a chocolate bar, you might get all excited about it, and be more hurt by losing it than if you hadn’t had it to begin with Suppose I give one of you a chocolate bar, and offer you an opportunity to sell it to someone else Good chance you wouldn’t Even if I offered to subsidize the purchase – I’d throw in 50 cents on top of what they pay you – you might not So we’d conclude you value the chocolate bar more than them. But if we’d started out giving the chocolate bar to them, maybe they wouldn’t have wanted to sell it to you either.o But this muddles the question of who values it more: if I give it to you, you value it more than him; if I give it to him, he values it more than you. But now we have no way to gauge which allocation is efficient!)So that’s the goal of behavioral law and economics – to give a more accurate model of how people actually behave, and use that model to reconsider the positive, prescriptive, and normative conclusions of law and economics.- The Jolls, Sunstein and Thaler paper concedes that so far, the results are fairly sparse- the paper reads more like a proposal for future research than a bunch of conclusions- Still, some of the initial results – basically, taking behavioral biases documented elsewhere and considering their implications for law and economics – are quite interesting.Behavioral biases – the way peoples’ actual behavior deviates from the standard model


View Full Document

UW-Madison ECON 522 - Lecture 24 Notes

Documents in this Course
Lecture 4

Lecture 4

46 pages

Lecture 5

Lecture 5

31 pages

Lecture 7

Lecture 7

39 pages

Lecture 9

Lecture 9

24 pages

Lecture 7

Lecture 7

13 pages

Lecture 6

Lecture 6

14 pages

Logistics

Logistics

35 pages

Logistics

Logistics

41 pages

Logistics

Logistics

36 pages

Lecture 8

Lecture 8

21 pages

Lecture 8

Lecture 8

47 pages

Lecture 9

Lecture 9

49 pages

Lecture 6

Lecture 6

46 pages

Logistics

Logistics

49 pages

Load more
Download Lecture 24 Notes
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Lecture 24 Notes and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Lecture 24 Notes 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?