Econ 522 Economics of LawLogisticsDuress/necessitySlide 3Imagine you’re a physicistEconomists (at least theorists) work the same wayMany assumptions get made differently in different situationsWhat does it take to do economic theory?Another way to think about this:The idea of a “standard” modelBasically all mainstream microeconomics is based on two premisesWe’ve been assuming this throughout the semesterBut rationality is a strong assumptionSlide 13Behavioral economicsSlide 16Behavioral economics – sourcesJolls/Sunstein/Thaler discuss three different “uses” for economicsBehavioral economics has implications for all three of theseThe goal of behavioral law and economicsSo, how does behavior typically differ from the standard model?Slide 21Trading experiment from CornellSlide 24Endowment effectEndowment effect – so what?Slide 27Context dependenceSlide 28Hindsight biasHindsight bias – so what?Similar bias – perception of probability skewed by availability and salience“Self-serving bias”Slide 34Slide 34How people discount the futureSlide 36“Ultimatum game”One interpretation of bounded self-interestSlide 39Jolls/Sunstein/ThalerOne prescriptive suggestionJolls/Sunstein/Thaler’s conclusion: the case for “anti-antipaternalism”Slide 43We saw last week…However…(Example I found online last semester)Tim Wu, “American Lawbreaking” (Slate) http://www.slate.com/id/2175730/entry/2175733/First example doesn’t perfectly fit premise, but interestingWu’s second example: pornographySlide 51Slide 52Wu’s other examples: copyright law, illegal immigration, Amish and MormonsThis all doesn’t really fit into our framework of criminal lawSo what’s my point for today?Econ 522Economics of LawDan QuintFall 2011Lecture 232Remaining lecturesToday: some interesting digressionsWednesday: efficiency, recapNext week: review, practice problemsHomework 4 due Thursday, 11:59 p.m.Final: Thursday Dec 2212:25-2:25, 6210 Social ScienceCumulative, more weight on second half of semesterLogistics3source: http://news.yahoo.com/man-sues-former-hostages-says-broke-promise-190902970.htmlDuress/necessity4Models inEconomics5Imagine you’re a physicist(Not drawn to scale)6The world is too complicated to study “as is”So we make a simple modelTry to leave in the “important parts” for studying a particular questionRealize that our results follow from the assumptions that we made, and may or may not be relevant to the real worldEconomists (at least theorists) work the same way7“Are people risk averse?”Ask a sociologist, you get an answerAsk an economist, he’ll say, “It depends on what type of problem you’re studying”For some questions, risk aversion is importantHow people choose investment portfoliosHow people save for retirement if they don’t know how long they’ll liveFor other questions, risk aversion plays no roleIncluding risk aversion complicates model, without adding insightSo we assume agents are risk neutral – not because they are, but because we’re focusing on something elseMany assumptions get made differently in different situations8What does it take to do economic theory?SolvethemodelReduce asituation toa tractablemodelInterpretthemodelTechnical abilityJudgment(Which assumptions to make)Judgment(How much to “trust” results, given the model/ assumptions behind them)9“All models are wrong, but some are useful.”– George Box (Statistician)Another way to think about this:10We said: some assumptions (risk neutrality) get made differently in different settingsOther assumptions get made so consistently that they become a part of the “standard way” that economists look at the world……almost become a part of conventional wisdomAnd then we start to forget that they were assumptions in the first placeThe idea of a “standard” model11People have preferencesAllowed to like whatever they like……but assumed to understand all their options, and how they rank themAnd people optimizePeople pick whichever option they like most……subject to what they can affordTo put it another way, people are rationalBasically all mainstream microeconomics is based on two premises12“People respond to incentives according to what they correctly perceive to be their own rational best interest”Property/nuisance laweach knows own threat point, can bargain with each other to transfer ownership of entitlements to whoever values them mostContract lawcan negotiate efficient contracts, courts can enforce them correctlyTort lawpeople know effects of their actions, react rationally to incentivescourts can assign liability and assess damages correctlyCriminal laweven criminals react rationally to incentives, commit crimes when benefit outweighs expected costWe’ve been assuming this throughout the semester13Very useful assumptionLed to lots of predictions about how laws affect behavior……and therefore what types of laws would lead to efficient outcomesBut conclusions are only as valid as the assumptionsToday:How these assumptions sometimes fail in real life……and therefore why we may be skeptical about some of the semester’s conclusionsBut, you’re still being tested on those conclusions!Think of today as a digressionBut rationality is a strong assumption14Behavioral Lawand Economics15How peoples’ actual behavior differs from predictions of “standard model”Started out ad-hocTake a prediction of the standard model, e.g., expected utility maximizationDo an experiment – put a bunch of undergrads in a room and make them play a gameOr look for instances in real world where prediction was violatedOver time, generated some fairly robust conclusionsSystematic ways behavior differs from perfect rationality in a number of different situationsBehavioral economics16What’s important is that deviations from standard predictions of economics are not randomNot random errorsBut consistent, systematic biasesAt its best, behavioral economics holds itself to a “higher standard” than traditional economicsTraditional economics: makes assumptions (rationality and optimization), derives predictionsAsks whether predictions seem right, but doesn’t spend much time questioning the assumptionsBehavioral economics looks to justify the assumptions as
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