Behavioural law and economics

Question 1

Coase theorem

Answer 1

Allocating legal rights to one party or another should not affect the outcome if:

• Clearly defined property rights
• Low transaction costs

Endowment effect fucks that up - The value of a right will depend on initial allocation. So how do you decide?

• Check 3rd party effects instead of joint wealth of parties at stake
• Judge which preference deserves the greatest respect

Question 2

Bounded rationality creates biases…

Answer 2

1. Implicit racial and group-based biases
2. Optimism bias
3. Self-serving bias
4. Hindsight bias

Question 3

Bounded will power

Answer 3

Is good to uphold because it creates positive 3rd party effects

Question 4

Bounded self-interest

Answer 4

1. People care about being treated and treating others fairly
2. Fairness is assessed based on a reference transaction

Question 5

Application to law

Answer 5

1. Disclosure rules in litigation - Self-serving bias
2. Business judgement rule on corporate liability - To prevent future hindsight bias of judge
3. Contract re-negotiation - Could be forbidden to counter-act bounded willpower
4. Consumer protection law - Because of bounded self-interest - There will be political lobbying and popular pressure to legislate

Question 6

Debiasing through law

Answer 6

1. Procedural rules that force parties to consider the opponents arguments
2. Substantive anti-discrimination laws