Working Paper: NBER ID: w11738
Authors: Christine Jolls; Cass R. Sunstein
Abstract: In many settings, human beings are boundedly rational. A distinctive and insufficiently explored legal response to bounded rationality is to attempt to "debias through law," by steering people in more rational directions. In many important domains, existing legal analyses emphasize the alternative approach of insulating outcomes from the effects of boundedly rational behavior, often through blocking private choices. In fact, however, a large number of actual and imaginable legal strategies are efforts to engage in the very different approach of debiasing through law by reducing or even eliminating people's boundedly rational behavior. In important contexts, these efforts to debias through law can avoid the costs and inefficiencies associated with regulatory approaches that take bounded rationality as a given and respond by attempting to insulate outcomes from its effects. This paper offers a general account of how debiasing through law does or could work to address legal questions across a range of areas, from consumer safety law to corporate law to property law. Discussion is also devoted to the risks of government manipulation and overshooting that are sometimes raised when debiasing through law is employed.
Keywords: bounded rationality; debiasing; law; consumer safety; corporate law
JEL Codes: K00; K11; K13; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| legal interventions (K41) | reduced instances of bounded rationality (D01) |
| debiasing through law (K16) | improved consumer understanding of risks (D18) |
| legal requirements for firms to present information (G38) | altered consumer perceptions (D18) |
| legal strategies (K41) | mitigate optimism bias (E71) |
| increasing the number of outside directors (G34) | mitigate optimism bias among inside directors (G41) |