Taking Behavioralism Seriously: The Problem of Market Manipulation

June
1999
Jon D. Hanson & Douglas A. Kysar

In recent years, legal scholars dissatisfied with the behavioral assumptions of the rational actor model have increasingly turned to the findings of cognitive psychologists and decision theorists to enhance the accuracy of efficiency analysis. Jon Hanson and Douglas Kysar review those findings in this Article, concluding that scholars have been well justified in incorporating the behavioralist account of human behavior into law and economics. Nevertheless, Hanson and Kysar argue that those scholars simultaneously have failed to take the findings of behavioral research to their logical conclusion. Using the scholarly application of behavioralist insights to products liability theory as an example, the authors demonstrate that legal scholars thus far have treated cognitive anomalies as relatively fixed and independent influences on individual decisionmaking. Rather than such an exogenous analysis, Hanson and Kysar advocate an endogenous examination of behavioralist findings that allows for internal, dynamic effects of cognitive biases within the decisionmaking model. By recognizing that cognitive anomalies influence not only the behavior of biased decisionmakers but also the incentives of other economic actors, Hanson and Kysar reveal the possibility of market manipulation--that is, the possibility that market outcomes can be influenced, if not determined, by the ability of one actor to control the format of information, the framing and presentation of choices, and, more generally, the setting within which market transactions occur. Again using the field of products liability theory as an example, the authors argue that such market manipulation will come to characterize consumer product markets; powerful economic incentives will drive manufacturers to engage in practices that, whether consciously or not, utilize non-rational consumer tendencies to influence consumer preferences and perceptions for gain. The authors conclude by previewing the evidence from their companion article that demonstrates the seriousness of the problem of market manipulation and the need for corrective legal devices such as enterprise liability.

This article appears in the June 1999 Issue: Volume 74, Number 3