Response to Jennifer Arlen on The Essential Role of Empirical Analysis in Developing Law and Economics Theory

Tamar Kricheli Katz

Jennifer Arlen’s The Essential Role of Empirical Analysis in Developing Law and Economics Theory11.Jennifer Arlen, The Essential Role of Empirical Analysis in Developing Law and Economics Theory, 38 Yale J. on Reg. (forthcoming 2021). explores the relationship between law-and-economics theory and empirical analysis. The paper provides a rich discussion of empirical-analysis examples to inform normative theoretical understandings. 

The paper focuses on empirical investigation of decision making, documenting the instances and conditions in which people systematically deviate from a rational decision-making model. Arlen demonstrates how empirical work exploring people’s actual decision-making environments, including the information and options available to them when they make these decisions, have improved theoretical law-and-economics models, making their predictions more accurate.22.Id. at 1-4.

However, the paper does not give much attention to the possibility that empirical work could be used to explore the fundamental assumptions of normative law-and-economics theory. More specifically, the paper does not consider the possibility that empirical work could be used to explore the fundamental descriptive assumptions regarding the interrelations across preference maximization, choice, the subjective well-being of individuals, and social welfare.

Beyond the numerous contributions that Arlen makes in the paper and her broader scholarship,33.See Jennifer Arlen, Matthew Spitzer & Eric Talley, Endowment Effects Within Corporate Agency Relationships, 31 J. Legal Stud. 1 (2002); Jennifer Arlen & Stephan Tontrup, Does the Endowment Effect Justify Legal Intervention? The Debiasing Effect of Institutions, 44 J. Legal Stud. 143 (2015); Jennifer Arlen & Stephan Tontrup. Strategic Bias Shifting: Herding as a Behaviorally Rational Response to Regret Aversion, 7 J. Legal Analysis 517 (2015). it seems that there is scope for exploring the potential for empirical analyses to improve law-and-economics normative theory, specifically by investigating its fundamental descriptive assumptions about the factors that can improve people’s well-being and social welfare broadly.44. For the important role of empirical legal work in the development of theories, see Joshua B. Fischman, Reuniting “Is” and “Ought” in Empirical Legal Scholarship, 162 U. Pa. L. Rev. 117 (2013).

Law-and-economics normative theory evaluates legal rules and policies by the value of their consequences in terms of individual welfare.55.Amartya Sen, Utilitarianism and Welfarism, 76 J. Phil. 463-89 (1979). More specifically, the welfarist criterion of social-welfare maximization evaluates legal rules and policies by whether they promote the goal of social welfare maximization. 

Naturally, descriptive empirical work and findings are not positioned to weigh in on the normative discussion66.“Empirical legal scholars must clarify the normative issues at stake in their research and be more explicit about the asserted connections between measurable data and normative claims.” Fischman, supra note 4, at 168. regarding the moral desirability of adopting the welfarist criterion of social welfare maximization. However, given that law-and-economics normative theory seeks to find the legal rules that would maximize social welfare, it is critically important that empirical research explore the fundamental descriptive assumptions made by normative law-and-economics theory. In other words, the natural next step for empirical legal analysis to take is to explore which factors indeed improve people’s wellbeing and the social welfare broadly. By doing so, I demonstrate that empirical work could contribute to the development of normative law-and-economics theory. 

One of the prominent descriptive assumptions that law-and-economics theory makes is that welfare maximization would increase the subjective wellbeing of individuals. One set of questions that empirical research should therefore focus on relates to the correlation between preference maximization and the subjective well-being of individuals. For instance, studies in psychology have explored the effects of a proliferation of options on subjective well-being.77.Barry Schwartz, Self-Determination: The Tyranny of Freedom, 55 Am. Psychologist 79 (2000). These studies have demonstrated that having more, compared to fewer, options to choose from can decrease a person’s intrinsic motivation: people were more likely to undertake optional class essay assignments or to prefer exotic jams or gourmet chocolates if presented with fewer (6) rather than more (24 or 30) options to choose from.88.See Sheena S. Iyengar & Mark R. Lepper, When Choice is Demotivating: Can One Desire Too Much of a Good Thing?, 79 J. Personality & Soc. Psychol. 995 (2000). Interestingly, fewer options also generated greater satisfaction with one’s ultimate choices.99.Id.  

Relatedly, research suggests that a larger range of options to choose from can lead people to feel less confident and less satisfied with the choices they have made, and to prefer not to choose—even if not choosing has negative implications for their well-being.1010.Id. A study using lab experiments and data from the 401(k) plans of more than 500,000 employees from 638 institutions determined that the availability of more, rather than fewer, options increased the tendency to choose simple and easy-to-understand options.1111.Sheena S. Iyengar & Emir Kamenica, Choice Proliferation, Simplicity Seeking, and Asset Allocation, 94 J. Pub. Econ. 530-39 (2010).

A similar group of studies has distinguished between looking for a “good enough” option—‘preference satisfaction’—and looking for the best option—‘preference maximization’.1212.See, e.g., Herbert A. Simon, A Behavioral Model of Rational Choice, 59 Q. J. Econ. 99 (1955). Studies have shown that the people who try to maximize their preferences (compared to people who try to satisfy them) tend to make better choices, but that they also tend to be less satisfied with the choices they made.1313.Sheena S. Iyengar, Rachael E. Wells & Barry Schwartz, Doing Better but Feeling Worse: Looking for the “Best” Job Undermines Satisfaction, 17 Psychol. Sci. 143 (2006).

Satisfying one’s preferences has been found to be associated with greater well-being compared to maximizing one’s preferences.1414.Barry Schwartz, Andrew Ward, John Monterosso, Sonja Lyubomirsky, Katherine White & Darrin R. Lehman, Maximizing Versus Satisficing: Happiness Is a Matter of Choice, 83 J. Personality & Soc. Psychol. 1178 (2002). Further, it has been shown that the tendency of individuals to strive for the best option, rather than for the “good enough” option, tends to be negatively correlated with happiness, optimism, self-esteem, and life satisfaction; and positively correlated with depression, perfectionism, and regret.1515.Wändi Bruine de Bruin, Alexandre Y. Dombrovski, Andrew M. Parker & Katalin Szanto, Late‐Life Depression, Suicidal Ideation, and Attempted Suicide: The Role of Individual Differences in Maximizing, Regret, and Negative Decision Outcomes, 29 J. of Behavioral Decision Making 363 (2016).  

Future research could be directed toward extending our understanding of the correlation between preference maximization and well-being. Such research could, for example, investigate whether the magnitude of this correlation is similar across groups of people, or for the same person over time. Likewise, empirical research could focus on elucidating the conditions under which the maximization of one’s preferences would not improve her well-being, or on the cumulative effects of constantly maximizing one’s preferences on her well-being over time. Relatedly, empirical research can focus on an additional set of descriptive assumptions regarding the effects of agency (and of the act of choosing) on a person’s well-being. 

A large body of literature underscores the positive effects that being afforded choice has on one’s well-being. The availability of choice tends to enhance one’s sense of self-determination and intrinsic motivation;1616.Edward L. Deci, The Psychology of Self-Determination (1980); Edward L. Deci & R.M. Ryan, Intrinsic Motivation and Self-Determination in Human Behavior (1985). to increase a person’s perception of control; 1717.See Deci, supra note 16; Deci & Ryan, supra note 16. and to enhance one’s performance and increase one’s satisfaction with the decision, its outcome, and her well-being.1818.Jerry M. Burger, Negative Reactions to Increases in Perceived Personal Control, 56 J. Personality & Soc. Psychol. 246 (1989); Diana I. Cordova & Mark R. Lepper, Intrinsic Motivation and the Process of Learning: Beneficial Effects of Contextualization, Personalization, and Choice, 88 J. Educ. Psychol. 715 (1996). Interestingly, other studies have shown that the act of choosing tends to increase one’s well-being only when it is possible to make a choice from a range of preferred alternatives. When choosing from a range of less-preferred alternatives, the act of choosing tends to decrease one’s well-being compared to non-choosing.1919.Simona Botti & Sheena S. Iyengar, The Psychological Pleasure and Pain of Choosing: When People Prefer Choosing at the Cost of Subsequent Outcome Satisfaction, 87 J. Personality & Soc. Psychol. 312 (2004). 

One recent related study showed that agency (possessing the capacity to alleviate one’s negative conditions) tends to shape one’s risk preferences. Participants in an experiment given more agency over their environment, and more options to alleviate time scarcity, expressed greater risk tolerance. These results held even though nearly all of the individuals in the experiment who had been provided with the option to alleviate time scarcity did not, in the event, exercise it. This suggests that “merely knowing that one can alleviate scarcity is sufficient” in itself to change one’s behavior.2020.Ayelet Gneezy, Alex Imas & Ania Jaroszewicz, The Impact of Agency on Time and Risk Preferences, 11 Nature Comm. 1 (2020).  Future research could further our understanding of the effects of agency (and choosing) on a person’s well-being by evaluating (1) the decreasing marginal positive effects of agency on well-being, and (2) the possible negative effects that agency and choosing can have on one’s well-being if the prospect of agency is suddenly denied. 

Empirical research should also be directed to an additional set of questions relating to the complex structure that makes up a person’s web or network of preferences. Like studies that have mapped networks of relationships and their structural features, future studies could focus on mapping individual networks of preferences and elucidating the intercalations across them, the structural distinctions between types of preferences, and the effects of the network structures on the content of the preferences and on preference change. Moreover, future studies could elaborate the effect of welfare maximization on the structure and content of one’s network of preferences. 

In addition to exploring the fundamental descriptive assumptions made by law-and-economics theory, empirical work can be used to elucidate the moral intuitions people have about the normative assumptions of law-and-economics theory. In other words, empirical work can be used to evaluate people’s perceptions of the correlation between welfare maximization and well-being and of the desirability of adopting the welfarist criterion of social welfare maximization. This does not mean that law-and-economics normative theory should follow people’s moral intuitions, but rather that understanding these intuitions is important. 

Finally, in the paper Arlen proposes that in order for empirical analyses to contribute to normative law-and-economics theory, they should accurately represent how people do or will respond to various legal rules. Building on Arlen’s own body of empirical research, and her co-founding of the Association and the Society for Empirical Legal Studies, it follows that for empirical work to fully capture the nuances of human behavior, research designs should include qualitative, experimental, and quantitative research methods that are capable of addressing different aspects of research questions and supplementing each other as part of the broader objective of contributing to the development of normative law-and-economics theory. 

     I would like to thank Hanoch Dagan for his insightful comments on this review.