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This assumption served as the basis for modern consumption theories according to which individuals smooth their consumption over time according to their permanent income.

In the past few decades, economic analysis of law has been challenged by a growing body of experimental and empirical studies that attest to prevalent and systematic deviations from the assumptions of economic rationality. While the findings on bounded rationality and heuristics and biases were initially perceived as antithetical to standard economic and legal-economic analysis, over time they have been largely integrated into mainstream economic analysis, including economic analysis of law. Moreover, the impact of behavioral insights has long since transcended purely economic analysis of law: in recent years, the behavioral movement has become one of the most influential developments in legal scholarship in general. Behavioral Law and Economics offers a state-of-the-art overview of the field. The book surveys the entire body of psychological research underpinning behavioral analysis of law, and critically evaluates the core methodological questions of this area of research. The book then discusses the fundamental normative questions stemming from the psychological findings on bounded rationality, and explores their implications for establishing the aims of legislation, and the means of attaining them. This is followed by a systematic and critical examination of the contributions of behavioral studies to all major fields of law—property, contracts, consumer protection, torts, corporate, securities regulation, antitrust, administrative, constitutional, international, criminal, and evidence law—as well as to the behavior of key players in the legal arena: litigants and judicial decision-makers.

This article focuses on the influence of framing on the way people understand their contractual obligations. A large body of both psychological and economic studies suggests that people treat payoffs framed as gains and payoffs framed as losses distinctly. Building on these studies, we hypothesize that the ways parties understand their duties are affected by the way in which they are framed. More specifically, we expect that promisors will tend to adopt a more self-serving interpretation when they are making decisions in the domain of losses. To test this prediction, we run a series of four experiments that are all based on a betweensubject design. The first two studies utilize experimental surveys that measure and compare participants' attitudes toward a contract interpretation dilemma. The third and fourth studies are incentive-compatible experiments, in which participants' actual interpretive decisions determine their payoff. All four experiments confirm our basic hypothesis and show that framing contractual payoffs as losses rather than as gains raises parties' tendency to interpret their obligations selfishly. These findings refine some of the previous understanding regarding the ability of penalties to optimize parties' contractual behavior, especially in situations in which monitoring is limited. Based on these findings, the article revisits some of the basic questions of contract law, shedding new light on an array of issues such as the law of liquidated damages and the optimal design of contracts.

The past twenty years have witnessed a surge in behavioral studies of law and law-related issues. These studies have challenged the application of the rational-choice model to legal analysis and introduced a more accurate and empirically grounded model of human behavior. This integration of economics, psychology, and law is breaking exciting ground in legal theory and the social sciences, shedding a new light on age-old legal questions as well as cutting-edge policy issues. The Oxford Handbook of Behavioral Economics and Law brings together leading scholars of law, psychology, and economics to provide an up-to-date and comprehensive analysis of this field of research, including its strengths and limitations as well as a forecast of its future development. Its twenty-nine chapters are organized into four parts. The first part provides a general overview of behavioral economics. The second part comprises four chapters introducing and criticizing the contribution of behavioral economics to legal theory. The third part discusses specific behavioral phenomena, their ramifications for legal policymaking, and their reflection in extant law. Finally, the fourth part analyzes the contribution of behavioral economics to fifteen legal spheres ranging from core doctrinal areas such as contracts, torts, and property to areas such as taxation and antitrust policy.