Taking behavioralism seriously: The problem of market manipulation

In recent years, legal scholars dissatisfied with the behavioral assumption s of the rational actor model have increasingly turned to the findings of c ognitive psychologists and decision theorists to enhance the accuracy of ef ficiency analysis. Jon Hanson and Douglas Kysar review those findings in th is Article, concluding that scholars have been well justified in incorporat ing the behavioralist account of human behavior into law and economics. Nev ertheless, Hanson and Kysar argue that those scholars simultaneously have f ailed to take the findings of behavioral research to their logical conclusi on. Using the scholarly application of behavioralist insights to products l iability theory as an example, the authors demonstrate that legal scholars thus far have treated cognitive anomalies as relatively fixed and independe nt influences on individual decisionmaking. Rather than such an exogenous a nalysis, Hanson and Kysar advocate an endogenous examination of behaviorali st findings that allows for internal, dynamic effects of cognitive biases w ithin the decisionmaking model. By recognizing that cognitive anomalies inf luence not only the behavior of biased decisionmakers bur also the incentiv es of other economic actors, Hanson and Kysar reveal the possibility of mar ket manipulation-that is, the possibility that market outcomes can be influ enced, if not determined, by the ability of one actor to control the format of information, the framing and presentation of choices, and, more general ly, the setting within which market transactions occur. Again using the fie ld of products liability theory as an example, the authors argue that such market manipulation will come to characterize consumer product markets; pow erful economic incentives will drive manufacturers to engage in practices t hat, whether consciously or not, utilize non-rational consumer tendencies t o influence consumer preferences and perceptions for gain. The authors conc lude by previewing the evidence from their companion article that demonstra tes the seriousness of the problem of market manipulation and the need for corrective legal devices such as enterprise liability.