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Foundational Principles of Contract Law$
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Melvin A. Eisenberg

Print publication date: 2018

Print ISBN-13: 9780199731404

Published to Oxford Scholarship Online: October 2018

DOI: 10.1093/oso/9780199731404.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 23 October 2021

Behavioral Economics and Contract Law

Behavioral Economics and Contract Law

(p.159) Eleven Behavioral Economics and Contract Law
Foundational Principles of Contract Law

Melvin A. Eisenberg

Oxford University Press

Chapter 11 concerns behavioral economics. Classical contract law was implicitly based on a rational-actor or expected-utility model of psychology. Under this model, actors who make decisions in the face of uncertainty rationally maximize their expected utility, with all future benefits and costs properly discounted to present value. Rationality, in turn, requires that when consequences are uncertain their likelihood must be evaluated without violating the basic rules of probability theory. Within the last half century a great body of theoretical and empirical work in cognitive psychology, known as behavioral economics, has shown that due to the limits of cognition the expected-utility model often diverges from the actual psychology of choice. Some of the decision-making rules that people use yield systematic errors, and other aspects of peoples’ cognitive capabilities are also systematically defective.

Keywords:   rational-actor psychology, expected-utility psychology, cognitive psychology, behavioral economics, probability theory, limits of cognition

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