BEHAVIORAL ECONOMICS AND CONSUMER STANDARD FORM CONTRACTS: IMPERATIVE LESSONS FROM BEHAVIORAL SCIENCE

Shmuel I. Becher, Yale Law School

Abstract

Whereas it is clear that asymmetric information is a serious threat to the efficiency of standard form contracts, legislatures, courts, and market-forces do not provide an adequate solution to this threat. This paper argues that a considerable part of this failure is due to the fact that important and relevant social science insights regarding consumers’ behavior is widely overlooked. This gap results in the prevalence of unfair or inefficient standard form contract provisions. More profoundly, it entails that current approaches towards standard form contracts are fundamentally flawed and bound to reach erratic and sometimes unjust conclusions. Cognitive biases and consumers’ actual behavioral patterns have an important role–descriptively and normatively–in the law of standard form contracts. This article explains how psychological phenomena contribute (i) to consumers’ tendency not to read standard form contracts even when by doing so they fail to maximize their utility; (ii) to consumers’ inability to evaluate correctly contract terms once they do read them; and as a result (iii) to sellers’ capability of manipulating consumers. Hence, presuming the efficiency of form contract terms might be misguided due to fundamental behavioral failures on the part of consumers. The end point of this discussion is twofold: First, to expand our understanding regarding the inadequacy of current approaches to standard form contract and the harm that consumers are exposed to when actual behavioral patterns are ignored. Secondly, it suggests valuable insights into the ways in which the design issues associated with the alternative proposed approach to standard form contracts ought to be approached.