by Jeff Sovern
Bear with me for a moment. As is well-known, Richard H. Thaler and Cass R. Sunstein,in their important book Nudge, describe how classical microeconomics assumes that all people are rational. They call such rational people "Homo Economicus" or, for short, "Econs." But, as they also describe, and as Thaler elaborates on in his new and also excellent book, Misbehaving, real people are often not rational. They make predictable errors, and the study of these errors has led to the development of behavioral economics. Thaler, Sunstein, and many others have argued that economic models should be revised to take into account these discoveries to make the models more accurate in describing human behavior, and thus more useful in predicting that behavior.
In Misbehaving, Thaler reports on how behavioral economics' model of the irrational person is winning the battle against classical microeconomics' Econs. Law has a similar war going on. Classical legal rules also make assumptions about people that have been proved not to describe human behavior accurately. For example, contract law's duty to read--which usually holds people to their contract whether they have read the contract or understand it or not--assumes that people read contracts. Another example: in evaluating the 1692g validation notice debt collectors are obliged to provide to consumers, courts assume that the consumer has read that notice, and uphold the validity of the notice whether or not consumers have actually read it, as long as the notice is not overshadowed (by, for example, larger print demanding payment) or is not contradicted (by, for example, demands for payment before the thirty days allotted for validation have expired.
But extensive literature, often referred to on this blog, makes clear that few people read contracts, and that many don't understand them when they do (I'll have more to say about consumer understanding of validation notices another time). The law thus employs rules which appear to be designed for people who don't actually exist, rather than the people who do, just as the economics models did. I've been trying to come up with a name for the imaginary humans the law assumes. Home Lex? Lexons for short? (Yes, I know "lexon" is not consistent with Latin, but "leges" doesn't have the right sound. And Lexis is taken.) If you have a better idea, please mention it in the comments.
This is a bit of an overstatement, but it seems to me that most common law consumer law rules are made for Lexons, while some statutes (but far from all) recognize that people are not always rational. The CFPB's rules partake of both. To the extent that the Bureau attempts to use disclosures to solve problems (e.g., the TILA/RESPA disclosures--and yes, I know the Bureau was commanded to do so by Congress), it is making rules for Lexons. To the extent that it prohibits self-destructive decisions (likely to be true of the forthcoming payday lending rules), it is making rules for real, fallible people. We probably won't see a clear victory for either side across the board, but I predict one side or the other wins a victory in one area or another. I would love to see any comments people care to post on this.