Implications of Behavioral Economics for Law Making

Economics as a body of knowledge has been known to have an immense impact on the analysis and practice of Law and Law making. In fact, various economic tools to analyze law are taught in law schools and used by law makers to shape law. The basic assumption from which all economic analyses starts is that individuals are rational and take actions to maximize their utility. However there have been some noneconomists who have not bought this assumption. This has given birth to a new school of thought known as Behavioral Economics. These experts believe that individuals are "normal" rather than "rational". According to this school of thought, individuals make choices based on limited information and limited cognitive ability and therefore their choices are not the ones that will "maximize" but "satisfice" the utility.As a result, the behavior and reaction to changes in Law of these individuals subject to bounded rationality are different from behavior and reaction of rational individuals. Although research in this area is becoming popular, the relationship between law and behavioral economics is still at its incipient stage. This is a conceptual and by and large a descriptive paper which attempts to provoke a thought in the mind of the reader that behavioral economics may be a more appropriate approach to analyze and shape Law. Its purpose is to extract from literature what behavioral economics is about and then consider some implications of behavioral economics for lawmaking. The authors feel that an endeavor to understand this relationship will help the lawmakers in ensuring that resources flow to their highest valued use.