Regulating for Rationality

Abstract

Traditional consumer protection law employs various disclosure requirements to respond to market imperfections that result when consumers are misinformed or unsophisticated. This regulation assumes that consumers can rationally act on the information that disclosure seeks to produce. Experimental results in psychology and behavioral economics question this rationality premise. The numerous reasoning defects consumers exhibit in these experiments would vitiate disclosure solutions if those defects also presented in markets. To assume that consumers behave as badly in markets as they do in the lab implies new regulatory responses. This Article sets out the novel and difficult challenges that such "regulating for rationality" -intervening to cure or to overcome cognitive error- poses for regulators.