Rationality's Reach

RATIONALITY'S REACHSeduction by Contract: Law, Economics, and Psychology in Con- sumer Markets. By Oren Bar-Gill. Oxford: Oxford University Press. 2012. Pp. xvi, 249. Cloth, $39; paper, $25.IntroductionEconomic analysis and the rational actor model have dominated con- tracts scholarship for at least a generation.1 In the past fifteen years or so, however, a group of behaviorists has challenged the ability of the rational choice model to account for consumer behavior.2 These behaviorists are not trying to dismantle the entire enterprise. They generally accept the funda- mentals of economic analysis but argue that the rational actor model can be improved by incorporating evidence of decisionmaking flaws that people exhibit.Oren Bar-Gill3 has been one of the foremost and influential proponents of a behaviorist take on contracts, and his recent book, Seduction by Con- tract: Law, Economics, and Psychology in Consumer Markets, is the culmina- tion of these efforts. In the book, he portrays consumers as the targets of temptation. The tempters are credit card, subprime mortgage, and cell phone companies that structure contracts in ways that exploit the behavioral weaknesses of some consumers. They seduce by offering upfront lures like frequent-flier miles, interest-only payments, and ostensibly free cell phones. But these contracts also bury deferred penalties such as escalating interest rates and a bevy of fees. The later costs are a source of regret for consumers and, in Bar-Gill's view, may warrant regulation that can limit this undesir- able seduction.Bar-Gill builds his analysis around a framework that emphasizes the problems with contractual complexity and deferred costs. Complexity can obscure the content of contracts, and consumers may be overly optimistic about what they do not know. This effect, Bar-Gill argues, can lead people to make errors when they assess the value of a bargain (p. 10). Deferred costs, meanwhile, exploit the intense preference that some consumers may have for immediate gratification (pp. 21-23). This myopia leads them to underesti- mate whether and how often they will fall prey to the deferred fees that many consumer contracts impose.Throughout the book, Bar-Gill recommends the same salve for both ills. Targeted disclosure, he argues, is a minimally intrusive way to improve con- sumer-purchasing decisions (pp. 32-43). It can correct optimism by alerting people to the cost of terms that may be buried in contracts, and it can mini- mize myopia by informing people about typical usage patterns.In this Review, I contrast Bar-Gill's analysis of complexity and deferred costs with an analysis of these problems that uses a pure rational choice model. My goal is to evaluate which of these approaches fares better at ex- plaining the necessarily limited evidence we have about consumer responses to contractual complexity and deferred costs. As will become clear, I think that what we learn from the behavioral take on myopia tells us more than would a behavioral perspective on contractual complexity. When it comes to dense and complex fine print, there are longstanding rational choice models that predict how people might respond to the high cost of learning what is in a contract. These models predict that people will not read consumer agreements and that contract quality will accordingly be low. I suggest that the problem of rational ignorance of contracts may be a more substantial problem than the misperception that Bar-Gill stresses.As part of this exercise, I explain my skepticism that the improved dis- closure Bar-Gill endorses will be the most effective way to regulate the problems he identifies with consumer contracts.4 With regard to complexity, this skepticism comes from an argument that the rational choice model may best explain how consumers evaluate form contracts. These models of com- plexity predict that the failure of consumers to read contracts will substan- tially degrade the overall quality of contracts. …