Risk Perceptions in Regulation, Tort Liability, and the Market

Risk regulations are generally based on a stylized view of the behavior of the individuals affected by the regulation. These behavioral assumptions establish the basis for regulation and also influence the character of the regulation that will be pursed. The mix of behavioral assumptions that provides the basis for policy is often inconsistent. In some cases policymakers assume that irrationality prevails if that assumption will promote government intervention. If, however, individual perception of the risk and response to it is required to make a policy effective, risk regulators do not recognize individuals' cognitive limitations. These stylized views of risk-taking behavior are often sharply contradicted by empirical evidence on individual behavior. Errors in judgment and decisions do exist, but all too often these errors provide the impetus for a government policy. The net effect is that these policies often reinforce market failures rather than eliminate them.