Like the placebo effect of medicine, laws impact social welfare beyond their objective effects by manipulating the public’s subjective perception of the law’s effectiveness. When evaluating a law’s impact on social welfare, scholars previously considered only the law’s objective effects and, in some cases, the psychic utility derived from it. However, many laws also significantly affect social welfare by manipulating subjective perceptions of the risks that they address (e.g., assuring the public that the law will mitigate the risk). The sense of assurance may in itself be a psychic effect, but the change in the perceived risk has an objective, measurable impact that is distinct from both objective and psychic effects of a law. This largely ignored effect is a law’s “Placebo Effect” – the impact on social welfare of a change in individuals’ subjective assessment of the legal action’s benefits. Failure to consider placebo effects may cause significant overstatement or understatement of a law’s benefits. Through application of literature on cognitive biases, the direction and magnitude of the placebo effect can be estimated, leading to more accurate evaluation of the feasibility of laws.


Law and Economics

Date of this Version

August 2005