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This chapter argues that reference-dependence and loss aversion are crucial not only to understanding human behavior, but also to understanding how the law shapes people’s behavior. Moreover, it argues that reference-dependence and loss aversion can explain—and possibly justify—key features of the law itself. It shows how these psychological notions permeate the law and illuminate fundamental characteristics of the legal system. It then considers an evolutionary explanation for the congruency between loss aversion and the law, as well as an explanation based on the correspondence between loss aversion, prevailing moral judgments, and the law. Finally, it is argued that reference-dependence and loss aversion not only explain basic features of the law, but can justify them, as well.
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