Behaviorism in Finance and Securities Law

Abstract

In this Article, I take stock (as something of an outsider) of the behavioral economics movement, focusing in particular on its interaction with traditional cost-benefit analysis and its implications for agency structure. The usual strategy for such a project—a strategy that has been used by others with behavioral economics—is to marshal the existing evidence and critically assess its significance. My approach here is somewhat different. Although I describe behavioral economics and summarize the strongest criticisms of its use, the heart of the Article is inductive, and focuses on a particular context: financial and securities regulation, as recently revamped by the Dodd-Frank Act and subsequent rule making. To lay the foundation, I begin by briefly describing behavioral economics and by surveying the most significant critiques of its use. I then consider how behavioral economics has informed, or might inform, the work of the Consumer Financial Protection Bureau, SEC rule making on proxy access, and the efforts of the new financial legislation to ban bailouts. I suggest, among other things, that behavioralism’s implications are quite different for rules and rule making than for questions of regulatory structure.