Insider Trading and Evolutionary Psychology: Strong Reciprocity, Cheater Detection, and the Expanding Boundaries of the Law

Abstract

Insider trading law has expanded in recent years to cover instances of trading on non-public information that fall outside of the fiduciary duty framework set forth by the U.S. Supreme Court in the landmark cases of Chiarella and Dirks. The trend towards a broader insider trading law moves the law closer towards what evolutionary psychology insists humans desire when engaging in collective action: that individuals benefit in proportion to the effort or investment they make in a common enterprise. Insider trading law can therefore be understood as a societal response to cheating in group activities, and the recent expansion of the law can be regarded as reflecting a proclivity for fairness as proportionality. An evolutionary psychology-based account of insider trading law also provides a basis for understanding the observed correlation between insider trading enforcement and various measures of the health of the financial markets, as well as a unified jurisprudence of insider trading law encompassing both consequentialist and deontological aspects.

Keywords: Insider trading, evolutionary psychology, law and economics

JEL Classification: C71, D64, G18, K22, K42