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http://ssrn.com/abstract=442820
 
 

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Fraud by Hindsight


G. Mitu Gulati


Duke University - School of Law

Jeffrey J. Rachlinski


Cornell Law School

Donald C. Langevoort


Georgetown University Law Center


Georgetown Public Law Research Paper No. 442820; Georgetown Law and Econ. Research Paper No. 442820; Cornell Legal Studies Research Paper No. 05-007

Abstract:     
In securities-fraud cases, courts routinely admonish plaintiffs that they are not permitted to rely on allegations of "fraud by hindsight." In effect, courts disfavor plaintiffs' use of evidence of bad outcomes to support claims of securities fraud. Disfavoring hindsight evidence appears to tap into a well known, well-understood, and intuitively accessible problem of human judgment of "20/20 hindsight." Events come to seem predictable after unfolding, and hence, bad outcomes must have been predicted by people in a position to make forecasts. Psychologists call this phenomenon the hindsight bias. The popularity of this doctrine among judges deciding securities cases suggests that judges actively seek techniques that enable them to correct for psychological biases that might otherwise affect their decision-making.

This paper assesses the hypothesis that judges have adopted the "fraud-by-hindsight" doctrine so as to avoid erroneous judgment infected with the hindsight bias. We find that although judges have identified a real problem in human judgment, they are not developing a doctrine to remedy the influence of hindsight on judgment. Rather, they are using this problem of human judgment as the justification for expanding their authority to manage the complex, high-stakes securities cases that come before them. The result provides judges with the greater case-management authority they seek, but leaves the securities litigation without a meaningful doctrine to ameliorate the influence of hindsight on judgment.

Number of Pages in PDF File: 61

JEL Classification: K0, K2

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Date posted: February 22, 2005  

Suggested Citation

Gulati, G. Mitu and Rachlinski , Jeffrey J. and Langevoort, Donald C., Fraud by Hindsight. Georgetown Public Law Research Paper No. 442820; Georgetown Law and Econ. Research Paper No. 442820; Cornell Legal Studies Research Paper No. 05-007. Available at SSRN: http://ssrn.com/abstract=442820 or http://dx.doi.org/10.2139/ssrn.442820

Contact Information

Gaurang Mitu Gulati (Contact Author)
Duke University - School of Law ( email )
Box 90360
Duke School of Law
Durham, NC 27708
United States
Jeffrey John Rachlinski
Cornell Law School ( email )
524 College Ave
Myron Taylor Hall
Ithaca, NY 14853
United States
607-255-5878 (Phone)
607-255-7193 (Fax)
Donald C. Langevoort
Georgetown University Law Center ( email )
600 New Jersey Avenue, NW
Washington, DC 20001
United States
202-662-9832 (Phone)
202-662-9412 (Fax)
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