Selling Hope, Selling Risk: Some Lessons for Law from Behavioral Economics About Stockbrokers and Their Sophisticated Customers

Abstract

Disputes involving the sale of risky securities to apparently sophisticated customers arise frequently, and pose vexing legal problems. This article draws from the literature on psychology and economics to develop a rich descriptive account of investment decision-making by both individual and institutional investors, and analyzes the temptations that brokers face to exploit individual cognitive and motivational slack and (in institutional settings) moral hazard problems that may also be subject to denial and rationalization. It then turns to normative questions involving issues such as the treatement of brokers as fiduciaries, the duty to read, and the nature of the brokers' risk disclosure obligations.

JEL Classification: G18