Trust Behavior: The Essential Foundation of Securities Markets

16 Pages Posted: 3 Aug 2009  

Lynn A. Stout

Cornell Law School - Jack G. Clarke Business Law Institute

Date Written: July 31, 2009

Abstract

Evidence is accumulating that in making investment decisions, many investors do not employ a 'rational expectations' approach in which they anticipate others’ future behavior by analyzing their incentives and constraints. Rather, many investors rely on trust. Indeed, trust may be essential to a well-developed securities market. A growing empirical literature investigates why and when people trust, and this literature offers several useful lessons. In particular, most people seem surprisingly willing to trust other people, and even institutions like 'the market,' in novel situations. Trust behavior, however, is subject to history effects. When trust is not met by trustworthiness but instead is abused, trust tends to disappear. These lessons carry significant implications for our understanding of modern securities markets.

Keywords: market investing, securities markets, investing behavior, market expectations

JEL Classification: G1, G2

Suggested Citation

Stout, Lynn A., Trust Behavior: The Essential Foundation of Securities Markets (July 31, 2009). UCLA School of Law, Law-Econ Research Paper No. 09-15. Available at SSRN: https://ssrn.com/abstract=1442023 or http://dx.doi.org/10.2139/ssrn.1442023

Lynn A. Stout (Contact Author)

Cornell Law School - Jack G. Clarke Business Law Institute ( email )

Myron Taylor Hall
Cornell University
Ithaca, NY 14853-4901
United States
607-255-8431 (Phone)

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