Fairness, Utility, and Market Risk

66 Pages Posted: 7 Mar 2010 Last revised: 5 Feb 2013

Jeff Schwartz

University of Utah - S.J. Quinney College of Law

Date Written: March 5, 2010

Abstract

In this Article, I argue that we lack a satisfactory theory about how disclosure, the centerpiece of securities regulation, serves investor interests. To close this gap, I contend that the regulations should be viewed as part of a broader societal framework that protects individuals from stock-market risk. I flesh out this notion in three ways. First, I set out to justify protection from market risk as a valid societal goal. To do so, I appeal to Rawlsian and utilitarian notions of justice. These moral theories contain the principle that a just society helps individuals manage risk. I argue that this principle applies to the risk in the stock market - its volatility. Second, I describe how society currently protects investors from market swings. I contend that securities regulation provides one form of protection. Beyond that, I argue, we rely on a largely market-based paradigm, where individuals are expected to manage volatility on their own by diversifying their portfolios and investing for the long term. In the final part of the Article, I look at the normative implications of this analysis. I ask whether today’s risk-management framework is effective, efficient, and fair. I argue that it comes up short in these regards and consider avenues of reform. I posit that reforms to securities regulations offer little upside, but that we can help investors through the creation of institutions exogenous to the market that facilitate better portfolio diversification and the equitable sharing of market risk across society and generations.

Keywords: Securities Regulation, Regulatory Theory

JEL Classification: G18, K22

Suggested Citation

Schwartz, Jeff, Fairness, Utility, and Market Risk (March 5, 2010). Oregon Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1565834 or http://dx.doi.org/10.2139/ssrn.1565834

Jeff Schwartz (Contact Author)

University of Utah - S.J. Quinney College of Law ( email )

383 S. University Street
Salt Lake City, UT 84112-0730
United States

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