Investment Indiscipline: A Behavioral Approach to Mutual Fund Jurisprudence by Professor Birdthistle

Professor William Birdthistle has recently posted his article Investment Indiscipline: A Behavioral Approach to Mutual Fund Jurisprudence on ssrn.  It will be published in the Illinois Law Review.  Here is the abstract:

Next Term, in Jones v. Harris, the Supreme Court will be called upon to resolve philosophical divergences on a massive, critical, yet academically slighted subject: the dysfunctional system through which almost one hundred million Americans attempt to save more than ten trillion dollars for their retirement. When this case was in the Seventh Circuit, two of the foremost theorists of law and economics, Chief Judge Frank Easterbrook and Judge Richard Posner, disagreed vociferously on competing analyses of the investment industry. The Supreme Court’s ruling will not only resolve the intricate fiduciary and doctrinal issues of this dispute but also have profound implications upon several major theoretical debates in contemporary American jurisprudence: the clash of classical versus behavioral economics; the judicial capacity to evaluate increasingly sophisticated econometric analyses of financial systems; and the determination of the legal constraints – if any – upon executive compensation decisions. 

In this Article, I advance a positive account of the economic and legal context of this dispute and then argue normatively for a behavioral approach to its resolution. Because of the unique structure and history of the personal investment industry in the United States, the architecture of this segment of the economy is singularly bereft of beneficial market forces and thus vulnerable to significant fiduciary distortions. The ultimate judicial resolution of this dispute should take full account of the behavioral constraints upon individual investors and their advisors to avoid nullifying a federal statute and to impose discipline in a vital segment of the U.S. economy.

In addition, Professor Birdthistle will be speaking at the first Faculty-Student Workshop today at noon.  Look for a video podcast of the event on this blog in the near future.