Law & Economics Working Papers Law & Economics Working Papers Archive: 2003-2009 University of Michigan Law School Year 2003 Behavioral Economics and the SEC Stephen Choi∗ Adam C. Pritchardy ∗University of California, Berkeley,
[email protected] yUniversity of Michigan Law School,
[email protected] This paper is posted at University of Michigan Law School Scholarship Repository. http://repository.law.umich.edu/law econ archive/art12 Choi and Pritchard: UNIVERSITY OF MICHIGAN JOHN M. OLIN CENTER FOR LAW & ECONOMICS BEHAVIORAL ECONOMICS AND THE SEC ADAM C. PRITCHARD WORKING PAPER #03-002 THIS PAPER CAN BE DOW NLOADED WITHOUT CHARGE AT : MICHIGAN JOHN M. OLIN CENTER WEBSITE HTTP://WWW.LAW .UMICH.EDU/CENTERSANDPROGRAMS/OLIN/PAPERS.HTM Published by University of Michigan Law School Scholarship Repository, 2003 1 Law & Economics Working Papers Archive: 2003-2009, Art. 12 [2003] Behavioral Economics and the SEC Behavioral24.doc: 3/20/03 12:22 PM Stephen J. Choi* & A.C. Pritchard** Abstract. Investors face myriad investment alternatives and seemingly limitless information concerning those alternatives. Not surprisingly, many commentators contend that investors frequently fall short of the ideal investor posited by the rational actor model. Investors are plagued with a variety of behavioral biases (such as, among others, the hindsight bias, the availability bias, loss aversion, and overconfidence). Even securities market institutions and intermediaries may suffer from biases, led astray by groupthink and overconfidence. The question remains whether regulators should focus on such biases in formulating policy. An omnipotent regulatory decisionmaker would certainly improve on flawed investor decisionmaking. The alternative we face, however, is a behaviorally-flawed regulator, the Securities and Exchange Commission (SEC).