Investment Indiscipline: A Behavioral Approach to Mutual Fund Jurisprudence

This Term, in Jones v. Harris Associates L.P., the Supreme Court will have the opportunity to resolve doctrinal, econometric, and philosophical divergences over a profoundly important financial system: the investment industry through which almost one hundred million Americans attempt to save more than ten trillion dollars for their retirement. When this case was before 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 this industry. The Supreme Court’s opinion in this case should not only resolve the intricate doctrinal fiduciary issues of the dispute but also have important implications for several major theoretical debates in contemporary American jurisprudence: the permissible constraints—if any—upon determinations of executive compensation; the judicial capacity to evaluate increasingly sophisticated econometric analyses of financial systems; and the growing tension between neoclassical and behavioral economics.Professor Birdthistle advances a positive account of the economic and legal context of this dispute and argues 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 unprotected by beneficial market forces and exhibits significant competitive weaknesses such as broad price dispersion and a negative correlation between fees and performance. The ultimate judicial resolution of this dispute should take account of the behavioral constraints upon individual investors and their advisors to avoid nullifying congressional action and to impose discipline in a vital segment of the U.S. economy.

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