Donald Langevoort is a Professor of Law at the Georgetown University Law Center. This post relates to Professor Langevoort’s new book.
Most existing work in the fields of corporate governance and investor protection assumes that corporate managers (and bankers, analysts, brokers and the like) are smart—and selfish—utility maximizers, while many investors are not. That follows naturally from the assumption that the former got to where they are via success in competitive crucibles that reward rationality, and survive and thrive by continuing their savvy ways. Many of the legal strategies designed to discourage opportunism and promote honesty and fiduciary responsibility take that assessment of human nature for granted.
But what if that assessment is overly simple, or wrong? In a new book—Selling Hope, Selling Risk: Corporations, Wall Street and the Dilemmas of Investor Protection—I explore what it means for securities regulation if we take seriously ways that cultural and cognitive biases affect the behavior of more than just ordinary investors. A rapidly growing body of research in financial economics, psychology, and sociology paints a richer picture of how these biases, especially egocentric ones, can actually be survival traits in the Darwinian world of business and finance. Phenomena like overconfidence, excessive optimism, competitive arousal, self-serving inference and many others offer explanations for why illusions sometimes produce marketplace success, not prevent it.