Selling Hope, Selling Risk: Some Lessons for Law from Behavioral Economics about Stockbrokers and Sophisticated Customers
![handle is hein.journals/calr84 and id is 641 raw text is: Selling Hope, Selling Risk: Some
Lessons for Law from Behavioral
Economics About Stockbrokers
and Sophisticated Customers
Donald C. Langevoortt
When risky investments go wrong, brokers and customers may
blame each other for the misfortune. Courts and others resolving these
disputes must then decide whether the broker withheld information
about the risk, or whether the customer knew about the risk and simply
made a bad decision. This Article argues that the choice of expla-
nations is not nearly so stark as it may appear. Drawing on research in
behavioral economics, the Article develops an account of why brokers
are tempted to mischaracterize an investment's level of risk, and why
sophisticated investors may make excessively risky investment choices.
The centerpiece of this account is trust: brokers are highly motivated to
cultivate their customers' trust, and customers have powerful incentives
to respond. This trust creates a sustainable opportunity for both
conscious and unconscious exploitation by the broker. The Article then
explores the legal and regulatory implications of this trust-based
account, arguing for meaningful risk disclosure requirements even when
the investor is sophisticated.
INTRODUCTION
[T]hese guys [the financial people at Gibson Greeting
Cards] have done some pretty wild stuff. And you know, they
probably do not understand it quite as well as they should. I
think that they have a pretty good understanding of it, but not
perfect. And that's like perfect for us.'
Copyright @ 1996 California Law Review, Inc.
t Lee S. & Charles A. Speir Professor of Law, Vanderbilt University. Thanks are due to
Elliott Weiss and Tamar Frankel for their helpful comments.
1. In the Matter of BT Securities Corp., Exchange Act Release No. 35,136, [1994-95 Transfer
Binder] Fed. See. L. Rep. (CCH) 85,477, at 86114 (Dec. 22, 1994). The Bankers Trust-Gibson
matter and a similar set of allegations involving the purchase of derivatives by Procter & Gamble are
detailed in Carol J. Loomis, Untangling the Derivatives Mess. FORTUNE, Mar. 20, 1995, at 50.](ViewImageLocal?handle=hein.journals/calr84&div=21&collection=&method=preview&ext=.png&size=3)
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Selling Hope, Selling Risk: Some Lessons for Law from Behavioral Economics about Stockbrokers and Sophisticated Customers
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