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European Perspectives on Behavioural Law and Economics pp 193–209Cite as

Retail Investors and Disclosure Requirements

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Part of the book series: Economic Analysis of Law in European Legal Scholarship ((EALELS,volume 2))

Abstract

Disclosures are among the most common techniques introduced. The purpose of such regulation is to correct, for the benefit of the potential retail investor, information asymmetries relating to the characteristics of the financial products and the motivations of the intermediary advisor. The devil is in the detail, however, and it has become apparent that disclosing without assessing “how” to disclose may create unexpected and harmful side-effects. For this reason, there is a need for a research agenda centred around the limits deriving from motivation in the use of financial information and in good decision- making. This research design would disentangle connections between financial law and emotions and, in particular, financial law and happiness as well as financial law and altruism.

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Notes

  1. 1.

    Chater et al. 2010.

  2. 2.

    See e.g., Barber 2005: past performance and the amount spent on marketing are the two main factors that account for the level of retail investment. The cost of management fees does not have an impact. See, however, the critical observations of Coates and Hubbard 2007.

  3. 3.

    Schiller 2012.

  4. 4.

    In a 2012 study, the American financial authority stressed that “American investors lack basic financial literacy”, see SEC 2012 report.

  5. 5.

    Chater et al. 2010.

  6. 6.

    See already Loewenstein et al. 2013.

  7. 7.

    Jovanovic 1982.

  8. 8.

    Coffee 1984.

  9. 9.

    A comprehensive accounting of costs, moreover, should include the time that people need to process the information, the opportunity costs of distracting attention from existing information, and even, in some cases, the hedonic cost of dealing with the information.

  10. 10.

    Ripken 2006.

  11. 11.

    Similarly, it does not require corporations to adopt a code of ethics for senior financial officers but, if no ethics code is adopted, requires corporations to disclose why they failed to do so.

  12. 12.

    Archong et al. 2013.

  13. 13.

    Beales et al. 1981: “[i]nformation remedies are most likely to be the most effective solution to information problems. They deal with the cause of the problem, rather than its symptoms, and leave the market maximum flexibility.”

  14. 14.

    Durkin and Elliehausen 2002, 109 et seq.

  15. 15.

    Durkin and Elliehausen 2002, 109 et seq.

  16. 16.

    It been understood that professional investors do fall into such traps see: Thaler Richard, Sunstein Cass. R. 2014, p. 124; Huang 2005, p. 501; Langevoort 1996; Hirshleifer and Shumway 2003, p. 1009.

  17. 17.

    “All human behavior can be viewed as involving participants who maximize their utility from a stable set of preferences and accumulate an optimal amount of information and other inputs in a variety of markets.” Becker 1976.

  18. 18.

    For a similar (mis)conception in the context of credit reporting, see, Staten and Cate 2004. Does the Fair Credit Reporting Act Promote Accurate Credit Reporting? Building Assets, Building Credit: A Symposium on Improving Financial Services in Low- Income Communities. See also Osovsky 2014.

  19. 19.

    Bowles and Gintis 2000, p. 1413.

  20. 20.

    “…Orthodox economic model of consumer behavior is, in essence, a model of robot-like experts. As such, it does a poor job of predicting the behavior of the average consumer. This is not because the average consumer is dumb, but rather that he does not spend all of his time thinking about how to make decisions.” Thaler 2000, p. 269 and 287.

  21. 21.

    See namely Oren 2008; Wright 2007; Camerer and Loewenstein 2004.

  22. 22.

    Sunstein 2011.

  23. 23.

    Hernstein et al. 1993, p. 149–185.

  24. 24.

    Fox et al. 2005, p. 197.

  25. 25.

    Secretary of the Treasury Paul O’Neill 2002. The State of Financial Literacy and Education in America: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 107th Cong. (testimony of Paul O’Neill, Secretary of the U.S. Department of the Treasury).

  26. 26.

    Willis 2008, p. 284.

  27. 27.

    See Willis 2008, p. 201.

  28. 28.

    US fin. Literacy & educ. Comm’n, taking ownership of the future: the national strategy for financial literacy at vii (2006).

  29. 29.

    Willis 2008, p. 207. Consumers with more education, more financial knowledge, and lower financial discount rates were found more likely to accept an offer of a brief, free credit-counseling session. See Meier and Sprenger 2007.

  30. 30.

    See Willis 2008, p. 205.

  31. 31.

    Willis 2008, p. 205.

  32. 32.

    Hershey et al. 1998, p. 467. See also Choi et al. 2006, p. 335–337. Employees who reported at the end of a retirement-investing seminar that they would increase their savings generally failed to do so.

  33. 33.

    See Anthes and Most 2000; Todd 2002.

  34. 34.

    Benartzi et al. 2007, p. 81.

  35. 35.

    For an overview of the literature of disclosure regulations and proposals see Marotta-Wurgler 2010.

  36. 36.

    See Iyengar and Lepper 2000, p. 996. (“[A]s both the number of options and the information about options increases, people tend to consider fewer choices and to process a smaller fraction of the overall information available regarding their choices…”) Agnew and Szykman 2005, p. 64–66. See also Issacharoff 2010.

  37. 37.

    Howells 2005, p.  363.

  38. 38.

    Hochhauser, Mark. Lost in the Fine Print: Readability of Financial Privacy Notices, at http://www.privacyrights.org/ar/GLB-Reading.htm.

  39. 39.

    Ben-Shahar and Schneider 2010.

  40. 40.

    Shiller 2003, p. 83–104. In addition, disclosure to regulators assist in their task of maintaining systemic stability.

  41. 41.

    For a review, see Spinnler 1991.

  42. 42.

    See namely, Gilovich et al. 2002; Kahneman 2011; Sunstein 2011, p. 1349.

  43. 43.

    Decision makers tend to be influenced by the way in which information is presented, e.g., test participants are more likely to opt for surgery if they are told that the ‘survival’ rate is 90 %, than they would if they are told that the mortality rate is 10 %.

  44. 44.

    Events coming immediately to mind (e.g., a recent financial market crash) are rated as more probable than events that are less mentally available.

  45. 45.

    A propensity to ignore probability all together when a decision is made under uncertainty.

  46. 46.

    A propensity to interpret information (or search for information) in a manner that confirms one’s preconceptions or hypothesis.

  47. 47.

    A preference for avoiding losses over making gains: e.g., test participants prefer to receive a sure EUR46 than have a 50 % chance of making EUR100 (whereas a logical rational agent would take the bet).

  48. 48.

    A propensity to avoid feelings of regret: money and time is invested in a project with dubious results rather than admitting mistake.

  49. 49.

    The tendency to overestimate pleasing outcomes.

  50. 50.

    The inclination to judge harmful actions as worse than equally harmful inactions.

  51. 51.

    Beshears et al. 2009.

  52. 52.

    Mercer et al. 2010.

  53. 53.

    Mercer et al. 2010.

  54. 54.

    It is modelled as an arousal biased competition for neuronal capacity: the BCM model.

  55. 55.

    Hertwig and Ortmann 2001.

  56. 56.

    Hüsser and Wirth 2013.

  57. 57.

    Beshears et al. 2009.

  58. 58.

    See Fischer and Wilkinson-Ryan 2014, p. 605.

  59. 59.

    Karlsson et al. 2009, p. 95–115. See also Sicherman et al. 2012. To Look or Not to Look: Financial Attention and Online Account Logins. Available at http://www8.gsb.columbia.edu/sites/financialstudies/files/files/financialattn.pdf.

  60. 60.

    Leventhal 1971, p. 1208–1224; Rogers 1975; Loeber et al. 2011, p. 292–298.

  61. 61.

    Sharot 2011.

  62. 62.

    Aghion, Philippe. La société de la défiance; Peyrefitte Alain 1995: the author describes how men tend to be “obsessed” with welfare when they perceive it is at risk (see spec. p. 401–402). By contrast the ethos of trust (“confiance”) enables men to build a more satisfactory society; trust cannot be imposed but is a result at the intersection of individual and social factors (self-confidence, confidence in others and in men as well as in God).

  63. 63.

    Experimental data collected by the author, forthcoming.

  64. 64.

    See Algan et al. 2012.

  65. 65.

    Yann et al. 2013.

  66. 66.

    Sah et al. 2012, 2013.

  67. 67.

    Sah et al. 2012, 2013.

  68. 68.

    In several of the experiments, advisees ended up being more likely to comply with the advice, even though they trusted it less.

  69. 69.

    Sah et al. 2012, 2013.

  70. 70.

    Rempel et al. 1985.

  71. 71.

    Locked 1996.

  72. 72.

    Johnson et al. 2005.

  73. 73.

    Non-profit organizations, such as the Consumer’s Checkbook (http://www.checkbook.org/) perform functions along this line.

  74. 74.

    Loewenstein et al. 2014.

  75. 75.

    Research conducted with the support of the Leverhulme Trust Fund.

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Authors and Affiliations

  1. Law Department, Essec Business School, Avenue B. Hirsch, 95 000, Cergy-Pontoise, France

    Prof. Dr. Geneviève Helleringer

  2. Institute of European and Comparative Law, Oxford University, St Cross Road, OX1 3UL, Oxford, United Kingdom

    Prof. Dr. Geneviève Helleringer

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    Klaus Mathis

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Helleringer, G. (2015). Retail Investors and Disclosure Requirements. In: Mathis, K. (eds) European Perspectives on Behavioural Law and Economics. Economic Analysis of Law in European Legal Scholarship, vol 2. Springer, Cham. https://doi.org/10.1007/978-3-319-11635-8_10

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