Sunday, August 8, 2010
Can Behavioral Economics Inform Our Understanding of Securities Arbitration?, by Barbara Black, University of Cincinnati - College of Law, was recently posted on SSRN. Here is the abstract:
The classical economic approach assumes that parties take rational account of the effects of ADR on the likely disposition of their disputes and adopt predispute arbitration agreements (PDAAs) when they mutually benefit the parties. Accordingly, there should be a presumption in favor of enforcing PDAAs so long as the parties have entered into them knowingly and voluntarily, but there is generally no reason for the state to favor PDAAs. In contrast, critics of mandatory consumer arbitration believe that, as a practical reality, consumers cannot bargain over PDAAs and have little choice but to accept the deal offered by the business. In addition, relying on the behavioral economics literature, they assert that consumers typically are not as rational as classic economic theory supposes.
The opposing positions in this debate over consumer arbitration have been well fleshed out in the academic literature. This paper will focus specifically on securities arbitration in the FINRA forum, where there are unique differences in the FINRA process that add complexity to this issue. I look at three examples of puzzling behavior in FINRA securities arbitration to explore whether behavioral economic theory provides an explanation.
This paper is a working paper that will be finalized during a workshop on Oct. 2, 2010 that is part of The University of Tennessee College of Law’s Behavior and Business Law Conference, sponsored by the Clayton Center for Entrepreneurial Law on the occasion of its 15th anniversary. Information on the conference can be found on the UT College of Law website.