Selling hope, selling risk: Some lessons for law from behavioral economics about stockbrokers and sophisticated customers

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 explanations 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.