Preventing Excessive Retail Investor Trading under MiFID: A Behavioural Law & Economics Perspective

Regulators around the world, including the European Commission, are becoming increasingly interested in behavioural finance as a toolbox for better securities regulation. When securities laws are designed to prevent or minimise the effect of systematic investor bias, they may violate one of the most fundamental principles of traditional securities regulation, the ‘inalienable right of everyone to make a fool of him (and her)self’ (Louis Loss). The paper discusses the potential and boundaries of an alternative concept of investor protection, based on the assumption that investors systematically fall prey to certain fallacies. Unlike the philosophy underlying traditional securities regulation, this concept’s impetus is not the danger of market failure caused by asymmetric information but by bounded rationality. Its objective is not the informed but the prudent investment decision. Its measures are rules of an ‘asymmetric’ or ‘libertarian’ paternalism which lead those who need help to better investment decisions without limiting the freedom of those who do not need or want any assistance. The paper exemplifies this concept by analysing how the Market in Financial Instruments Directive’s conduct-of-business regulation could be re-shaped to protect overconfident investors who suffer from biased self-attribution and confirmation bias from the dangers of excessive trading.