Behavioral Economics and the SEC‪.‬

INTRODUCTION Not all investors are rational. Quite apart from the obvious examples of credulity in the face of the latest Ponzi scheme, there is no shortage of evidence that many investors' decisions are influenced by systematic biases that impair their abilities to maximize their investment returns. (1) For example, investors will often hold onto poorly performing stocks longer than warranted, hoping to recoup their losses. (2) Other investors will engage in speculative trading, dissipating their returns by paying larger commissions than more passive investors. (3) And we are not just talking about widows and orphans here. There is evidence that supposedly sophisticated institutional investors--mutual funds, pension funds, insurance companies--suffer from similar biases that impair their decisions. (4) These biases are not merely isolated quirks, rather, they are consistent, deep-rooted, and systematic behavioral patterns. Apparently even the considerable sums at stake in the securities markets are not enough to induce market participants to overcome these cognitive defects on a consistent basis.