Behavioral economics (or, the application of empirical psychology to economics) has been around for more than a decade, and its teachings have begun to influence both policymaking and legal strategy. So it makes sense that at some point, someone would try to apply it to class action practice.

In her article "Behavioral Science and Scienter in Class Action Securities Fraud Litigation," Miami Business professor Ann Morales Olazabal makes a first attempt at applying some of the insights from behavioral economics to securities fraud cases. Her specific concern is what the past decade’s findings say about the PSLRA’s scienter requirement, which mandates that a corporation or its officers must knowingly mislead investors. After all, if much of our thinking is "automatic" and biased, it becomes more difficult to say that an executive knowingly disseminated false information that he himself may have believed. As she puts it:

When we humans make decisions and draw conclusions, we are subject to the fallacies, illusions, biases, and heuristics about which psychologists, neurobiologists, and behavioral economists like Professor Kahneman warn us. Corporate officers and managers are not spared by virtue of their positions. They are human beings like everyone else. Setting to one side naked opportunism, and even possible motivation and purpose to stay shielded from the truth, what we know about cognitive heuristics and biases tells us fairly unequivocally that top managers’ judgments about risks, corporate performance, and business prospects are subject to a host of skewing phenomena. Importantly, what we have learned about fast and slow thinking thus far raises the likelihood that executives who speak to the market about their businesses are, by dint of human nature, likely to be more reckless than they and we may have thought.

(Emphasis added, internal footnotes omitted.) Professor Olazabal worries that these effects mean that the securities laws may not lead to an optimal level of deterrence, and advocates creating a "recklessness" standard instead for statutes like the PSLRA and Sarbanas-Oxley. As a matter of policy, she may or may not be right. In fact, as I have argued elsewhere, the optimal level of deterrence for any behavior may be a moving target over time.

Meanwhile, securities lawyers looking to dismiss or defeat securities class actions may want to dig deeper into which allegations about scienter may more plausibly be explained by the cognitive biases we know affect corporate defendants.