Document Type

Article

Publication Date

2011

Abstract

This paper contributes to the ongoing debate over FINRA arbitration by invoking behavioral economics principles to understand why PDAAs in securities arbitration continue to resist powerful market and political forces calling for their elimination.

Part II of the paper sets forth background information to put the issue in context. It first describes several important distinctions between securities arbitration and other forms of consumer arbitration. It next summarizes pertinent economic theory, first classical economic theory in support of PDAAs and then behavioral economics principles that challenge the classical approach.

Part III poses three questions regarding the staying power of PDAAs and explores whether classical or behavioral economics theory can help answer them. Part III concludes that behavioral economics supports regulation of PDAAs in securities arbitration to assure fairness.

Part IV poses a fourth question related to the policy implications of the preceding behavioral economics analysis: What would happen if the SEC or Congress prohibited PDAAs in customers' agreements? I conclude that if Congress or the SEC prohibits PDAAs in securities arbitration, the effect on the FINRA arbitration forum may not be beneficial to investors with small dollar value claims.

Share

COinS