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Lexeconics pp 85-94 | Cite as

Comments on “ERISA and the Prudent Man Rule”

  • Lewis A. Kornhauser
Part of the Social Dimensions of Economics book series (SDOE, volume 2)

Abstract

As Professor Blair has pointed out, modern portfolio theory suggests a multitude of irrationalities in common law standards for trustees managing investment funds. In elaborating the statutory standards for the “prudent expert” established by the Employee Retirement Income Security Act,1 these perversities are certainly to be avoided. Using portfolio theory to criticize the current standards, however, is a different and much simpler task than using the theory to promulgate new standards that courts can use effectively.

Keywords

Supra Note Investment Strategy Capital Asset Price Model Portfolio Theory Efficient Market Hypothesis 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes

  1. 2.
    Brown, “Toward An Economic Theory of Liability,” 2 Journal of Legal Studies 323 (1973), sets out one of the basic models.CrossRefGoogle Scholar
  2. 3.
    Brown id., criticizes the complete information assumption; Cooter, Kornhauser, and Lande, “Liability Rules, Limited Information and The Role of Precedent,” 10 Bell Journal of Economics, 366 (1979), criticize the informational and behavioral assumptions; Green “On the Optimal Structure of Liability Laws,” 7 Bell Journal of Economics 553 (1976), investigates the cost uniformity assumption. See also the articles cited in note 4 infra.CrossRefGoogle Scholar
  3. 4.
    Diamond, “Accident Law and Resource Allocation,” 5 Bell Journal of Economics and Management Science 366 (1924); Diamond & Mirrless, “On the Assignment of Liability: The Uniform Case,” 6 Bell Journal of Economics 487 (1975).Google Scholar
  4. 6.
    On tort law, see Fletcher, “Fairness and Utility in Tort Theory,” 85 Harv. L. Rev. 537 (1972); Epstein, “A Theory of Strict Liability,” 2 J. Legal Stud. 151 (1973’; Schwartz, “Contributory and and Comparative Negligence: A Reappraisal,” 87 Yale L.J. 697 (1978). On antitrust law, see Blake and Jones, “Toward a Three Dimensional Antitrust Policy,” 65 Colum. L. Rev. 422 (1965); “Antitrust Jurisprudence: A Symposium on the Economic, Political, and Social Goals of Antitrust Policy,” 125 U. Pa. L. Rev. 1182 (1977).CrossRefGoogle Scholar
  5. 8.
    Bines, “Modern Portfolio Theory and Investment Management Law: Retirement of Legal Doctrine,”76 Colum. L. Rev. 721 (1976), begins to confront some of the questions discussed here. See also the sources cited in note 10 infra.CrossRefGoogle Scholar
  6. 12.
    Markowitz, Portfolio Selection: Efficient Diversification of Investments, New Haven, 1920. Jensen, “Capital Markets: Theory and Evidence,” 3 Bell Journal of Economics 357 (1972).Google Scholar
  7. 13.
    Sharpe, “Capital Asset Prices: A Theory of Market Equilibrium under Consitions of Risk,” 19 Journal of Finance 425 (1964); Linter, “Security Prices, Risk and Maximal Gains from Diversification,” 20 Journal of Finance 587 (1965);, “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets,” 47 Rev. of Econ. & Stat. 13 (1965); Jensen, supra note 12.CrossRefGoogle Scholar
  8. 14a.
    Pettaway, “On the Use of β in Regulatory Proceedings, and Empirical Examination,” 9 Bell Journal of Economics 239 (1978).Google Scholar
  9. 16.
    Compare Sharpe, “Risk, Market Sensitivity and Diversification”, Financial Analysts J., Jan.–Feb. 1972 at 74–77 (recommending 30–40 stocks as “best”) Langbein and Posner, “Market Funds and Trust-Investment Law,” 1976 Am. B. Foundation Research J. 1, II (recommending a market portfolio.)Google Scholar
  10. 18.
    Fama, “Efficient Capital Markets: A Review of Theory and Empirical Work,” 25 Journal of Finance 383 (1920).Google Scholar
  11. 22.
    Cohen, “The Suitability Rule and Economic Theory,” 80 Yale L.J. 1604, note 51 (1971), notes this controversy in the economics literature.CrossRefGoogle Scholar

Copyright information

© Martinus Nijhoff Publishing 1981

Authors and Affiliations

  • Lewis A. Kornhauser
    • 1
  1. 1.New York University School of LawUSA

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