Due Diligence

Why Rules Don't Work

Rules and incentives-based fixes to social and economic problems like the most recent banking disaster don't work, says Barry Schwartz, American psychologist and the Dorwin Cartwright Professor of Social Theory and Social Action at Swarthmore College, in this fascinating talk for TED (the excellent and now widely known California-based annual conference on ideas). It is clear that Schwartz does not think very highly of Wall Street banks in their current incarnation, but his anti-rules approach is perhaps counter-intuitive for someone who has this attitude. He calls, instead, for wisdom and practical sense. It's natural to wonder how you encourage such things without incentives or rules, but maybe that will be the subject of a future talk.

This is a particularly interesting subject to consider as the SEC looks at harmonizing the principles-based regulatory regime that governs RIAs and investment advisers with the rules-based regulatory regime that governs broker/dealers and brokers. A report is due to Congress from the SEC on Jan. 21.

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