Peter H. Huang Harold E. Kohn Chair Professor of Law James ...

Emotional Impact Analysis
decisions that government agencies or companies make. 73 Empirical research based upon data from the
European Union revealed that institutional trust in law positively impacts people’s subjective well-
being. 74 Thus, EIA should analyze and acknowledge not only emotions related to substantive outcomes,
but also such emotions related to procedural or process considerations as emotional difficulties that
individuals and groups of people have in facing and making certain types of tradeoffs. 75
This Article advocates that securities and financial regulators can and must incorporate
consequences that securities and financial regulations have upon the affect, emotions, feelings, and moods
of investors, other financial markets participants, and even people who are not participants in financial or
securities markets. 76 EIA advocates that regulators consider emotional impacts that alternative
regulations have upon both emotions themselves and consequences of emotions on economic and
financial variables. Such analysis is more challenging than traditional CBA but researchers in psychology
and neurosciences have successfully analyzed, measured, and studied changes in emotions. Ex ante CBA
of environmental, health, and safety regulations is based upon monetary measures of benefits and costs, 77
determined via revealed preference techniques, such as hedonic pricing methodology, 78 or stated
preference techniques, such as contingent valuation methodology. 79 EIA shares its emphasis on actual
73 Jonathan Baron & Andrea D. Gurmankin Levy, Cost-Benefit Analysis Can Increase Trust in Decision Makers,
available at http://www.sas.upenn.edu/~baron/cba.html.
74 John Hudson, Institutional Trust and Subjective Well-Being across the EU, 59 KYKLOS 43 (2006).
75 See generally MARY LUCE FRANCES ET AL., EMOTIONAL DECISIONS: TRADEOFF DIFFICULTY AND COPING IN
CONSUMER CHOICE (2001).
76 See e.g., Patric Andersson & Richard Tour, How to Sample Behavior and Emotions: A Psychological Approach
and an Empirical Example, 26 IRISH J. MGMT. 92 (2005) (describing an experience sampling method pilot study of
day-traders); and Andrew W. Lo et al., Fear and Greed in Financial Markets: A Clinical Study of Day-Traders, 95
AM. ECON. REV. 352 (2005) (finding a correlation between more intense emotional reactions to monetary gains or
losses and significantly worse performance among day-traders). See generally JOCELYN PIXLEY, EMOTIONS IN
FINANCE: DISTRUST AND UNCERTAINTY IN GLOBAL MARKETS (2004).
77 ANTHONY E. BOARDMAN ET AL., COST -BENEFIT ANALYSIS: CONCEPTS AND PRACTICE 3 (3d ed. 2006)
(differentiating between ex ante CBA and ex post CBA).
78 See generally Daniel McFadden, The New Science of Pleasure: Consumer Behavior and the Measurement of
Well-Being, Frisch Lecture, Econometric Society World Congress, London (Aug. 20, 2005) (revised Oct. 5, 2005),
available at http://emlab.berkeley.edu/users/webfac/dromer/e237_f05/mcfadden.pdf. See e.g., PATRICK BAYER ET
AL., MIGRATION AND HEDONIC VALUATION: THE CASE OF AIR QUALITY, NAT’L BUREAU OF ECON. RES. WORKING
PAPER NO. 12106, available at http://www.nber.org/papers/w12106 (critiquing standard hedonic techniques for
estimating value of local amenities because those methods assume that households move freely among locations).
79 See e.g., Kenneth J. Arrow et al., Report of the NOAA Panel on Contingent Valuation, 58 FED. REG. 4601 (1993);
and Dollar-Based Ecosystem Valuation Methods: Contingent Valuation Method, available at
http://www.ecosystemvaluation.org/contingent_valuation.htm.
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