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

Emotional Impact Analysis
vast amount of empirical evidence that stringent SEC regulation facilitates capital market development
and economic growth. 217 It should be clear that EIA can suggest and justify regulations that CBA might
not because EIA but not CBA takes into account such positive emotional impacts as investor confidence
and trust. Symmetrically EIA can prevent and eliminate regulations that CBA might not because EIA but
not CBA takes into account such negative emotional impacts as anxiety and fear. An example of a policy
that might fail EIA are non-specific terrorist alerts that only serve to incite hysteria and panic among the
public at large that more than offsets any unemotional regulatory gains in terms of detecting and
preventing terrorist attacks. Financial regulators engaging in EIA should not let other people’s or their
own preconceived notions about whether there is too much or too little financial regulation overall dictate
EIA of specific proposed rules and regulations. Instead, a virtue of EIA is that it has a potential to and
should provide a principled and unbiased tool for evaluating alternative regulatory policies.
C. Relevance of Criticisms of Cost-Benefit Analysis in Non-Financial Regulation
Some people feel that routinely utilizing CBA for making policy decisions about environmental
regulations is disturbing and inappropriate for a host of reasons. Applications of CBA to environmental,
health, and safety regulations have understandably generated much contentious debate and heated
controversy. 218 Some believe that, as is also possible with an increasingly influential Precautionary
Principle, 219 certain politicians and interest groups utilize CBA for delay, inaction, and regulatory
216 Elizabeth F. Brown, E Pluribus Unum – Out of Many, One: Why the United States Needs a Single Financial
Services Regulator, 14 U. MIAMI BUS. L. REV. 1 (2005).
217 Frank B. Cross & Robert A. Prentice, Economies, Capital Markets, and Securities Law U of Texas Law, Law and
Econ Research Paper (2006), available at http://ssrn.com/abstract=908927 (surveying this literature and contributing
its own empirical study).
218 See generally ACKERMAN & HEINZERLING, supra note 83; Robert H. Frank, Why Is Cost-Benefit Analysis So
Controversial, 29 J. LEGAL STUD. 913 (2000); Jeffrey L. Harrison, Piercing Pareto Superiority: Real People and the
Obligations of Legal Theory, 39 AZ. L. REV. 1 (1997); Jeffrey L. Harrison, Egoism, Altruism, and Market Illusions:
The Limits of Law and Economics, 33 U.C.L.A. L. REV. 1309 (1986); JORDAN & HARRIS, supra note 199, at 382-84
(2005); MARK KELMAN, Is the Kaldor-Hicks Position Coherent?, in A GUIDE TO CRITICAL LEGAL STUDIES 141-50
(1987); Duncan Kennedy, Cost-Benefit Analysis of Entitlement Problems: A Critique, 33 STAN. L. REV. 387, 422-45
(1981); and Symposium, Cost-Benefit Analysis: Legal, Economic, and Philosophical Perspectives, 29 J. LEGAL
STUD. 837 (2000).
219 See e.g., Mike Feintuck, Precautionary Maybe, But What’s the Principle? The Precautionary Principle, the
Regulation of Risk, and the Public Domain, 32 J.L. & SOC. 371 (2005). See generally CASS R. SUNSTEIN, LAWS OF
FEAR: BEYOND THE PRECAUTIONARY PRINCIPLE (2005). But see Dan M. Kahan et al., Fear and Democracy or Fear
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