Mind-reading versus neuromarketing: how does a product make an impact on the consumer?

Purpose – This research study aims to illustrate the mapping of each consumer’s mental processes in a market-relevant context. This paper shows how such maps deliver operational insights that cannot be gained by physical methods such as brain imaging. Design/methodology/approach – A marketed conceptual attribute and a sensed material characteristic of a popular product were varied across presentations in a common use. The relative acceptability of each proposition was rated together with analytical descriptors. The mental interaction that determined each consumer’s preferences was calculated from the individual’s performance at discriminating each viewed sample from a personal norm. These personal cognitive characteristics were aggregated into maps of demand in the market for subpanels who bought these for the senses or for the attribute. Findings – Each of 18 hypothesized mental processes dominated acceptance in at least a few individuals among both sensory and conceptual purchasers. Consumers using their own descriptive vocabulary processed the factors in appeal of the product more centrally. The sensory and conceptual factors tested were most often processed separately, but a minority of consumers treated them as identical. The personal ideal points used in the integration of information showed that consumers wished for extremes of the marketed concept that are technologically challenging or even impossible. None of this evidence could be obtained from brain imaging, casting in question its usefulness in marketing. Research limitations/implications – Panel mapping of multiple discriminations from a personal norm fills three major gaps in consumer marketing research. First, preference scores are related to major influences on choices and their cognitive interactions in the mind. Second, the calculations are completed on the individual’s data and the cognitive parameters of each consumer’s behavior are aggregated – never the raw scores. Third, discrimination scaling puts marketed symbolic attributes and sensed material characteristics on the same footing, hence measuring their causal interactions for the first time. Practical implications – Neuromarketing is an unworkable proposition because brain imaging does not distinguish qualitative differences in behavior. Preference tests are operationally effective when designed and analyzed to relate behavioral scores to major influences from market concepts and sensory qualities in interaction. The particular interactions measured in the reported study relate to the major market for healthy eating. Originality/value – This is the first study to measure mental interactions among determinants of preference, as well as including both a marketed concept and a sensed characteristic. Such an approach could be of great value to consumer marketing, both defensively and creatively

The End of the Securities Fraud Class Action as We Know It

In this article, I argue that securities fraud class actions (SFCAs) should not be treated as class actions but rather should be treated as derivative actions. In addition, I argue that such actions should be dismissed unless it appears that insiders (including the company itself) have enjoyed gains from trading during the fraud period. Both of these conclusions are based on the fundamental argument that (1) securities law seeks to protect the interests of reasonable investors, (2) reasonable investors diversify, and (3) diversified investors are effectively protected against the supposed financial harms of securities fraud by virtue of being diversified, except in cases in which insiders have extracted gains by trading during the fraud period. Only those actions that involve insider trading or the equivalent by directors, officers, or agents of the defendant company (or the company itself) entail genuine financial harm to the plaintiff class, because only those actions involve an extraction of wealth from the public market. Accordingly, only SFCAs that allege insider trading or the equivalent should survive a motion to dismiss. In addition to the fact that diversified investors suffer no compensable harm in the absence of insider trading or the equivalent – simple securities fraud -- SFCAs visit serious collateral damage on defendant companies, ultimately reducing investor return. In an action based on failure to disclose bad news, the prospect of payout will cause stock price to fall by more than it otherwise would -- even in a perfectly efficient market – and will trigger a positive feedback mechanism that will have the effect of magnifying the potential payout. This feedback effect can be quantified with precision using a simple formula. For example, in a case in which the release of bad news should cause market price to fall by 10 percent, the SFCA feedback effect will result in a price decline of about 20 percent if share turnover has been 50 percent during the fraud period. Thus, by their very nature SFCAs cause additional damage to defendant companies and stockholders. It is easy to fix the feedback problem. If the case does not involve insider extraction of gains, it should be dismissed. If the case does involve insider extraction of gains, it should be litigated in the name of the corporation, and the corporation should recover any gain extracted by insiders. Specifically, treating a securities fraud action as an action by the corporation (whether it is maintained by the corporation itself or derivatively by a representative stockholder) will make stockholders whole and will avoid collateral damage to the issuer corporation. Finally, the argument here suggests a new rationale for why insider trading should be illegal, namely, that it involves the extraction of wealth from the market and presumptively diversified investors. In turn, this suggests that diversified investors and largely undiversified insiders should be viewed as two different classes of investors with distinct interests. Thus, I also explore the public policy reasons for recognizing such a distinction and some of its other implications

The Missing Link Between Insider Trading and Securities Fraud

In a recent article, I argued that diversified investors - the vast majority of investors - would prefer that securities fraud class actions under the 1934 Act and Rule 10b-5 be dismissed in the absence of insider trading or similar offenses during the fraud period. See Richard A. Booth, The End of the Securities Fraud Class Action as We Know It, 4 Berk. Bus. L. J. 1 (2007), http://ssrn.com/abstract=683197. In this article, I draw on the classic case, SEC v. Texas Gulf Sulfur Company, to show that the federal courts originally viewed securities fraud as inextricably connected to insider trading and that the recognition of separable causes of action has caused much of the difficulty in this area. I argue that the federal law of insider trading fails to capture many of ways that insiders can misappropriate stockholder wealth. For example, timing and backdating in connection with stock option grants likely do not constitute insider trading but likely do constitute misappropriation. Thus, I here address the question of how to define misappropriation of stockholder wealth in the context of a derivative action based on securities fraud. I conclude that the question is essentially one of state law fiduciary duty that should be decided by state courts under the emerging duty of candor. Although this solution raises potential conflicts with federal law in general and SLUSA in particular, I argue that these conflicts are no different from conflicts that arise in many state law cases that touch on issues of disclosure. Moreover, I argue that handling such claims under state law is more consistent with the federal statutory scheme and ultimately preferable to developing or maintaining a separate body of federal law addressing either securities fraud or insider trading

What is a Business Crime?

Criminal prosecution has been used with increasing frequency recently in connection with a variety of business failures and other financial offenses. Indeed, it appears that there are few such offenses that cannot be prosecuted criminally even though they also give rise to civil remedies. While some such offenses seem to be quite serious frauds, others seem to be as minor as getting the accounting rules wrong. Thus, the question addressed in this essay is how to define a business crime and what should be the proper role of criminal prosecution in connection with business offenses. I start with the proposition that we should criminalize conduct only when lesser remedies do not work to deter the offense. I then describe the array of private civil remedies available, ranging from simple compensatory damages to punitive damages to class actions and derivative actions and find that there are few business offenses that cannot be well addressed by these devices. I conclude that as a general matter private civil remedies are much more efficient at addressing business and financial crimes. The expansion of criminal prosecution may be due to some extent to problems with the way civil remedies work in practice, but for the most part it is difficult to explain except as a result of failure to understand the role of criminal law and to define financial crimes with any precision