Law Commons^™

The Puzzling Persistence Of The Constrained Prudent Man Rule, Jeffrey N. Gordon

Faculty Scholarship

Professor Gordon examines a seeming paradox: How did a rule named for the "prudent man," with its connotations of wisdom and judiciousness, become a constraint that discourages trustees and other fiduciaries from making investments now regularly favored by prudent investors? He argues that the current understanding of the Prudent Man Rule, the standard governing investments by trustees and other financial fiduciaries, is founded on a narrow conception of risk and safety that has been superseded by contemporary understanding of markets and investments, and in particular, portfolio theory. He identifies three factors that have prevented the Rule from evolving in response …