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Article

Abstract

This article examines a basic dilemma that appears across nearly all areas of the law: what is the appropriate regulatory response to uncertainty in the policymaking environment, where the costs, benefits, and other consequences of any particular legal intervention are difficult to predict, and often equally difficult to measure after the fact? Although a vast theoretical literature addresses that question, the existing scholarship almost uniformly seeks to identify a single policy rule or procedure that is most robust to uncertainty. This article takes a fundamentally different approach. By drawing on the leading theory of financial investment under uncertainty-Modern Portfolio Theory-it argues that the primary normative implication of an unpredictable legal landscape is that policymakers should apply a portfolio of overlapping rules. As this article further shows, insights from Modern Portfolio Theory do not only provide normative guidance on how the regulatory structure can account for legal uncertainty; They also explain how the law does in fact address that problem. This second, positive claim helps resolve an empirical puzzle that has long been debated among law-and-economics scholars: why is the joint use of multiple regulations so often found in contexts where a single rule would appear to suffice? The answer, it is argued, is that the widespread use of overlapping regulatory portfolios is an efficient response to the equally widespread problem of policymaking uncertainty. After laying out these theoretical claims, this article provides supporting evidence from a variety of legal areas, including: safety regulations in accident law; the financial regulation of banking crises; and, environmental law on climate change. The case studies demonstrate the flexibility of Modern Portfolio Theory to questions of regulatory design in general. Although the policy challenges posed by automobile traffic, financial crises, and climate change are essentially unrelated, the legal framework governing each of those areas implicitly reflects a portfolio approach. *

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