The Puzzling Persistence of the Constrained Prudent Man Rule

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by trustees and other financial fiduciaries, is founded on a narrow conception of risk and safety that has been superseded by contemporary understanding of markets and investments, and in particular, portfolio theory.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 to modern investment theory: an authoritative treatise that has inhibited the normal common law process of reinterpretation and change; potential litigants who are poorly situated for litigation or who are unable to contract out from under the Rule\u27s strictures; and the difficulty courts have in assimilating complicated economic theories that seem to involve sweeping doctrinal change. Professor Gordon concludes by arguing that, contrary to courts\u27 fears, the only significant clash between portfolio theory and trust doctrine arises in the allocation of returns between life beneficiaries and remaindermen, and he analyzes ways of resolving the conflict