The Erosion Of The 'Reasonable Investor': Reconceptualizing Materiality In The Era Of Algorithmic Sentiment And Social Media Volatility

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Vedika Vyankatesh Kamalu, B.A.LL.B., Manikchand Pahade Law College, Chh. Sambhajinagar (MAH)

ABSTRACT

Securities regulation has long anchored itself to a comforting legal fiction: the 'reasonable investor.' Traditionally, courts and regulators envision a rational actor who meticulously weighs balance sheets and corporate disclosures before allocating capital. But does this hyper-rational consumer of information actually reflect the modern market? Today's capital markets are increasingly driven not by fundamental financial analysis, but by the lightning-fast reflexes of high-frequency trading algorithms and the decentralized momentum of retail sentiment. Turning then to the psychological aspect of market participation, we see a profound disconnect. When a stray tweet from Elon Musk about Tesla or a Reddit board coordinating a massive short squeeze on GameStop can instantly dictate billions in market capitalization, the traditional doctrine of materiality begins to fracture. This paper explores the critical gap between 20th-century disclosure theory and a 21st-century reality where 'information' is frequently defined by virality rather than intrinsic economic substance. This brings us to a critical contradiction in the law. If a trading algorithm reacts purely to scraped keywords, or a retail mob trades entirely on memes, the mandated financial disclosures designed for the classical 'reasonable person' become arguably obsolete. Bypassing heavily quantitative analysis, this study offers a theoretical critique of current international regulatory frameworks. I argue that the law must shift its focus from protecting a hypothetical rational individual toward enforcing a broader standard of 'market integrity.' Ultimately, unless jurisprudence redefines materiality to account for these modern intermediaries and feedback loops, transparency mandates risk becoming empty procedural formalities rather than functional safeguards for market stability.

Keywords: Materiality Doctrine, Reasonable Investor Standard, Algorithmic Trading, Market Integrity, Securities Regulation.

476. THE EROSION OF THE 'REASONABLE INVESTOR'- RECONCEPTUALIZING MATERIALITY IN THE ERA OF

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