THE STASH MAY 20, 2009
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I know, I know--too much is made of the Obama administration's affinity for behavioral economics. (Frank and I tried to preempt that criticism in our piece about Obamaism by downplaying the behavioral discussion and burying it in the second half of the piece. But even that was a bit much for some readers...)
Still, this subset of provisions in the credit-card legislation strikes me as an important and direct application of behavioral economics. From the Journal:
Information once relegated to tiny print must be made clearer, and consumers will soon be told how long it would take to pay off a balance if they pay only the minimum due. ...
For consumers, the legislation aims to change habits -- perhaps leading them to make fewer big-ticket purchases with credit cards -- by clarifying the cost of using card debt. Several provisions in the legislation are geared toward forcing consumers to recognize how much they're paying in interest.A hyper-rational utility-maximizer should be able to tell how much he or she is paying in interest and act accordingly. Actual human beings have trouble even finding the right information, much less processing it correctly. It'll be interesting to see how much this affects the amount of credit-card debt people are willing to carry. If it drops significantly, score one for the behavioralists.Conversely, you'd probably have to score one against the banks, since this would lower profits. Which is normally a good thing. But, as I think both Simon Johnson and Felix Salmon have pointed out (can't find the links easily), it may be a bit at odds with the administration's hope that banks will earn their way out of the current crisis and therefore won't need additional federal money.Having said that, from a pure distributional standpoint, it's probably preferable to end the hidden fees and interest rate hikes even if it costs taxpayers more in terms of bailout money. I'm guessing the fees disproportionately hit the working- and lower-middle class while federal tax revenue (with the exception of the payroll tax) is raised pretty progressively.--Noam Scheiber
2 comments
No matter how big you make the small print, a corporate attorney will come up with a way to make it all the smaller still.
And the thing about behavioral psychology is that it is all the easier to manipulate human behavior. In other words, if folks are nudged in one direction they can always be nudged in the opposite direction as well.
For example, some years ago, I was employed as a buyer for a company. The owner and I went to workshop/seminar to garner practical tips on how to do the job better. Then a few weeks later the same folks sent us a list of additional seminars. One of them was a workshop on how to more effectively sell merchandize to buyers like me.
So, here they are promising me methods I can employ againt sellers while at same time teaching sellers how to effectively deal with buyers like me!!
No doubt the irony of it never occured to them.
george
- iambiguous
May 21, 2009 at 1:38am
George:
The "irony" almost certainly occurred to them. As someone who helps with negotiations classes in an MBA program (and researches negotiations), we're always aware that we're speaking to both sides. We'd have to be pretty stupid to not realize that (which would make your company even stupider for paying large sums to come listen).
The question is whether the rules can be constructed in such a way that people at least have more information with which to make better decisions. Sounds like these rules do, in fact, provide people with more relevant information. Unlike what you're saying, not everything can simply be waved away; once information is out there (e.g., the *very prominent* display of EPA gas mileage on cars), you can't pretend it doesn't exist.
Now, whether people actually *read* their statements ... well, that's a different question altogether. The effect (if any) may be at the edges instead of across the board.
- twicker
May 21, 2009 at 10:10am