Disclosure 2.0: Disclosure in the Lab
If, as I suggested in my last post, making the consumer smarter is hopeless, at least for those of us whose prenatal and early childhood environments can no longer be altered, what about disclosure? Could point-of-sale disclosure equip consumers to make good financial decisions?
Simple disclosures appear effective in directly aiding consumer decisionmaking in some domains, the A, B, and C restaurant hygiene grades being the classic example. But because financial products have many varying features that consumers need to understand to make good decisions, financial product disclosures are inevitably much more complex. As a recent article by Omri Ben-Shahar and Carl Schneider details, generally speaking, consumers do not read, or if they do read they do not understand, or if they do understand they do not use correctly, the information presented in complex product disclosures.
1. These disclosures do not lead to understanding of the product. Why not? Consumer literacy and numeracy limitations, information overload, product complexity, hyperbolic discounting, etc.
2. These disclosures do not lead to understanding of the market, in two respects. Disclosures often do not help consumers select among products due to problems of the timing of disclosure, product heterogeneity and noncomparability, choice overload, etc. More fundamentally, disclosures tied to each product do not broaden the set of choices among which consumers select (consumers' "consideration sets"). Consideration sets have an enormous influence on decisions yet tend to be quite small.
3. These disclosures do not lead to consumer understanding of their own likely future experience with the product, because consumers do not know themselves well, are overconfident, etc.
4. Disclosures do not control consumers’ decision frames and resources. Decision frames are instead shaped by, e.g., advertising, sales talk, past experience, social influences, and even the language one speaks. Decisionmaking resources depend on, e.g., time constraints, stress levels, and even blood sugar levels.
The CFPB (following a trend started by other federal agencies) has been engaged in a valiant effort to address the first of these problems in the context of consumer credit products. Rather than a pointy-headed regulator sitting in her office using some generic readability concepts (font size, tabular format, etc.) to come up with a disclosure, the CFPB has been testing disclosure prototypes on real, live consumers. Disclosure 2.0!
Although I am about to criticize this, let me first acknowledge that the new disclosures are dramatically more comprehensible. For the mortgage disclosures, former CFPB Assistant Director for Mortgage Markets Pat McCoy has told me that they were able to get “100% comprehension” of “key terms” from their testers (except for one or two hopelessly low-comprehension testers). While I don’t know the comparable “before” statistic for the old TILA and GFE disclosures, I think we can safely say it was much, much, much lower.
I don’t mean to pick on the CFPB (think of it as a tough love approach, which my students will tell you I take with them as well), but this is testing in the lab, and we do not select financial products in a lab. We select them:
- while distracted by life (Did I remember to put money in the parking meter?) and
- under emotional pressure (The house is perfect, now I just really need to qualify for this mortgage!),
- surrounded by puffing and flattery provided by salespeople ("You are so smart to be buying now, while the market is down and rates are low."),
- against a background of product advertising (“Get in on the good life!”) and
- social pressure (Once I am a homeowner, I will finally be grown up.),
- using not the government-tested disclosure to make a decision but rather shortcuts (My friend recommended this mortgage broker so I’m sure she’s getting me a good deal.),
- so we can get back to the rest of life (I’ve got to finish this before my parking meter runs out.).
Moreover, Disclosure 2.0 deals with only the first of the four fundamental problems with disclosure identified above. My prediction: although other Dodd-Frank reforms will substantially improve mortgage outcomes, the new disclosure will not.