Should We Not Disclose Credit Card Information?

The paper Professor Richard Wiener (Univ. of Nebraska), a psychology professor, discussed presents findings that are completely contrary to economic predictions. Standard economic theory would predict that if consumers are given complete information, they will act rationally and not overspend where the costs of spending outweigh the benefits of consuming. However, the preliminary conclusions he and his co-authors reach in Limits of Enhanced Disclosure suggest that giving consumers additional credit card disclosures does not reduce consumer spending and, in some instances, may make consumers spend even more.

The paper responds to assumptions underlying BAPCPA. Namely, BAPCPA proponents argued that the consumers (well, at least the ones who were not out there gaming the system...) were making irrational spending choices because they didn’t understand just how bad those choices were. By giving debtors additional information (mandatory credit counseling, additional Truth in Lending Act disclosures), BAPCPA assumed that they would change their behavior and make better decisions.

The participants in the study (including former bankruptcy debtors) were asked to logon to an online site that simulated a shopping trip and to make purchases using a fictional credit card. Half of the participants received unenhanced disclosures that consisted largely of the credit card balance, interest rate, and minimum payment due (i.e., the pre-BAPCPA disclosures). The rest of the participants received enhanced disclosures (how many minimum payments they would need to pay off the balance, how many months if would take before they reached a zero balance). After the participants reviewed the disclosures and then after they concluded their shopping trip, they took a test that measured whether they were experiencing positive or negative effects.

Professor Wiener and his co-authors found that whether participants (debtors and non-debtors alike) would decide to purchase items on the simulated shopping trip was not affected by their prior knowledge about the effects of high interest rates, the costs of making only minimum payments, etc. He found that people who received the enhanced discosures tended to shop less, but only if they weren’t shopping to end a bad mood (the study tested for various types of emotions). People who shop to engage in "mood repair" tend to spend more if they received the enhanced disclosures.

Professor Wiener argued that if we truly want to help consumers reduce their credit card spending, we must consider the negative emotion disclosure often produces in consumers. Just giving people another piece of paper with more (even if clearer) disclosures may not be enough. He also suggests that financial education and perhaps therapy may be useful, because without this consumers are not likely to benefit from enhanced disclosures even if those disclosures would tell them when it’s good or bad to make a certain purchase.

Professor Thomas Ulen (Illinois), a law professor, noted that it was not surprising that Professor Wiener’s research found that the information contained in enhanced disclosures produces negative affect. However, he suggested that the finding that enhanced disclosure triggers negative affect, which then causes debtors to spend more, is startling. Professor Ulen stressed that this finding questions the effectiveness of disclosure regulations since they obviously do not seem to cause people to avoid the warning signs of bad future events. He suggested that the disclosures may be ineffective for a number of reasons.

One reason might be over-optimism by consumers who believe that they won’t be the ones to make a bad spending decision.  This cognitive bias may induce debtors to ignore disclosures because they feel they are in control and, in any event, they feel they have always been able to dig themselves out of dire economic situation.  Professor Ulen cited other potential biases that might cause debtors to ignore enhanced disclosures, including the tendency to ignore low probability events. That is, when people are faced with events that have a low probability of ever occurring – even if those events would have catastrophic economic consequences, like losing your home in a foreclosure – people ignore the risks posed by the events.

Professor Ulen noted that, given the results of Professor Wiener’s experiment, it would be useless to just add more disclosures even if you make them clearer.  This, he stated, makes you wonder, would it really be better not to disclose information? Should we find a way to wrap disclosures around happy images in order to avoid triggering negative emotions?