Listen to their discussion about laws requiring disclosure from credit card providers.
Thaler on Nudging People to Make Better Choices: "
University of Chicago Graduate School of Business economist Richard Thaler has spent his career arguing that people are less-than-rational when they make economic decisions. As a leading figure in behaviorist economics, he’s long argued that policymakers need to guide people where they’re prone to fail.
In his new book, “Nudge,” written with University of Chicago Law School professor Cass Sunstein, he looks at how policymakers might go about doing that. He and Mr. Sunstein make an argument for policies that guide people toward making optimal decisions while not depriving them of their ability to make a choice. They call this idea “libertarian paternalism.” (“Why not paternal libertarianism?” asked Nobel laureate Daniel Kahneman at a recent event. ‘It’s no worse,’ Mr. Thaler replied.)
Mr. Thaler discussed his work with the Journal’s Justin Lahart.
WSJ: We’re all familiar with how marketers, advertisers and, especially these days, vote-hungry politicians use framing to influence our choices. In your book, you argue that policymakers might use framing and other behavioral methods to get us to make better choices. Automatically signing employees up for their 401(k), with the option of dropping it, might serve them better than having 401(k) participation depend on their signing up. But at the same time, isn’t using ‘nudges’ to modify people’s behavior manipulative?
Thaler: Nudges do alter behavior but calling them manipulative is unfairly pejorative (perhaps even manipulative!). As we stress in the book it is impossible to avoid some nudging. Much as we might wish for it these days, we cannot expect politicians to stop speaking. So they choose their words carefully. One is either pro choice or pro life. No one is anti-choice or life! Once we accept the fact that some nudging is inevitable, we can move on to the question of how nudges can be used to improve people’s lives, as judged by themselves.
WSJ: If you could put just one nudge into place in the U.S., what would it be?
Thaler: Picking your favorite nudge is a bit like picking your favorite child, however, if I have to pick just one I would go with our idea for electronic disclosure, what we call RECAP. The basic idea is that many aspects of our lives have gotten so complicated that it is no longer feasible for sellers to comply with “plain English disclosure.” This is certainly the case for mortgages, which have become very complex, but it is even true for cell phone plans and credit cards.
Traditionally regulators have put into place rules to prevent “sharp” practices, but these rules are often a bad idea for two reasons. First, they can prevent innovation. Second, as soon as you abolish one shady strategy, sellers think of a new one. So, instead of bans and mandates, we propose that sellers be required to simply disclose what they are doing electronically.
Here is how it would work for credit cards. Once a year your credit card provider would have to send you two electronic files. The first would be essentially a spread sheet that characterized every way in which the provider can charge you for something, from late payments, to interest rate changes, to charges for currency exchanges.
The second file would just be a list of everything you did in the past year that incurred a charge. We predict that Web sites would quickly emerge to translate and evaluate these files so consumers would understand how they were being charged and what they did to incur charges. The web sites would also provide information on alternative suppliers that would be better given the customer’s usage.
We think this idea would work very well in many domains, from mortgages, to cellphone plans, to the Medicare prescription drug program.
(Via WSJ.com: Economics Blog.)
Can you think of a suitable analogue for franchising regulation?
Why not simply get rid of the disclosure requirements, and disclose yearly how much the trademark license actually cost, with links to alternative approved suppliers?
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