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September 20, 2013Plenary Session

Federal Reserve Bank of ClevelandPolicy Summit

The Future of (Financial) Disclosure:Applying Insights from(Behavioral) Economics

Jonathan ZinmanProfessor of Economics, Dartmouth College

Scientific Director, US Household Finance Initiative

Focus Today: Potential for Innovation In content of informational interventions

In delivery: timing, channel, and sender

In “compliance”: enforcement innovations, alternatives (Economics, even without the “behavioral”, offers insights)

In impacts, via testing Consumer responses to information are hard to predict, context

specific Field, randomized testing absolutely critical

Market responses aren’t always easy to predict either!

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What are the stakes?

Helping consumers directly (of course) Helping consumers indirectly, by improving market efficiency

Disclosure affects: Tax burdens *Product costs Market structure

Bank vs. non-bank provision Vertical vs. horizontal integration Larger vs. smaller companies

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Content Innovations

Behavioral economics offers some insights, but more in the form of principles/approaches than prescriptions…

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Content Innovations: Some Design Principles

Diagnose: what don’t people know, understand, remember, consider? Treat: how best communicate that information?

Simplify

Prioritize

“Frame”

Meet people where they’re at Facilitating, nudging more effective than felt change

“Smart” (personalized) disclosure

Be humble: we still have a lot to learn Mixed and limited evidence, especially outside the lab

A premise of behavioral social science is that context matters

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Timing and Channel Innovations

The point-of-sale is often too late to meaningfully affect decisions Search costs

Emotion

“Back up” to decision point: a (direct) marketing approach to disclosure

Or more broadly to information policy

Engagement/outreach strategies as complement to traditional disclosure

Who delivers? Suppliers

Nonprofits, government agencies, infomediaries

Promising results from field tests on Medicare, school choice

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Enforcement Innovations, Alternatives

Enforcement costs limit effectiveness of mandated disclosure in some markets

TILA for car loans is good example of this (Stango and Zinman RFS 2011)

Alternatives/complements to traditional approaches: Engagement approach (relying on 3rd parties)

Forensics (machine readable disclosures should help)

Two-way communication between consumers and regulators

Interventions designed to change equilibrium to voluntary disclosure Applications from other branches of economics

E.g. focus on breeding consumer wariness/skepticism

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Testing for Impacts: Why

Do you know enough

to design an informational intervention?...

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Testing for Impacts: Why

Do you know enough to design an informational intervention? What do you think happened when…

Some behavioral economists worked with an employer to increase 401k contributions among low-saving employees. They tested adding information to simplified enrollment materials that emphasized the high fraction of coworkers who were saving (peer info).

Savings rate fell in one key segment of workforce, unchanged in others

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Testing for Impacts: Why

Do you know enough to design an informational intervention? What do you think happened when…

Some other behavioral economists conducted a lab experiment where some advisors were forced to disclose that their pay structure gave them incentives to give biased advice.

The disclosing advisors gave more-biased advice (moral license)

The advisees did not anticipate this (over-trusting)

Advisees made worse decisions on balance under mandated disclosure

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Testing for Impacts: How

We’re not yet ready to write prescriptions… what should we do? Test, AB-style (randomized-control), in the field

Why isn’t the lab, focus groups sufficient? Context matters Competition for attention

Persuasion and distraction

Emotion

How to do field testing? Safe harbors for non-governmental players

Start small, evaluate, iterate to effectiveness

Beta-testing approach to (information) policy

More humility, more flexibility, more creativity, more rigor!

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