Download - Michael Barr LendIt 2014
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Behavioral Economics & Consumer Empowerment in Online Lending
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Classical model
Decision Ac<on Outcome
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Behavioral Economics
¤ Informa<on vs understanding ¤ Inten<on vs. behavior ¤ Predictable biases
¤ Mispercep<on ¤ Misforecas<ng ¤ Myopia ¤ Decisional conflict ¤ Mental accoun<ng ¤ AEen<on constraints, local focus, informa<on overload ¤ Procras<na<on, iner<a
¤ Context & Ins<tu<ons ¤ Defaults, framing, hassle factors ¤ Behavior ¤ Planning
*See Barr, Mullainathan & Shafir, The Case for Behaviorally Informed Regula<on (2009) 4
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¡ Mispercep(on ¡ Misforecas<ng ¡ Myopia
¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring
¡ Mental accoun<ng ¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on
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¡ Mispercep<on
¡ Misforecas(ng ¡ Myopia
¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring
¡ Mental accoun<ng ¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on
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¡ Mispercep<on ¡ Misforecas<ng
¡ Myopia ¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring
¡ Mental accoun<ng ¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on
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¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia
¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring
¡ Mental accoun<ng ¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on
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http://feedbacksolutions.wordpress.com/2012/02/02/improving-healthy-food-beverage-choices-through-choice-architecture/
¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict
¡ Context ¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng
¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on
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¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context
¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng
¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on
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¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context
¡ Present bias
¡ Poor monitoring ¡ Mental accoun<ng
¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on
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¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context
¡ Present bias ¡ Poor monitoring
¡ Mental accoun(ng ¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on
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¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context
¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng
¡ A;en(on constraints ¡ Informa<on overload ¡ Procras<na<on
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¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context
¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng ¡ AEen<on constraints
¡ Informa(on overload ¡ Procras<na<on
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¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context
¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng ¡ AEen<on constraints ¡ Informa<on overload
¡ Procras(na(on
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Behavioral model
• Frame • Bias
Decision
• AEen<on • Context
Ac<on • Hassle • Iner<a
Outcome
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Market Structure ¤ Compe<<ve markets ¤ When does behavioral agent maEer more? For example: ¤ Shrouding
¤ Mortgage contracts ¤ Con<ngent payments
¤ Credit card late fees, debit overdraY ¤ Cell phone contracts with penalty rates over min.
¤ Agency costs/side-‐payments/low-‐monitoring ¤ Mortgage brokers ¤ Securi<es brokers
¤ Some<mes, bundling purchase & loan reduces debt discipline ¤ Buy here, Pay here Used Car Dealers/Lenders ¤ Rent to Own
¤ High Switching Costs (e.g., from bill pay)
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Price Shrouding
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Buy here/pay here
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The firm & the individual
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Market Neutral to Consumers
Consumers misunderstand compounding in savings • Banks would like to reduce this to increase savings base
Consumers misunderstand compounding in borrowing • Banks would like to exploit this to increase borrowing
Market Exploits Consumers
Consumers procras<nate in signing up for EITC • Tax filing companies would like to reduce this to increase number of customers
Consumers procras<nate in returning rebates • Retailers would like to exploit this to increase revenue
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The firm & the individual
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THE CRISIS
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THREE LEGGED STOOL
Reform
Financial Products
Consumer Protec<on
Financial Educa<on
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Antoinette Schoar and Piyush Tantia, The Financial Health Check: A Behavioral Approach to Financial Coaching, (New America Foundation, 2014) 4.
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Financial Regula<on: what values?
• Simplicity • Transparency • Honesty • Fairness • Trust • Empowerment • Performance, cost, resiliency How can financial regula<on beEer serve households and the economy?
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CARD Act ¤ Disclosure enhancements ¤ Debiasing
¤ Fees (misforecas<ng) ¤ minimum payments (misperceiving)
¤ Opt-‐in for over-‐limit transac<ons ¤ Excess payments pay off highest rate first ¤ Reasonable <me to pay/stable due dates ¤ Bans on double-‐cycle billing ¤ Bans on late fee traps, retroac<ve rate hikes ¤ Penalty fee “reasonable & propor<onal”
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CREDIT CARD ACT
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Dodd-‐Frank Act ¤ Mortgage regula<on
¤ Mortgage broker regula<on ¤ YSPs ¤ Ability to pay ¤ Ban on steering ¤ Licensing, registra<on
¤ Enhanced disclosures ¤ Escrow requirements ¤ “Plain vanilla” s<cky default
¤ QRM Risk Reten<on Rule ¤ QM Ability to Pay Rule ¤ GSE Credit Box
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MORTGAGE RULES
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Dodd-‐Frank Act
• CFPB – Unfair, abusive, decep<ve acts/prac<ces – Consumer protec<on rules – Supervision – Enforcement – Informa<on, Educa<on, Counseling, Complaints – Empirical tes<ng/safe harbors for pilots – Disclosure
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¡ Payday lending regula(on ¡ Online payday lending regula<on
¡ Debt collector supervision
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¡ Payday lending regula<on
¡ Online payday lending regula(on
¡ Debt collector supervision
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¡ Payday lending regula<on ¡ Online payday lending regula<on
¡ Debt collector supervision
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¡ Payday lending regula<on ¡ Online payday lending regula<on
¡ Debt collector supervision
¡ Peer-‐to-‐peer lending? ¡ JOBS Act & crowdfunding?
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Behaviorally Informed Regula<on ¤ Financial regula<on, educa<on and private sector innova<on needs to take account of behavioral economic insights.
¤ Psychology & industrial organiza<on. ¤ Individual behavior ¤ Market context ¤ Regulatory response
¤ Behaviorally informed equilibrium model of intersec<on of firms and individuals
¤ Policies (regula<on, access, technology)
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Peer-‐to-‐Peer Lending
Risks and Opportunities
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A minister holds a sign during a rally concerning predatory lending legisla<on in Montgomery, Ala.(Photo: Julie Benne/, AP)
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Financial innova<on: what values?
• Simplicity • Transparency • Honesty • Fairness • Trust • Empowerment • Performance, cost, resiliency How can innova<on beEer serve households and the economy?
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Financial innova<on: what values?
• Disclosure can (mistakenly) increase trust • Behaviorally Informed Regula<on (Barr Mullainathan & Shafir 2007)
• The Dirt on Coming Clean (Cain et al. 2005)
• Smart Disclosure • Trust is earned • Social networks
– Peer to peer
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Dynamic TIL Disclosure
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How can I get the right loan?
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Why is this my rate?
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