Behavioral  Economics  &  Consumer  Empowerment  in    Online  Lending  

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

¡  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  

The  firm  &  the  individual  

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THE  CRISIS  

23 http://www.gonzotimes.com/wp-content/uploads/2012/08/economy1.jpg

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.

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?      

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

How can I get the right loan?

Why is this my rate?

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