Do we really need a Consumer Financial Protection Bureau? Why can’t we rely on
free markets? After all, there is a fierce competition in consumer markets,
whether the products are mortgages, credit cards, or cell phones. In the
presence of such competition, it is not so easy to identify a standard market
failure that would justify regulation. If the goal really is to ensure that
people know before they owe, we might think that the best solution is for
government to recede and to allow the market to do its work.
Oren Bar-Gill has a straightforward answer to the critics. He believes that government regulation can be justified by “behavioral market failures,” in the form of biases and misperceptions that have been carefully studied in psychology and behavioral economics. Bar-Gill does not refer to the gorilla experiment, but he places a lot of emphasis on salience, and he contends that because consumers are imperfectly rational, they are likely to ignore important information and hence to make big mistakes. To be sure, he acknowledges that, in principle, competition could correct the problem. But he insists that, in practice, competitive forces are often the problem, not the solution. The reason is that sellers must do what the market rewards. If sellers offer people the objectively best cell phone contracts, they will end up losing out to their competitors, who are offering contracts that are less good but subjectively more appealing.
To be clear, Bar-Gill does not contend that there is literal fraud here, but urges instead that as a result of competitive pressures, sellers are forced “to exploit the biases and misperceptions of their customers.” In his view, the consequences for consumers can be extremely bad. Indeed, “seductive” contract design helped fuel the demand for subprime mortgages, thus contributing to the subprime meltdown of 2008. But how, exactly, do companies exploit these biases and misperceptions? Bar-Gill emphasizes two strategies. The first involves cost deferral. The second involves complexity.
- Cass Sunstein on Behavioral Economics and Consumer Protection
Oren Bar-Gill has a straightforward answer to the critics. He believes that government regulation can be justified by “behavioral market failures,” in the form of biases and misperceptions that have been carefully studied in psychology and behavioral economics. Bar-Gill does not refer to the gorilla experiment, but he places a lot of emphasis on salience, and he contends that because consumers are imperfectly rational, they are likely to ignore important information and hence to make big mistakes. To be sure, he acknowledges that, in principle, competition could correct the problem. But he insists that, in practice, competitive forces are often the problem, not the solution. The reason is that sellers must do what the market rewards. If sellers offer people the objectively best cell phone contracts, they will end up losing out to their competitors, who are offering contracts that are less good but subjectively more appealing.
To be clear, Bar-Gill does not contend that there is literal fraud here, but urges instead that as a result of competitive pressures, sellers are forced “to exploit the biases and misperceptions of their customers.” In his view, the consequences for consumers can be extremely bad. Indeed, “seductive” contract design helped fuel the demand for subprime mortgages, thus contributing to the subprime meltdown of 2008. But how, exactly, do companies exploit these biases and misperceptions? Bar-Gill emphasizes two strategies. The first involves cost deferral. The second involves complexity.
- Cass Sunstein on Behavioral Economics and Consumer Protection
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