Consumer Law Regulatory Insights: CFPB Symposia Series Discusses How Behavioral Economics Can Inform Regulatory Action

On September 19, 2019, the Consumer Financial Protection Bureau (Bureau) hosted the second in a series of scheduled symposia. After the first symposium, we evaluated the panel discussions that focused on the term "abusive" and whether the Bureau should disclose parameters surrounding its interpretation of the term. The September 19 symposium addressed how behavioral law and economics can inform regulatory action. The discussion consisted of two panels: first, an academic discussion of behavioral economics, while a second panel discussed how behavioral economics can inform regulatory action, or lack thereof, in the consumer financial services field.

Policy Makers Take Behavioral Economics More Seriously

The academic panel stressed that policy makers are increasingly incorporating behavioral economics into the design of more effective policy solutions. As the panelists explained, an understanding of psychology can help create more cost-effective mechanisms to change consumer behavior than available using only the traditional view of market economics. The panelists also focused on the book Nudge, by Cass Sunstein and Richard Thaler, as a catalyst for governments around the world starting to implement policy based on behaviorist theories.

The Evolving Perception of Disclosure Requirements

The panelists discussed "framing"—the way an option is presented—at length. The panelists noted that framing can offer insights into why certain types of interventions such as disclosures, implemented to help consumers, do not work as intended. For example, David Gal, a Professor of Marketing at the University of Illinois–Chicago, explained that framing information in a way that would have allowed people to pick a better mortgage before the financial 2008 financial crisis would have had little impact on their financial well-being. This is because people were buying the wrong house—a house that put them in a precarious financial position—not picking the wrong mortgage.

Do Regulations Impede Customer Choice Rather than Help?

In his concluding remarks, Deputy Director Brian Johnson noted that behavioral law and economics can be used to evaluate whether regulations serve to impede consumer choice. The panelists also noted that behavioral models can aid in evaluating how a regulation may influence a consumer's decisions.

Practical Takeaways

1. Recognize the tension that exists between the intended impact of an action and the way that action actually impacts consumer choice.
   • The panelists' discussion highlighted the importance of understanding both the factors driving consumer behavior, as well as how your product development and marketing actions may be viewed by a regulatory body.
2. Disclosure may not cure all.
   • Instead of relying solely on disclosures, the intended outcome of such disclosures should be considered when designing and marketing a product. Throughout the design and marketing process, it is important to remember that focus groups can be the subject of a subpoena in an enforcement action.
3. Be thoughtful about the number of options you offer a consumer.
   • By thoughtfully designing the number of options offered to a consumer, you can build a "choice architecture" that is both economically attractive and compliant with regulation.