Friday, August 30, 2013

Disclosure: Psychology Changes Everything (Loewenstein, Sunstein & Golman 2013)

George Loewenstien, Cass Sunstein and Russell Golman have a new working paper called ‘Disclosure: Psychology Changes Everything’. The paper is a valuable literature review of the effects of mandatory disclosure laws on both the demand side (the disclosees) and the supply side (the disclosers) and provides an overview of the application of psychological insights to disclosure related behaviour.

1. Introduction
The authors note the ubiquity of mandatory disclosure laws in public policy in areas such as the provision of energy efficiency labels and health and safety warnings. The advantange of disclosure is that, in contrast to harder regulation such as bans or legal curtailments of certain behaviours, it does not interfere with individual decision-making and respects heterogeneous preferences. There are several papers questioning the efficacy of disclosure policies - while giving the consumer the information he needs to make an informed decision may seem a common-sense policy, there is a surprising lack of data on this area.

Behavioural economics offers a new rationale for disclosure regulation in situations of “behavioral market failures”. These are cases when the consumer may be subject to costs that they impose on themselves but fail to internalize at the time the decision is made. These costs have been called internalities as opposed to externalities which are costs that spill over to third parties. An example of an internality would be a person harming their long-term health by smoking or harming their finances by choosing a savings account which offers less interest than an alternative which is the same in every other respect.

When deciding the form of disclosure interventions, the authors note the importance of categorizing situations as problems of (i) verifiable information (e.g. calorie counts, energy consumption, likely side effects of medication) and (ii) unverifiable information (e.g. whether a doctor who recommends you for a clinical trial for which he receives a fee in return for your participation is really acting in your best interest). The former are classic cases of asymmetric information between the producer and consumer which would seem to be easily addressed but in the latter cases mandatory disclosure may not be as effective since it often touches on areas of subjective judgment. In the example given, having the doctor inform the patient of the potential conflict of interest does not necessarily mean that the trial is not suitable for the patient. Another example would be a real-estate agent telling a client that the house they like will be snapped up by someone else soon: disclosing that the agent might prefer a quicker commission doesn’t invalidate the quality of the advice.

2. Standard Economic View of Disclosure
Rather than address the costs and benefits of mandatory disclosure laws, traditional economics tends to focus on market failure preconditions such as the absence or asymmetry of information between buyers and sellers. The conventional view is that although sellers may have misaligned incentives from buyers in that they be incentivized to make products look good in obvious ways at the expense of concealing weaknesses for non-obvious attributes or decide to shroud the long-term costs of their goods through teaser rates, in the long-run the market should punish these practices  In theory, mandatory disclosure laws should not be necessary although this point of view has notable critics (e.g. Akerlof’s ‘Market for Lemons’).

3. Psychological Insights
The authors describe seven psychological mechanisms which can affect the judgment and behaviour of disclosers and disclosees. They are briefly described below along with an example of how they apply to disclosure.
(i)                 Limited Attention
The economic view is that attention is a scarce resource which people rationally allocate, in contrast to psychology which says that people often don’t consciously decide what to focus on. If the latter description is a more accurate reflection of reality, disclosure in many cases may simply elicit the “yeah, whatever” response that is the typical reaction to privacy disclosures for internet users. The authors say that “Limits on attention may well be the most important factor affecting the efficacy of disclosure.”
(ii)               Inattention to Missing Information
People don’t notice a dog which doesn’t bark. While traditional economic theory would posit that people will “fill in the blanks” regarding missing information on products (its calorie content for example) by assuming the worst or seeking out the information, the authors give the contrary example of salad cream sales declining after disclosure laws mandated the provision of the product’s fat % on the label. This implies that consumers were not attentive to this information beforehand.
(iii)             Motivated Attention
“Information is not only an input into decision-making, it is a source of utility in it’s own right.” People may choose not to get checked for illness for fear of the outcome or avoid checking negative news about their investments. In these cases disclosure would not change behaviour as intended.
(iv)             Biased probability judgments
Disclosure may not work as intended if people are not already biased towards performing an undesirable behaviour; for example people often over-estimate the dangers of smoking and providing information that reduces the perceived risks of nicotine could have perverse consequences.
(v)               Moral licensing
A discloser who fulfills a legal disclosure obligation may then feel less responsible for giving unbiased advice; in effect the legal imposition might crowd-out the discloser’s instrinsic motivation to ‘do right’ by the consumer. The authors cite several experiments on this area but I think a field experiment would be very valuable to examine the strength of this effect in the real-world.
(vi)             Panhandler & anxiety effects
An advisor who discloses a conflict of interest may put subtle pressure on the recipient – to return to the example of the hypothetical doctor who recommends a patient for a clinical trial and adds that the trial would pay the doctor for finding subjects, the patient may feel pressured to ‘help’ his doctor by complying or he may feel anxious about implicitly questioning the doctor’s ability to rise above the conflict by refusing his offer. The authors cite both lab and field experiments in support of this effect.
(vii)           Telltale heart’ effect
The industry response to disclosure laws may be greater than is strictly warranted by the consumer response. For example, forcing a fast-food restaurant to post calorie information may have little effect on consumer purchases (see #79) but it may nonetheless spur the chain to begin offering healthier alternatives either because the issue is much more salient to them compared to the consumer or because they feel guilty.

4. Making Disclosure Work
The authors identify five methods to improve disclosure regulations.
(i)                 Simplification
Discussed in detail in Sunstein’s book ‘Simpler’. “Perhaps the most obvious change is to reduce the number of less important disclosures to increase the salience of the most important ones.”
(ii)               Standardization of Information
Allow people to make effective comparisions by standardizing information such as with College Scorecards or energy efficient gradings.
(iii)             Social Comparision Information
Opower’s use of social norm comparisons for electricity use is an exemplar (see #11) of disclosing social information to encourage behaviour change. This method could also be used to produce environmentally-friendly rankings for polluting industries or to address possible conflicts of interest; such as the listing of the top eight physician speakers in 2009 in terms of money received from the pharmaceutical industry which lead to a drop in funds received.
(iv)             Vividness
Vivid disclosures may have a more dramatic effect on behaviour than a dry presentation of the facts (see #49).
(v)               Smart Disclosure
Disclosure requirements could make information available in standardized formats so that information brokers, such as Skyscanner, could arise to process and provide it to end-users.

5.  Conclusions
Disclosure laws are not always as successful as expected; they often don’t change the behaviour of consumers but can significantly change the behaviour of suppliers. More research is needed, particularly field experiments and RCTs that look at the intersection between discloser and disclosee behaviour.

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