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
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.”
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.
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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