As Truth-in-Lending laws are celebrating half a century of failure, and as consumers—especially those with low income—continue to make disastrous credit decisions, lawmakers are looking to reboot the disclosure paradigm. Energized by insights from behavioral economics, Twenty-First Century regulators are rapidly discarding the old idea of “comprehensive” disclosure, developing instead psychologically-smart, graphically-appealing, and timely-relevant compact disclosure templates. But now, a new study by Seira et al. has put to the test an array of these smart disclosures. And the results are devastating.
Smart disclosures seem to make perfect sense. If consumers need information to make good decisions, it should be delivered to them in a user-friendly manner. Smart disclosures should provide salient “total cost of credit” scores. They should “nudge” debtors to avoid massive debt, for example by showing them the real cost of making only minimum monthly payments. They should harness “peer effects” by warning people when their debt is above average for similar consumers. And they should arrive via eye-popping easy-to-understand media.
Some of these techniques show modest promise in the lab. But would they work in the real lives of consumers? A few years ago I co-wrote a book on this topic (Ben-Shahar and Schneider, 2014). On the basis of evidence from prior rounds of disclosure reform and a diagnosis why disclosures failed, we predicted that the new round of smart disclosures would not bring improvements. Not surprisingly, our book did not slow down the legions of enthusiastic disclosurites. Hopes were high that behaviorally-informed disclosure regulations would make successful transition from the lab to the street.
Some disappointing evidence began to arrive, primarily in an excellent paper by Agarwal et al. (2015), showing that the 2009 CARD Act reform requiring the months-to-pay disclosure nudge had no meaningful effect. But the recently published paper by Seira, Elizondo, and Laguna-Müggenburg is truly a game changer. It quashes the hope that the new paradigm of disclosure would succeed where its predecessors failed.
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