Nudging Consumers Toward Good Choices

Behavioral economists push for clear mortgage disclosure.


I've been meaning to get back to Richard Thaler and Cass Sunstein's book, Nudge: Improving Decisions About Health, Wealth and Happiness.

It's their crack at a popular explanation of behavioral economics, where "the robot-like creatures who populate standard economic theories are replaced with real human beings."

Their recommendations are the interesting part: Get government to offer better options (not requirements) that create a more effective range of choices that "nudge" consumers into actions that are the most beneficial.

If your inner libertarian is screaming "Nanny state!" right now, consider the remedy below for improving the sort of information that got mortgage borrowers in trouble in the first place.

From an op-ed by Thaler and Sunstein in today's Boston Globe:

In brief, government would achieve simplified transparency by requiring all lenders to provide borrowers with an electronic file that contains, in standardized form, information on every feature of the contract.

Instead of fine print, there would be electronic information. And because disclosure would be standardized, consumers could easily compare one mortgage, and one credit card or school loan proposal, with many others.

Now, you might wonder, how do these electronic files, even if standardized, help us mortals who have trouble learning how to record a TV show on a VCR? The answer would come through the market.

As soon as the government required electronic disclosures, websites would quickly emerge to help people in the task of comparing offerings. A borrower would go to "," upload the relevant quote, and receive an easy-to-understand analysis of the loan they have been offered, plus other loans that they might consider.

The same approach could be used in other domains, from cellphone calling plans to Medicare prescription drug coverage.

This proposal illustrates the essence of good policymaking from the standpoint of behavioral economics. Government does not tell people what to do. Instead, it tries to improve markets by making it easier for busy people to make good decisions.