Again, it's not just the evidence that matters, but how it's presented. In the weekend Wall Street Journal, Jason Zweig presents insightful analysis about science and evidence as it applies to regulating financial institutions (behind paywall). In About Time: Regulation Based on Human Nature, Zweig says "A key component of President Obama's financial-reform package is its proposed Consumer Financial Protection Agency, which would apply findings from the science of human behavior to ensure 'transparency, simplicity, fairness, and access' for borrowers, savers and other financial consumers.... In my view, a behavioral approach is decades overdue. Financial regulations always have been written mainly by lawyers and legislators -- then promptly shot full of holes by promoters who understand how real human beings think and behave.
"Lawyers think that the mere disclosure of risks and conflicts of
interest provides the information that investors or consumers need.
That is a fantasy. Faced with 47 pages' worth of 'Risk Factors,'
investors come away with a warm glow of safety; risks that seem hard to
understand appear unlikely to happen, and people who provide you with
lots of detail seem likely to be honest. To inform anyone, information has to be accessible." Amen to that.
Zweig is a big fan of the book Nudge by Richard Thaler and Cass Sunstein. "The central idea in 'Nudge' is what Profs. Thaler and Sunstein call 'choice architecture' -- the context, format and framing of how decisions are presented to consumers. You will eat more nuts from a big bowl than from a small bowl. You will choose surgery if you are told it offers a 90% chance of survival; you will reject it if you are told there is a 10% chance it will kill you. The same people who would skip investing in a 401(k) if they had to 'opt in' to the plan will participate if they have to 'opt out' in order to skip it."
Thaler and Sunstein elaborate in an interview on amazon.com, "Amazon.com: What do you mean by 'nudge' and why do people sometimes need to be nudged? Thaler and Sunstein: By a nudge we mean anything that influences our choices. A school cafeteria might try to nudge kids toward good diets by putting the healthiest foods at front. We think that it's time for institutions, including government, to become much more user-friendly by enlisting the science of choice to make life easier for people and by gentling nudging them in directions that will make their lives better.
"Amazon.com: What are some of the situations where nudges can make a difference? Thaler and Sunstein: Well, to name just a few: better investments for everyone, more savings for retirement, less obesity, more charitable giving, a cleaner planet, and an improved educational system. We could easily make people both wealthier and healthier by devising friendlier choice environments, or architectures.
"Amazon.com: Can you describe a nudge that is now being used successfully? Thaler and Sunstein: One example is the Save More Tomorrow program. Firms offer employees who are not saving very much the option of joining a program in which their saving rates are automatically increased whenever the employee gets a raise. This plan has more than tripled saving rates in some firms, and is now offered by thousands of employers.
"Amazon.com: What is 'choice architecture' and how does it affect the average person's daily life? Thaler and Sunstein: ...The architecture includes rules deciding what happens if you do nothing; what's said and what isn't said; what you see and what you don't. Doctors, employers, credit card companies, banks, and even parents are choice architects. We show that by carefully designing the choice architecture, we can make dramatic improvements in the decisions people make, without forcing anyone to do anything. For example, we can help people save more and invest better in their retirement plans, make better choices when picking a mortgage, save on their utility bills, and improve the environment simultaneously."
In his WSJ piece, Zweig may be a bit overenthusiastic in saying that the Obama "proposal is an outgrowth of 'Nudge'". It's not as if the coverage is all about "choice architecture" -- see Factbox or FindLaw, for example. However, Sunstein has been nominated to head the Office of Information and Regulatory Affairs, a role sometimes described as "the regulation czar." In reading the coverage of the proposal for a Consumer Financial Protection Agency, But the debate over how to regulate financial institutions ain't over yet; it's complicated and stakeholders will fight hard to protect their turf. The one thing I know for sure is that we desperately need to use evidence more creatively, transparently, and comprehensively. For that, I am grateful to folks like Thaler and Sunstein.
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