Michael Barr LendIt 2014
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Michael Barr discussed the regulatory environment at LendIt 14.
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Michael Barr LendIt 2014
- 1. Behavioral Economics & Consumer Empowerment in Online Lending
- 2. Classical model Decision Ac<on Outcome 2
- 3. 3
- 4. Behavioral Economics ¤ Informa<on vs understanding ¤ Inten<on vs. behavior ¤ Predictable biases ¤ Mispercep<on ¤ Misforecas<ng ¤ Myopia ¤ Decisional conflict ¤ Mental accoun<ng ¤ AEen<on constraints, local focus, informa<on overload ¤ Procras<na<on, iner<a ¤ Context & Ins<tu<ons ¤ Defaults, framing, hassle factors ¤ Behavior ¤ Planning *See Barr, Mullainathan & Shafir, The Case for Behaviorally Informed Regula<on (2009) 4
- 5. ¡ Mispercep(on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng ¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on 5
- 6. ¡ Mispercep<on ¡ Misforecas(ng ¡ Myopia ¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng ¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on 6
- 7. ¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng ¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on 7
- 8. ¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng ¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on 8
- 9. http://feedbacksolutions.wordpress.com/2012/02/02/improving-healthy-food-beverage-choices- through-choice-architecture/ ¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng ¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on 9
- 10. ¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng ¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on 10
- 11. ¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng ¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on 11
- 12. ¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring ¡ Mental accoun(ng ¡ AEen<on constraints ¡ Informa<on overload ¡ Procras<na<on 12
- 13. ¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng ¡ A;en(on constraints ¡ Informa<on overload ¡ Procras<na<on 13
- 14. ¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng ¡ AEen<on constraints ¡ Informa(on overload ¡ Procras<na<on 14
- 15. ¡ Mispercep<on ¡ Misforecas<ng ¡ Myopia ¡ Decisional conflict ¡ Context ¡ Present bias ¡ Poor monitoring ¡ Mental accoun<ng ¡ AEen<on constraints ¡ Informa<on overload ¡ Procras(na(on 15
- 16. Behavioral model • Frame • Bias Decision • AEen<on • Context Ac<on • Hassle • Iner<a Outcome 16
- 18. Market Structure ¤ Compe<<ve markets ¤ When does behavioral agent maEer more? For example: ¤ Shrouding ¤ Mortgage contracts ¤ Con<ngent payments ¤ Credit card late fees, debit overdraY ¤ Cell phone contracts with penalty rates over min. ¤ Agency costs/side-‐payments/low-‐monitoring ¤ Mortgage brokers ¤ Securi<es brokers ¤ Some<mes, bundling purchase & loan reduces debt discipline ¤ Buy here, Pay here Used Car Dealers/Lenders ¤ Rent to Own ¤ High Switching Costs (e.g., from bill pay) 18
- 19. Price Shrouding 19
- 20. Buy here/pay here 20
- 21. The firm & the individual 21 Market Neutral to Consumers Consumers misunderstand compounding in savings • Banks would like to reduce this to increase savings base Consumers misunderstand compounding in borrowing • Banks would like to exploit this to increase borrowing Market Exploits Consumers Consumers procras<nate in signing up for EITC • Tax filing companies would like to reduce this to increase number of customers Consumers procras<nate in returning rebates • Retailers would like to exploit this to increase revenue
- 22. The firm & the individual 22
- 24. THREE LEGGED STOOL Reform Financial Products Consumer Protec<on Financial Educa<on 24
- 25. Antoinette Schoar and Piyush Tantia, The Financial Health Check: A Behavioral Approach to Financial Coachi (New America Foundation, 2014) 4.
- 26. Financial Regula<on: what values? • Simplicity • Transparency • Honesty • Fairness • Trust • Empowerment • Performance, cost, resiliency How can financial regula<on beEer serve households and the economy? 26
- 27. CARD Act ¤ Disclosure enhancements ¤ Debiasing ¤ Fees (misforecas<ng) ¤ minimum payments (misperceiving) ¤ Opt-‐in for over-‐limit transac<ons ¤ Excess payments pay off highest rate first ¤ Reasonable <me to pay/stable due dates ¤ Bans on double-‐cycle billing ¤ Bans on late fee traps, retroac<ve rate hikes ¤ Penalty fee “reasonable & propor<onal” 27
- 28. CREDIT CARD ACT 28
- 29. Dodd-‐Frank Act ¤ Mortgage regula<on ¤ Mortgage broker regula<on ¤ YSPs ¤ Ability to pay ¤ Ban on steering ¤ Licensing, registra<on ¤ Enhanced disclosures ¤ Escrow requirements ¤ “Plain vanilla” s<cky default ¤ QRM Risk Reten<on Rule ¤ QM Ability to Pay Rule ¤ GSE Credit Box 29
- 31. Dodd-‐Frank Act • CFPB – Unfair, abusive, decep<ve acts/prac<ces – Consumer protec<on rules – Supervision – Enforcement – Informa<on, Educa<on, Counseling, Complaints – Empirical tes<ng/safe harbors for pilots – Disclosure 31
- 32. 32
- 33. 33 ¡ Payday lending regula(on ¡ Online payday lending regula<on ¡ Debt collector supervision
- 34. 34 ¡ Payday lending regula<on ¡ Online payday lending regula(on ¡ Debt collector supervision
- 35. 35 ¡ Payday lending regula<on ¡ Online payday lending regula<on ¡ Debt collector supervision
- 36. 36 ¡ Payday lending regula<on ¡ Online payday lending regula<on ¡ Debt collector supervision ¡ Peer-‐to-‐peer lending? ¡ JOBS Act & crowdfunding?
- 37. Behaviorally Informed Regula<on ¤ Financial regula<on, educa<on and private sector innova<on needs to take account of behavioral economic insights. ¤ Psychology & industrial organiza<on. ¤ Individual behavior ¤ Market context ¤ Regulatory response ¤ Behaviorally informed equilibrium model of intersec<on of firms and individuals ¤ Policies (regula<on, access, technology) 37
- 38. 38
- 39. 39 Peer-‐to-‐Peer Lending Risks and Opportunities
- 40. 40
- 41. 41 A minister holds a sign during a rally concerning predatory lending legisla<on in Montgomery, Ala.(Photo: Julie Benne/, AP)
- 42. 42
- 43. Financial innova<on: what values? • Simplicity • Transparency • Honesty • Fairness • Trust • Empowerment • Performance, cost, resiliency How can innova<on beEer serve households and the economy? 43
- 44. Financial innova<on: what values? • Disclosure can (mistakenly) increase trust • Behaviorally Informed Regula<on (Barr Mullainathan & Shafir 2007) • The Dirt on Coming Clean (Cain et al. 2005) • Smart Disclosure • Trust is earned • Social networks – Peer to peer 44
- 46. How can I get the right loan?
- 47. Why is this my rate?
- 49. 49