Federal Reserve Bank of Cleveland Policy Summit

1. poverty-action.org/ushouseholdfinance The Future of (Financial) Disclosure: Applying Insights from (Behavioral) Economics Jonathan Zinman Professor of Economics, Dartmouth College Scientific Director, US Household Finance Initiative Federal Reserve Bank of Cleveland Policy Summit September 20, 2013 Plenary Session

2. Focus Today: Potential for Innovation • In content of informational interventions • In delivery: timing, channel, and sender • In “compliance”: enforcement innovations, alternatives • (Economics, even without the “behavioral”, offers insights) • In impacts, via testing • Consumer responses to information are hard to predict, context specific • Field, randomized testing absolutely critical • Market responses aren’t always easy to predict either! poverty-action.org/ushouseholdfinance

3. What are the stakes? • Helping consumers directly (of course) • Helping consumers indirectly, by improving market efficiency • Disclosure affects: • Tax burdens • *Product costs • Market structure • Bank vs. non-bank provision • Vertical vs. horizontal integration • Larger vs. smaller companies poverty-action.org/ushouseholdfinance

4. Content Innovations Behavioral economics offers some insights, but more in the form of principles/approaches than prescriptions… poverty-action.org/ushouseholdfinance

5. Content Innovations: Some Design Principles • Diagnose:what don’t people know, understand, remember, consider? • Treat: how best communicate that information? • Simplify • Prioritize • “Frame” • Meet people where they’re at • Facilitating, nudging more effective than felt change • “Smart” (personalized) disclosure • Be humble: we still have a lot to learn • Mixed and limited evidence, especially outside the lab • A premise of behavioral social science is that context matters poverty-action.org/ushouseholdfinance

6. Timing and Channel Innovations • The point-of-sale is often too late to meaningfully affect decisions • Search costs • Emotion • “Back up” to decision point: a (direct) marketing approach to disclosure • Or more broadly to information policy • Engagement/outreach strategies as complement to traditional disclosure • Who delivers? • Suppliers • Nonprofits, government agencies, infomediaries • Promising results from field tests on Medicare, school choice poverty-action.org/ushouseholdfinance

7. Enforcement Innovations, Alternatives • Enforcement costs limit effectiveness of mandated disclosure in some markets • TILA for car loans is good example of this (Stango and Zinman RFS 2011) • Alternatives/complements to traditional approaches: • Engagement approach (relying on 3rdparties) • Forensics (machine readable disclosures should help) • Two-way communication between consumers and regulators • Interventions designed to change equilibrium to voluntary disclosure • Applications from other branches of economics • E.g. focus on breeding consumer wariness/skepticism poverty-action.org/ushouseholdfinance

8. Testing for Impacts: Why Do you know enough to design an informational intervention?... poverty-action.org/ushouseholdfinance

9. Testing for Impacts: Why • Do you know enough to design an informational intervention? What do you think happened when… • Some behavioral economists worked with an employer to increase 401k contributions among low-saving employees. They tested adding information to simplified enrollment materials that emphasized the high fraction of coworkers who were saving (peer info). • Savings rate fell in one key segment of workforce, unchanged in others poverty-action.org/ushouseholdfinance

10. Testing for Impacts: Why • Do you know enough to design an informational intervention? What do you think happened when… • Some other behavioral economists conducted a lab experiment where some advisors were forced to disclose that their pay structure gave them incentives to give biased advice. • The disclosing advisors gave more-biased advice (moral license) • The advisees did not anticipate this (over-trusting) • Advisees made worse decisions on balance under mandated disclosure poverty-action.org/ushouseholdfinance

11. Testing for Impacts: How • We’re not yet ready to write prescriptions… what should we do? • Test, AB-style (randomized-control), in the field • Why isn’t the lab, focus groups sufficient? Context matters • Competition for attention • Persuasion and distraction • Emotion • How to do field testing? • Safe harbors for non-governmental players • Start small, evaluate, iterate to effectiveness • Beta-testing approach to (information) policy • More humility, more flexibility, more creativity, more rigor! poverty-action.org/ushouseholdfinance