Michael Barr LendIt 2014
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The document discusses how behavioral economics can be applied to online lending. It begins by contrasting the classical economic model of rational decision making with findings from behavioral economics that show humans are subject to predictable biases. These biases include misperception, misforecasting, present bias, attention constraints, and procrastination. The document then discusses how market structures, like bundling or high switching costs, can exploit consumer biases. It argues behavioral insights should inform regulation to make markets work better for individuals and the economy. Regulations should aim for simplicity, transparency, honesty and fairness.
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 造もInforma<on vs understanding 造もInten<on vs. behavior 造もPredictable biases 造も Mispercep<on 造も Misforecas<ng 造も Myopia 造も Decisional con鍖ict 造も Mental accoun<ng 造も AEen<on constraints, local focus, informa<on overload 造も Procras<na<on, iner<a 造もContext & Ins<tu<ons 造も Defaults, framing, hassle factors 造も Behavior 造も Planning *See Barr, Mullainathan & Sha鍖r, The Case for Behaviorally Informed Regula<on (2009) 4
- 5. 臓≠ Mispercep(on 臓≠ Misforecas<ng 臓≠ Myopia 臓≠ Decisional con鍖ict 臓≠ Context 臓≠ Present bias 臓≠ Poor monitoring 臓≠ Mental accoun<ng 臓≠ AEen<on constraints 臓≠ Informa<on overload 臓≠ Procras<na<on 5
- 6. 臓≠ Mispercep<on 臓≠ Misforecas(ng 臓≠ Myopia 臓≠ Decisional con鍖ict 臓≠ Context 臓≠ Present bias 臓≠ Poor monitoring 臓≠ Mental accoun<ng 臓≠ AEen<on constraints 臓≠ Informa<on overload 臓≠ Procras<na<on 6
- 7. 臓≠ Mispercep<on 臓≠ Misforecas<ng 臓≠ Myopia 臓≠ Decisional con鍖ict 臓≠ Context 臓≠ Present bias 臓≠ Poor monitoring 臓≠ Mental accoun<ng 臓≠ AEen<on constraints 臓≠ Informa<on overload 臓≠ Procras<na<on 7
- 8. 臓≠ Mispercep<on 臓≠ Misforecas<ng 臓≠ Myopia 臓≠ Decisional con鍖ict 臓≠ Context 臓≠ Present bias 臓≠ Poor monitoring 臓≠ Mental accoun<ng 臓≠ AEen<on constraints 臓≠ Informa<on overload 臓≠ Procras<na<on 8
- 9. http://feedbacksolutions.wordpress.com/2012/02/02/improving-healthy-food-beverage-choices- through-choice-architecture/ 臓≠ Mispercep<on 臓≠ Misforecas<ng 臓≠ Myopia 臓≠ Decisional con鍖ict 臓≠ Context 臓≠ Present bias 臓≠ Poor monitoring 臓≠ Mental accoun<ng 臓≠ AEen<on constraints 臓≠ Informa<on overload 臓≠ Procras<na<on 9
- 10. 臓≠ Mispercep<on 臓≠ Misforecas<ng 臓≠ Myopia 臓≠ Decisional con鍖ict 臓≠ Context 臓≠ Present bias 臓≠ Poor monitoring 臓≠ Mental accoun<ng 臓≠ AEen<on constraints 臓≠ Informa<on overload 臓≠ Procras<na<on 10
- 11. 臓≠ Mispercep<on 臓≠ Misforecas<ng 臓≠ Myopia 臓≠ Decisional con鍖ict 臓≠ Context 臓≠ Present bias 臓≠ Poor monitoring 臓≠ Mental accoun<ng 臓≠ AEen<on constraints 臓≠ Informa<on overload 臓≠ Procras<na<on 11
- 12. 臓≠ Mispercep<on 臓≠ Misforecas<ng 臓≠ Myopia 臓≠ Decisional con鍖ict 臓≠ Context 臓≠ Present bias 臓≠ Poor monitoring 臓≠ Mental accoun(ng 臓≠ AEen<on constraints 臓≠ Informa<on overload 臓≠ Procras<na<on 12
- 13. 臓≠ Mispercep<on 臓≠ Misforecas<ng 臓≠ Myopia 臓≠ Decisional con鍖ict 臓≠ Context 臓≠ Present bias 臓≠ Poor monitoring 臓≠ Mental accoun<ng 臓≠ A;en(on constraints 臓≠ Informa<on overload 臓≠ Procras<na<on 13
- 14. 臓≠ Mispercep<on 臓≠ Misforecas<ng 臓≠ Myopia 臓≠ Decisional con鍖ict 臓≠ Context 臓≠ Present bias 臓≠ Poor monitoring 臓≠ Mental accoun<ng 臓≠ AEen<on constraints 臓≠ Informa(on overload 臓≠ Procras<na<on 14
- 15. 臓≠ Mispercep<on 臓≠ Misforecas<ng 臓≠ Myopia 臓≠ Decisional con鍖ict 臓≠ Context 臓≠ Present bias 臓≠ Poor monitoring 臓≠ Mental accoun<ng 臓≠ AEen<on constraints 臓≠ Informa<on overload 臓≠ Procras(na(on 15
- 16. Behavioral model ≒Frame ≒Bias Decision ≒AEen<on ≒Context Ac<on ≒Hassle ≒Iner<a Outcome 16
- 18. Market Structure 造もCompe<<ve markets 造もWhen does behavioral agent maEer more? For example: 造も Shrouding 造もMortgage contracts 造も Con<ngent payments 造もCredit card late fees, debit overdraY 造もCell phone contracts with penalty rates over min. 造も Agency costs/side-足payments/low-足monitoring 造もMortgage brokers 造もSecuri<es brokers 造も Some<mes, bundling purchase & loan reduces debt discipline 造もBuy here, Pay here Used Car Dealers/Lenders 造もRent to Own 造も High Switching Costs (e.g., from bill pay) 18
- 19. Price Shrouding 19
- 20. Buy here/pay here 20
- 21. The 鍖rm & 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 鍖ling 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 鍖rm & 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 鍖nancial regula<on beEer serve households and the economy? 26
- 27. CARD Act 造もDisclosure enhancements 造もDebiasing 造もFees (misforecas<ng) 造もminimum payments (misperceiving) 造もOpt-足in for over-足limit transac<ons 造もExcess payments pay o鍖 highest rate 鍖rst 造もReasonable <me to pay/stable due dates 造もBans on double-足cycle billing 造もBans on late fee traps, retroac<ve rate hikes 造もPenalty fee reasonable & propor<onal 27
- 28. CREDIT CARD ACT 28
- 29. Dodd-足Frank Act 造もMortgage regula<on 造もMortgage broker regula<on 造もYSPs 造もAbility to pay 造もBan on steering 造もLicensing, registra<on 造もEnhanced disclosures 造もEscrow requirements 造もPlain vanilla s<cky default 造もQRM Risk Reten<on Rule 造もQM Ability to Pay Rule 造もGSE Credit Box 29
- 31. Dodd-足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 臓≠Payday lending regula(on 臓≠ Online payday lending regula<on 臓≠ Debt collector supervision
- 34. 34 臓≠ Payday lending regula<on 臓≠Online payday lending regula(on 臓≠ Debt collector supervision
- 35. 35 臓≠ Payday lending regula<on 臓≠ Online payday lending regula<on 臓≠Debt collector supervision
- 36. 36 臓≠ Payday lending regula<on 臓≠ Online payday lending regula<on 臓≠ Debt collector supervision 臓≠Peer-足to-足peer lending? 臓≠JOBS Act & crowdfunding?
- 37. Behaviorally Informed Regula<on 造もFinancial regula<on, educa<on and private sector innova<on needs to take account of behavioral economic insights. 造もPsychology & industrial organiza<on. 造もIndividual behavior 造もMarket context 造もRegulatory response 造もBehaviorally informed equilibrium model of intersec<on of 鍖rms and individuals 造もPolicies (regula<on, access, technology) 37
- 38. 38
- 39. 39 Peer-足to-足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 & Sha鍖r 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