Addressing the cautions and considerations

Cautions and considerations for behaviourally informed consumer policy

4.4 Guidelines for cautious behavioural consumer policy

4.4.1 Addressing the cautions and considerations

The cautions and considerations from both the methodological and the normative or policy perspective are valid concerns and they should therefore be addressed. This section will provide ways of accounting for some of these cautions and considerations.

a. Scientifically sound basis for policy analysis

First, the methodological concerns that have been raised with respect to the effects of behavioural insight on theory or policy will be discussed. A sound scientific basis should underlie any policy analysis and recommendation. When in a certain market consumers are argued to behave under the influence of biases and heuristics, this statement should be carefully assessed. Behavioural studies should also be conducted in contexts that are equal or similar to the market conditions in which the bias is argued to be effective and detrimental. Empirical studies should be undertaken to enhance the scientific basis. Data should be interpreted cautiously, refraining from undue generalisations. Statistical studies merely suggest certain observations; evidence about biased consumer decision making should not be inferred from one study. Literature or a collection of articles of which the common message is not heavily disputed, suggesting a common observation, is more trustworthy. Only when a sound scientific basis has been established and the claim that consumers are biased in a certain market can be credibly asserted, a market-based welfare analysis can be conducted.

b. Economic welfare analysis is more than rational choice

Economic theory provides highly valuable insights about markets, the behaviour of agents within that market, market failures and the costs and benefits of government interventions correcting those market failures. Economics has produced further insight on the basis of RCT than merely predictions of individual behaviour. For instance, market failures and social welfare considerations provide rationales for government intervention.

Also, different costs and benefits to government interventions have been established. An example is the insight that consumer protection will in the end be borne by consumers themselves, and also that increasing costs to consumers do not necessarily decrease consumer welfare if consumers get higher quality in return. Economic theory has a long history of establishing a general framework for analysing the economic effects of laws and policies. The costs and effects of rules, law and regulations, the incentives that they create for market parties and desirable strategies for intervention in the market can be described using economic analysis. Economic analysis is therefore an extremely useful tool for the development of efficient and effective consumer policy. Traditional economic analysis should not be abandoned in favour of behavioural insights, even in those cases when behavioural notions are better able to explain and predict behaviour than rational choice. Rational choice is only one part of the entire set of economic insights. Economic insight can still be valid and relevant to policy issues even when consumer behaviour in certain situations is better explained and predicted using biases than RCT. In these cases RCT could be abandoned in the pursuit of accurate predictions of the behaviour of market parties in favour of behavioural insights. However, other relevant insights that have been pointed out by economic theory still hold, such as reputational concerns of commercial parties, costs and adverse effects of government interventions and the working of the market mechanism as a whole. The entire picture required for policy analysis includes more aspects than only individual behaviour;

economic analysis therefore still has a role to play even when individual behaviour in certain cases is more accurately predicted by behavioural insights. Sound economic principles and a rigorous evaluation of the costs and benefits should provide the foundation of any proposed government intervention.

c. Market-based analysis of consumer behaviour

Studies should be conducted in the relevant markets to assess the discussed consumer behaviour, taking as much of the particulars of that market into account. In cases where consumer biases are argued to be detrimental to social welfare, these behavioural assessments should portray the following characteristics:¹⁴⁵

145 As is discussed in Ogus (2005), OECD (2007) and Bar-Gill (2008: 801-2).

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Behavioural assessments should be sound scientific and preferably empirical market-based studies of relevant consumer behaviour. This includes the contexts in which consumers take decisions. When analysing consumer behaviour, both conventional economics and behavioural insights should be explored for explanations of the observed behaviour. Both sets of insights should be evaluated according to their accuracy at explaining and predicting consumer behaviour in this particular context;

When biases are shown to affect relevant consumer decision making, the assessment should shown whether or not these biases are abused by sellers to the detriment of consumers;

The assessment should provide a full examination of consumer and social welfare effects of relevant consumer behaviour and strategic response of sellers. This assessment should explore the decrease in welfare suffered by consumers due to inhibitions in their decision making process, whether those inhibitions stem from information asymmetries or from heuristics and biases. Consumer learning, education by sellers and other market corrections to overcome consumer biases should be also be regarded as relevant material to be included in the assessment.

d. Designing behavioural interventions: efficient, context-specific and heuristic-savvy An intervention that is designed to counteract the negative consequences of biased consumer decision making should correspond to three criteria: it should be efficient, so that the benefits of the intervention outweigh its costs but also that no other intervention is more effective at similar costs; it should be context-specific, meaning that it should address particular issues within consumer decision making and refrain from overly general solutions; and it should be heuristic-savvy, which implies that it should account for choice architectures and where possible employ biases.¹⁴⁶

Efficient

For any government intervention, the requirement of efficiency implies that the intervention should (1) be effective in counteracting the negative consequences of the consumer bias, (2) provide more benefits than costs, and (3) be the most desirable option in comparison to other policy options, including the option of no intervention.¹⁴⁷ First, to be effective and actually remedy the problem, the devised intervention has to address the cause. For the development of intervention strategies information can be taken from both economic and behavioural literature. When behavioural notions are shown to apply to the

146 The term “heuristics-savvy” is borrowed from Korobkin (2006: 14).

147 Many scholars point towards the continued necessity of conducting a(n) (economic) cost-benefit analysis of government interventions, also when these are based upon behavioural insights. See for instance: Ogus (2005), OECD (2007), Amir and Lobel (2008: 2122-3) and Field (2008: 94).

issue at hand, the intervention should aim at correcting them or otherwise account for these biases. When the decrease in welfare is caused by information asymmetry however, the intervention should be based on economic insights because such a market failure can best be counteracted by typical information remedies. Secondly, an analysis of all costs and benefits of the devised intervention is should be made. Intervening in the decision making of other people can be costly, not only for the government, but also for the targeted individuals as they might have to forgo on certain options. The cost-benefit analysis should include possible distributional effects and other negative consequences of policy interventions, that have been described in this chapter. Preferably, and when applicable, intervention on behalf of biased consumers should not distort the decision making of well-informed consumers. Sellers’ welfare should also be taken into account, especially when the policy intervention implies costly efforts on their behalf.¹⁴⁸ The accurate weighing of intervention consequences, including the different effects that they will have on different groups, can represent a difficult policy question (OECD, 2007). It is one however that needs to be provided with an answer. Thirdly, all available policy options to remedy the market failure or the behavioural problem should be considered, including the option of no intervention. Due to the costly nature of government interventions and the difficulties connected with deciding for other people, policies corresponding to soft paternalism have benefits over more intrusive policy suggestions.

Especially when the consequences of interventions are unclear, as is often the case with

‘newly devised’ interventions such as behaviourally informed ones, less intrusive interventions are to be preferred over far-reaching interventions (Loewenstein and Haisley, 2008: 216).

Context-specific

If anything, the psychological literature suggests that biases and heuristics are highly context-specific. The question is then to what extent an overarching and general theory such as rational choice is actually required. Predictions that apply to specific contexts might be just as helpful, as policies usually target specific contexts as well. For instance, consumers might respond differently to the risks provided by faulty product design than they respond to the risk of a possible loss of income which is relevant in mortgage contracts. Specific policies can be developed to address the respective contract types.

Insights from psychology can be used to develop policy for specific areas, taking the available information about the specificity of the cases into account (Brennan, 2008:

142). Empirical and experimental research should pinpoint the contexts in which the different types of decision making processes are used. The validity issues connected to experimental research however result in the fact that experimental observations may not provide a sufficient justification for policy changes that are more general in nature

148 For instance, placing information duties on sellers, even when the aim is to provide less and better information to debias consumers, will be a burden to sellers.

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(Harrison, 2008: 60). Policy interventions based upon behavioural insights should therefore be applied within limited contexts; an intervention based upon behavioural notions might be efficient in some situations, but not in all.

Heuristic-savvy

Behavioural insights could be especially relevant to the design of intervention instruments. Mulholland claims that “the principal value of behavioural economics to consumer protection lies in its ability to help in the more efficient implementation of existing policy goals” (Mulholland, 2008: 68). The interventions should be heuristic-savvy: taking due account of the biases and heuristics at play in the relevant decision making process, and where possible even employing consumer heuristics to accomplish beneficial results (Korobkin, 2006: 14-6). The consumer behaviour that is addressed through policy instruments is affected by certain decision contexts or choice architectures. It should be assessed which biases and heuristics, as well as which choice architectures, underlie the biased decision (Amir and Lobel, 2008: 2122-3). A (creative) solution should be proposed and assessed accordingly.¹⁴⁹ This proposed solution will aim to correct or account for the biased decision making of the policy target group, for example by switching the default rule or by debiasing or rebiasing the consumer.¹⁵⁰ The efficiency of several interventions should be duly assessed. Naturally, the proposed correction should be examined to see to what extent it actually aids consumers in their decision making abilities or causes an improvement in their resulting decisions. It would be valuable to distinguish the circumstances which “trigger” rational thinking as opposed to intuitive thinking, or the dominance of one bias over the other (Amir and Lobel, 2008:

2122-3). Depending on the ease with which consumers can switch their decision making strategy, one instrument might be more efficient than others within the context of one specific policy question.

e. Transparent and rigorous decision making procedures for policy

The implementation of behavioural insights consumer policy increases the discretion policy makers have in designing policies, which gives rise to fears of possible manipulation of policy to further the ends of policy makers instead of consumers. Also, as policy makers are biased themselves, their decision making might be just as flawed as the consumers’ decision making. Cost-benefit analysis, transparency, field testing and rigorous decision making procedures could have be used to overcome some of the difficulties connected to using behavioural insights in policy making.

149 As behavioural policy solutions are not yet common or wide-spread, some creativity is required in the design of behavioural interventions.

150 See above, chapter 3, section 3.3.3, also for a discussion of the benefits and consequences of these intervention strategies which is relevant for the selection of the most appropriate intervention strategy.

Cost-benefit analysis and transparency

Sunstein however argues that a cost-benefit analysis is an excellent strategy for lawmakers to overcome cognitive biases in the development of policy (Sunstein, 1999).

A sound cost-benefit analysis can create an accurate overview of all foreseen consequences, including the chances that these consequences will actually take place, the cost-effectiveness and the efficiency of policies: will they meet the goals they are supposed to? The cost aspect of policy options should include the wide variety of possible costs, such as administrative costs, monitoring costs, enforcement costs, but also other consequences that government intervention can have such as changing consumer demand, increasing prices, stimulating moral hazard, et cetera. An overview of all costs and benefits of the preferred policy option, set out against the consequences of other policy options, could result in more objective decision making which is less influenced by biases and heuristics and guards against policy makers abusing their discretion. Sound cost-benefit analysis can also aid policymakers in being more transparent about their considerations for new policy plans. Transparency is a vital part of valid policy making.

The application of Rawls’ publicity principle to government interventions results in the publicity condition: the requirement that these interventions should stand up to public scrutiny (Rawls, 1993: 66-7). If a government cannot or will not defend a (nudging) strategy in public and refuses to disclose its true intentions for implementing this policy, the intervention should not be put into practice.

Field testing

The procedures for the development and implementation of behaviourally informed policy should furthermore include field testing of the proposed interventions to reduce uncertainties regarding the costs and benefits of policies. If possible, economic policy interventions and especially the behaviourally informed ones should be tested in small-scale field experiments to determine the actual effects of the policy intervention before they are applied to a large population (Greenstone, 2009: 118-9). Consumers who are affected by biases might therefore not respond in the way that had been envisaged by the policy intervention (OECD, 2007). Undue generalisation of behavioural observations can be corrected at this stage of the policy making process. Soft paternalism is not yet a common concept and therefore “unchartered territory”, in need of careful testing before being implemented (Loewenstein and Haisley, 2008: 216). This solution can however not guarantee a successful implementation: some relevant behavioural effects, such as learning effects, might take years to effectuate. The possibility of such delayed effects should also be taken into account in the development of behavioural policy (Benjamin and Laibson, 2003: 28-32). The credibility of policy evaluations that are undertaken with the use of experiments should furthermore be enhanced by making the data and the evaluations transparent and publicly available, again increasing the transparency of the considerations that underlie government plans (Greenstone, 2009: 119).

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Stakeholder participation

Slippery slopes and the distrust towards policy makers do not necessarily call for the rejection of all paternalistic interventions. These cautions are however relevant and support a rigorous set of preconditions that should be met before government officials are allowed to intervene in markets (Sylvan, 2008). Therefore, the procedures for decision making should allow different interest groups, stakeholders and experts to voice their opinions and review policy suggestions.¹⁵¹ Organisational structures and review processes should be put in place to counteract excessive discretion on the part of the policy makers. Also, experts can be employed to increase the quality of the decision making of policy makers. Amir and Lobel argue that this type of cooperation between government, regulated entities and other stakeholders in the development of new policy corresponds to the ‘new governance approach’. This approach ensures public participation, transparency and sharing of best practices and information. It takes insights from behavioural theories that regard adversarialism as counterproductive and therefore aim to stimulate companies and individuals to share information by engaging in mutually beneficial problem solving (Amir and Lobel, 2008: 2127-37). Europe has since 1998 known the requirement of a Regulatory Impact Assessment (RIA) in cases where a regulatory proposal is expected to have an effect on business, charities and voluntary organisations (Ramsay, 2007: 59). The implementation of RIAs is aimed at stimulating rigorous and transparent policy making, which can also aid behaviourally informed policy proposals.

Policy making that involves many stakeholders, experts and other interested parties will admittedly require a complicated decision making process. The involvement of many people in this process will imply lengthy procedures with a higher cost of decision making. Also, there might be a risk of regulatory capture, where interest groups try to influence policy makers into decisions that are merely beneficial to the interest group itself; this might apply to both business and consumer organisations (Bates, 2002: 88-9).¹⁵² Policy strategies that aim to promote of interests of consumers should require consumer participation, both at the level of policy decision making and the level of enforcement. However, consumer participation (at least in the EU) is limited and outweighed by the influence of business interest groups (Ramsay, 2007: 19-22). Policy makers should be aware of the respective agendas of the relevant interest groups; interest groups are however also valuable sources of information. Inviting different stakeholders with adverse interests to partake in policy development processes could limit the risk of capture (Cafaggi, 2008: 138).

151 See also Stiglitz (2009: 18) arguing that parties who are likely to be hurt by a failure of regulations should be well represented in the regulatory structures.

152 See below, chapter 7, section 7.2.5, for a discussion about involving interest groups in regulatory decision making process. See also Dayagi-Epstein (2006) more specifically about difficulties concerned with representation of consumer interests through consumer organisations.

Policy makers’ discretion

Transparent procedures which involve all relevant stakeholders should prevent policy makers from making self-interested decisions that they claim to take on behalf of consumers, unless there are (actual) sound arguments to do so. Also, procedural transparency should limit the policy makers’ discretion and the possibility of undue manipulation or biased decision making, and reduce the risk of regulatory capture (Rachlinski, 2003: 1214-9; Cafaggi, 2006: 57). Furthermore, rule-making should be separated from rule-monitoring to avoid possible conflicts of interest on the monitoring agent’s part (Cafaggi, 2008: 138). Behavioural insights increase the palate of available justifications for welfare-enhancing consumer policy interventions, extending beyond situations that do call for intervention on the basis of rational choice and standard economic insights. The risks of unsuccessful interventions should however be taken into account, as policy makers can err. The potential of undue government manipulation is very real, even though this danger is far from new and hardly limited to behaviourally informed interventions to consumer policy. Transparency in decision making procedures and procedural aims, the involvement of stakeholders, experts and other interested parties and the conducting of field experiments should increase the understanding of possible effects of policies before they are implemented and guard against manipulation. The

In document Behavioural Economics in Consumer Policy: The Economic Analysis of Standard Terms in Consumer Contracts Revisited (Page 133-140)