Behavioural implications for standard term policy

Behavioural analysis of standard terms in consumer contracts suggests a lesser focus on information duties. Consumer vigilance should only be expected to improve the quality of standard terms in consumer contracts to a very limited extent, if at all. The question of which interventions should be recommended for policy that aims to correct consumers’ biased decision making also deserves some discussion.

a. The effectiveness of information remedies

In general, the application of behavioural insights such as information overload, emotional status and social pressures concerning standard terms in consumer contracts corresponds to the insights of information economics. Consumers fail to read and assess

216 Risk perceptions relating to particular standard terms will not be assessed in the following section on the suggestions of empirical research, as this research takes a more general perspective on standard terms. See also below, chapter 8, section 8.2.2.

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standard terms sufficiently, which results in low quality terms being offered in the market. Admittedly, this view is not new to information economics. Information overload was already theorised in information economics to be a possible cause of suboptimal decision making. The salience or rather the non-salience of standard terms, which is seen as a behavioural addition to explanations of consumer behaviour, does in fact not differ much from the insights that had already been gained by economic theory concerning rational apathy. Information economics also allows for the possibility that information asymmetry cannot be sufficiently counteracted through information remedies, at which point substantive interventions might be warranted. The preferred solution within information economics is reliance upon information remedies, also in the context of standard terms in consumer contracts. Information remedies are argued to correct adverse selection and increase social welfare by increasing the quality of standard terms. Since these information remedies however are dependent on consumers’ informed decision making, their effectiveness can be doubted as a result of behavioural biases and heuristics.

Behavioural theory brings the argument of low quality terms that result from consumers not fully reading and assessing terms to a further level. The biases with regard to information overload and social pressure result in even more doubts about the effectiveness of information remedies. While information economics relies upon information remedies to correct information asymmetry, it can be concluded from behavioural notions that information might not be a sufficient remedy for information asymmetry in the case of standard terms. As has been discussed previously, the instrument of information disclosure should be carefully re-assessed in the light of behavioural notions.²¹⁷ Behavioural insights suggest that even if adequate information is available in the market, this no longer necessarily means that welfare enhancing government intervention is redundant in the context of consumer protection. Consumers are overwhelmed as it is; their psychological capacities might render the extra information provided through information remedies ineffective. This implication of behavioural insights to policy can be clearly argued to be relevant to the context of standard terms in consumer contracts. This change of focus and different view on information remedies can be seen as one of the major implications of behavioural insights applied to standard terms, and consumer protection in general.

b. Reliance upon consumer vigilance

Behavioural notions suggest that consumer vigilance should not generally be depended upon to discipline the market for standard terms. The findings on consumer behaviour regarding reading, assessment and commitment to terms after having decided to acquire the good further increase doubts about the capability of consumers to discipline the market and to effectuate efficient standard terms to be drafted by sellers.

217 See above, chapter 3, section 3.3.2c.

Consumer biases and heuristics might impede consumers in this challenging task. As consumers are more likely to read terms ex post, and feel committed to the contract, consumers’ propensity to actively negotiate a higher quality in standard terms is reduced.

These insights regarding propensity to read also provide more arguments against the theory of the informed minority of consumers who are able to discipline the market. In addition, these insights provide further arguments to doubt the effectiveness of private enforcement of regulation that aims to ban onerous terms, in excess to the concerns already mentioned above.²¹⁸ Again, the concerns raised in (information) economics are aggravated by behavioural insights.

Behavioural literature has furthermore distinguished certain terms that are likely to be disregarded and therefore non-salient, such as low probability risks and dreaded risks.

Moreover, defaults that were already seen to be sticky from a transaction cost perspective are now shown to be even “stickier” due to behavioural biases. In general, behavioural insights suggest that the effectiveness of consumer vigilance to cure the market failure of information asymmetry, which results in adverse selection, should be doubted.

c. Behavioural intervention strategies to correct biased decision making

This section aims to provide some arguments relating to the question of which intervention strategy should be recommended for the task of improving consumer decision making with regard to standardised contract terms.²¹⁹ In light of the fact that behavioural insight suggests that consumers will fail to negotiate over standard terms in consumer contracts and that effective strategies that should enable people to truly read, assess and shop for terms are hardly (or even im-) possible, a change in policy focus might be justified. Policy measures should go beyond the aim of enabling consumers to read (Becher and Unger-Aviram, 2009: 22).²²⁰ Furthermore, recommendations for policy should relate to the issue which interventions would allow the market to operate best in an environment where consumer reading and negotiations of terms are not or only to a very limited extent possible (Baird, 2006: 935). As has been explained above, behavioural intervention strategies can aim at debiasing consumers, changing the default of the decisions or rebiasing consumers by employing the effects of one bias to overcome the detrimental effects of another one. The question remains which intervention strategy that accounts for behavioural insight should be recommended to address the issue of standard terms in consumer contracts.²²¹

218 See above, section 5.3.3c.

219 In accordance to the cautions, considerations and guidelines that have been developed in chapter 4, it must first be established whether behavioural interventions are justified. Only then should intervention strategies based upon behavioural insights be contemplated.

220 Becher and Unger-Aviram (2009: 22) instruct: “Policymakers, devote less attention to improving plain language!”.

221 The question of how the issue of standard terms in consumer contracts should be addressed in a way that accounts for behavioural insights, is only limitedly discussed in current behavioural economic literature. Bar-Gill (2009), mentioned above, suggests to inform consumers of average use patterns; and Becher (2009) suggests a “fair contracts approving” mechanism to overcome the one-sidedness in

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In general, debiasing is to be preferred over the other intervention strategies as it allows consumers to make an informed decision. This intervention strategy could entail the implementation of an instrument in which less and better information is disclosed, perhaps by disclosing some standard terms separately from the contract, or information on the package of the product or on a label that is provided where the good is displayed, in large text size and simple wordings. There are however not a great number of terms that can actually be included in the decision making process as a result of debiasing, and these terms, even though they are disclosed, might still not be assessed by consumers.

Another way of (limitedly) debiasing consumers and making their decision more informed is providing sellers with a reliable signal of the higher quality of their terms.

When a credible signal of quality can be established through a certificate or some other kind of seal of approval, or some rating or labelling scheme for the quality of the contract standard form, this intervention might to some extent be able to increase the quality of standard terms.

The intervention strategy of changing the default however also seems promising.

When policy instruments directly change the standardised consumer terms into terms of higher quality, consumer decision making processes do not need to be altered. The standard terms could be upgraded to a higher level of quality by a combination of legal standards and some sort of authority monitoring of terms. The quality of terms could also be raised by inviting consumer interest groups to have a say in which terms should be included in standard forms. Also, certain higher quality terms could be mandatorily included in consumer standard forms; even entire contracts could be prescribed to sellers and consumers.²²² The intervention of rebiasing does not seem very applicable to the case of standardised consumer contracts.

5.4.3 Conclusion: behavioural additions to standard term policy recommendations