Sunday, April 20, 2008

Lessons from behavioral economics for the mortgage crisis

This article by behavioral economics whizzes Richard Thaler and Cass Sunstein, offers some great ideas which I believe might actually get enacted in an Obama administration. They write:

The problem now is that both mortgages and credit cards have rates that vary over time, and numerous other fees that are difficult to understand....

The best response would make use of modern technology to create a Truth in Lending Act for the 21st century.

In brief, government would achieve simplified transparency by requiring all lenders to provide borrowers with an electronic file that contains, in standardized form, information on every feature of the contract.

Instead of fine print, there would be electronic information. And because disclosure would be standardized, consumers could easily compare one mortgage, and one credit card or school loan proposal, with many others.

Now, you might wonder, how do these electronic files, even if standardized, help us mortals who have trouble learning how to record a TV show on a VCR? The answer would come through the market.

As soon as the government required electronic disclosures, websites would quickly emerge to help people in the task of comparing offerings. A borrower would go to "," upload the relevant quote, and receive an easy-to-understand analysis of the loan they have been offered, plus other loans that they might consider.

The same approach could be used in other domains, from cellphone calling plans to Medicare prescription drug coverage.

This proposal illustrates the essence of good policymaking from the standpoint of behavioral economics. Government does not tell people what to do. Instead, it tries to improve markets by making it easier for busy people to make good decisions.
This sort of policy fits very well with the make-your-life-simpler "Ipod government" model that Obama advisor Austan Goolsbee has discussed.

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