Tag Archives: Cordray

Financial Literacy Rehash

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The Consumer Financial Protection Bureau released its second Financial Literacy Annual Report. In blogging about last year’s report, I noted that the CFPB assumed that financial education worked more than research had shown it to work. Unfortunately, this report seems to be mostly a rehash (in many cases an extensive word-for-word rehash) of last year’s (pace Senator Walsh). From what I could tell, the only significant new financial education research that the CFPB has undertaken since last year is its “rules of thumb” project.

“Rules of thumb” are a decision-making and education technique that uses practical, easily-implemented guidelines for making decisions. Existing research has found rules of thumb to be a successful technique for improving decision making in many areas, and more successful than comprehensive education in some instances. Thus, rules of thumb could be a cost-effective method to improve consumer decision making. However, little research exists examining the effectiveness of rules of thumb for financial decision making.

Accordingly, in 2014 the Bureau began a research project to study the effectiveness of rules-of-thumb-based approaches aimed at helping consumers decrease their credit card debt. Rules-of-thumb-based education may be particularly appropriate for improving consumer literacy about credit card use, as credit card decisions are repetitive and frequent. We have finished the first phase of the project to understand how to create rules of thumb, when they are most useful, and how they can be implemented to ensure maximum success. The second phase of the project will test a set of rules of thumb aimed at helping consumers decrease their credit card debt. When we release the final results, which are expected in 2015, we expect that this project will increase knowledge of the efficacy of a rules-of-thumb approach to financial education both within the CFPB and among a range of external stakeholders who serve consumers. (72-73, footnote omitted)

This seems like a great project for the CFPB to undertake. But the rest of its efforts to improve its understanding about the efficacy of financial literacy leaves me under, underwhelmed, particularly because the rule-of-thumb project is limited to just one consumer financial product, credit cards.

Paternalism or Consumer Protection?

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Adam Smith (not that one) and Todd Zywicki have posted Behavior, Paternalism, and Policy: Evaluating Consumer Financial Protection to SSRN. It opens,

The Consumer Financial Protection Bureau (CFPB) is one of the most powerful and least accountable regulatory agencies in American history. Immune from budgetary oversight by Congress and headed by a single director whom the president cannot remove except under special circumstances, the agency wields unconstrained, vaguely defined powers to regulate virtually every consumer and small business credit product in America In part, the CFPB has justified its ongoing intervention into financial credit markets based on a prior belief in the inability of consumers to competently weigh their decisions. This belief is founded on research conducted in the area of behavioral economics, which shows that people are prone to a variety of errors in their decision-making.

Beginning with the seminal work of Nobel Laureate Daniel Kahneman and his coauthor Amos Tversky, behavioral economics has identified numerous purported behavioral “anomalies” through extensive laboratory investigation. Anomalies (or behavioral biases) are defined as observed behavioral deviations from the predictions of neoclassical economic theory, where it is assumed that people rationally optimize according to a given set of information and constraints. Behavioral economists have sought to explain the sources of such anomalous choices by identifying and cataloging a variety of cognitive limitations and psychological biases.

Building on these findings, behavioral theorists have exported their research into the policy realm. This program, led by such luminaries as Richard Thaler and Cass Sunstein—and known as behavioral law and economics (BLE)—applies the insights gleaned from studies of human behavior to improve existing institutions by designing rules to compensate for (or take advantage of) behavioral biases. Starting from the premise that observed choices are inconsistent with neoclassical theory, behavioral economists argue that intervention is necessary to generate desirable outcomes for consumers who would otherwise make poor choices. (3-4, citation omitted)

As regular readers of this blog know, I am generally a fan of the CFPB. I recommend this paper to those who want the CFPB to be an effective tool of government. The paper critiques the CFPB in a variety of ways. I find a number of them convincing and one key one to be incredibly wrongheaded.

Convincing

  • The CFPB must avoid “confirmation bias” in its decision-making and its evidence-based analyses. (7)
  • The CFPB’s behavioral law and economics approach needs “a complementary behavioral political economy framework” to apply to the CFPB itself as a political actor. (39)
  • The CFPB should account for the ways that its actions might drive consumers to worse choices than they would face in the absence of heavy regulation of the credit markets. The paper gives illegal loan sharking as an example of a possible worse choice.
  • The CFPB would benefit from “‘adversarial review’ by a body of experts housed elsewhere in the Federal Reserve.” (40) This seems like a reasonable way to ensure that the CFPB both maintains its independence and avoids the echo chamber effect that an agency with one director (as opposed to an agency led by a bipartisan commission) might suffer from.

Wrongheaded

It amazes me that in 2014, commentators could say — “autonomous consumer choice should receive greater priority. Regulatory bodies inevitably will have an effect on the services firms choose to offer” — without addressing the negative impact of the unfettered consumer choices of the Subprime Boom that were a factor in the Subprime Bust. (39) We have not even finished with the foreclosure crisis that was the inevitable result of that boom and bust cycle. Yet law and economics scholars are already bemoaning the reduction of consumer choice caused by the regulatorily-favored Qualified Mortgage without also considering the Wild West atmosphere that characterized the mortgage market in the early 2000s. The regulatory state may not be able to craft a perfect credit market but the unfettered market failed to do so as well.

This paper does not take the full range of possible market structures (from heavy regulation to no regulation) seriously and so it is seriously flawed. It also cherry picks its facts and scholarly support at points. That being said, it does offer some trenchant comments and criticisms about the CFPB as currently structured and is therefore worth a read.