As policy makers turn their attention to the private sector, they’re using a similar approach to disclosure—with, if anything, even bigger implications. Ironically, the potential gains to businesses and consumers will come about in part because of the increasing difficulty in making wise decisions about ever-more-complicated products and services. The good news is that we have smartphones that can do things we could barely have imagined a decade ago. The bad news is that we can’t understand our monthly smartphone bills. By making the necessary data available to choice engines, we can get the most out of all the new variety we face, from complex mortgages to smart electricity meters. Just as Amazon and Netflix can help you decide which book to read or movie to watch, other choice engines can help you with decisions that have much higher stakes.
In the U.S., federal laws and regulations require the disclosure of product, service, and other information in many domains. Sometimes disclosures are statements that must be displayed on a product (“Warning: Cigarettes Cause Strokes and Heart Disease”). In other cases, disclosures are numbers, from price (interest rates on mortgages) to basic product characteristics (calories) to government ratings (crash safety scores). In still other cases, disclosures are notifications sent when companies or institutions take certain actions (charging overdraft fees or holding elections at publicly traded companies).
Sometimes the mere disclosure of unsavory product characteristics is enough to change the behavior of firms and individuals. After the Food and Drug Administration required the disclosure of trans-fat content on nutrition facts labels, in 2006, a study of 229 Americans showed a 58% decrease in the levels of trans-fatty acids found in participants’ arteries, along with corresponding changes in how companies produced and advertised products.
But even subtle changes in how information is presented can have significant and predictable impacts on how people process and act on it. Labeling a food 90% fat free can have a different effect than calling it 10% fat. There is some evidence that if retirement-plan statements were to present savings in terms of the monthly income that would be available in retirement rather than the current account balance, people would increase their contribution rate. Research also shows that financial professionals give better ratings to investments with aesthetically pleasing annual reports than to those with less attractive reports that contain exactly the same data. In fact, a spiffy report impresses the finance pros as much as a 20% increase in annual revenues does.
“People don’t always make the sensible decisions that they would wish to make,” the Nobel laureate and behavioral economics pioneer Daniel Kahneman told us. “They’re influenced by all sorts of superficial things, and they procrastinate and don’t read the small print. You’ve got to create situations that allow them to make better decisions for themselves.”
Unfortunately, disclosure and regulatory policies have generally been written with the implicit assumption that as long as the costs of obtaining information are relatively low, the structure and format of disclosure are relatively unimportant. The burden of deciphering and understanding disclosed information is left to consumers.
And when many complex factors must be taken into account, consumers find it especially difficult to find the product or service that best suits their needs. Neither of us could tell you what our average and peak mobile phone and data usage are (though our providers certainly could)—much less whether another provider would give us a better deal or better service (though we suspect that’s so). Even when the stakes are potentially much higher, such as choosing a mortgage, most people take the first offer they’re given, even though a bit of shopping could save them thousands of dollars. Companies thus have real incentives to invest time, energy, and talent in competing through obfuscation. When firms can gain market share that way—by hiding product characteristics in the plain sight of fine print, for instance—market efficiency, other firms, and consumers all suffer.
The goal of a good electronic-disclosure regime should be to ensure that consumers know what they’re getting and can compare products. The better consumers are able to understand the features and prices of the products and services they buy, the less regulators need to interfere. In the 2008 book Nudge, one of us (Thaler) and the legal scholar Cass Sunstein put forward the Record, Evaluate, and Compare Alternative Prices (RECAP) framework. Both the Obama administration and the Cameron government have adopted versions of this idea—and had the good sense to think of snappier names. The U.S. calls it Smart Disclosure— defined as the “timely release of complex information and data in standardized, machine-readable formats in ways that enable consumers to make informed decisions.” The British effort, which for now focuses on individual banking, energy, and mobile phone usage data, is called “midata.”