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Confusing Disclosure and Information

This is just a great paragraph from Stephen Waldman. It's about financial regulation, but it applies to much more.


One of the great errors in modern policy is to confuse disclosure with information. It is not the case, currently, that banks secretly take your money without itemizing the charge on some statement. (Sometimes when they take your money they call it "service fee" or something equally nondescriptive, and it'd be nice if that practice went away.) Rather, banks intentionally define contracts in such a way that the cost to many customers of understanding and competitively shopping all the dimensions of the product seems higher than the cost of terminating the search and signing the dotted line. More detailed disclosure doesn't eliminate, and can sometimes exacerbate, the real information costs customers face, which derive from the complexity of the required analysis and lack of information about alternatives, not from an absence of product data. Of that we all have pages, with more arriving every month.

In the abstract, this isn't a surprising trend: The world is becoming more complex, and we are not becoming much smarter. What is surprising is that technological innovation has done a lot more for how we compare relatively small and comprehensible items -- books, music, movies -- than large and complex items such as health insurance plans and credit cards. In part, that's because more complex items aren't particularly standardized. That's what the "plain vanilla" provisions of financial regulation might have accomplished, if they hadn't been unceremoniously dumped.

By Ezra Klein  |  October 1, 2009; 5:31 PM ET
Categories:  Financial Regulation  
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Comments

I'm sure this is true for a lot of things, but today I was trying to reserach how the prescription drug market works. I came away realizing that no one understands it. It's a giant money-laundering scheme.

Posted by: bmull | October 1, 2009 6:54 PM | Report abuse

"That's what the "plain vanilla" provisions of financial regulation might have accomplished, if they hadn't been unceremoniously dumped."

You consistently write as if regulations like this have no costs...just benefits.

Posted by: kingstu01 | October 1, 2009 7:13 PM | Report abuse

If banks were required to provide a standard set of 'plain vanilla' products, my intuition is that banks would not provide attractive terms (as they'd presumably prefer people to choose other of their products), and that the products offered by the major players would be virtually indistinguishable from each other. I.e., they'd find a way to prevent these products from being helpful to the consumer in any way.

As you say, there are great resources out there that compare, e.g., consumer electronics on every conceivable dimension. It seems like the same could be done, to great effect, for complex financial products: quantify them and distill the results in a quick-to-reference grid. CNET for financial products.

Posted by: ardnopes | October 1, 2009 8:41 PM | Report abuse

I agree absolutely that this is a very important issue. I made the same point two weeks ago in a comment to an Atlantic Post by Mike Konczal (at: http://business.theatlantic.com/2009/09/financial_engineering_against_moral_hazard.php#comment-274459):

A general comment is that one of the things that's assumed away typically in freshwater models is the costs of calculation, information gathering, and just complication. These things can entail tremendous time costs, time that could have been spent producing things, and can add great risk to people's lives, because it can be very hard to know what's going on, and if there's something you've missed that can really hurt you financially, or devastate you.

And excessive risk can really lower people's utility (quality of life), as most Americans have learned over a generation of Republican dominance.

When freshwater economists and libertarians leave us with these Rube Goldberg schemes to avoid government at any cost, one thing they ignore is the complication costs, and that people aren't able to make massively complicated calculations instantly, and don't have the years of specialized education and training often necessary to make them well, and even if they did, there's a great deal of time to be spent gathering the needed information.

An example of how these costs can be in the trillions per decade is how much higher administration costs are for our fragmented health care system versus single-payer (and we already have single-payer and it has vastly higher satisfaction than private insurance; it's Medicare for our seniors). Furthermore, the figures that report the trillions in cost per decade only count the costs on the provider end; they're not even counting the time, unpleasantness, and risk (of making a mistakes and the insurer not paying) costs to hundreds of millions of consumers.

Posted by: RichardHSerlin | October 1, 2009 8:58 PM | Report abuse

Wait...do Americans not have comparison websites?

Posted by: albamus | October 2, 2009 3:09 AM | Report abuse

I had the same thought as albamus - why can't we just compare accounts and banking companies like we compare books?

In fact I think there are websites that do this, they just aren't that popular yet. If we ever get the technology to deposit a check over the internet, though, I think they will be. :-)

Posted by: Drew_Miller_Hates_IDs_That_Dont_Allow_Spaces | October 2, 2009 9:19 AM | Report abuse

Follow the money. Of course disclosures are getting more complex, because information asymmetry is where larger profits come from. If my product has an expected value to you of a dollar, but I can convince you that the expected value is $1.15 -- or simply that the cost of figuring out the expected value exceeds any price improvement you might get -- that's money in my pocket.

To have a comparison web site you would (unlike for, say, books or games) need professionals skilled in the art of reading this stuff (most of whom, unsurprisingly, work for the other side) plus a huge legal staff and/or the co-operation of a lot of state attorneys general to get and maintain access to the various terms being offered by financial institutions.

From there it would be pretty straightforward -- you'd want to be able to generate a bunch of what-if graphs showing how much any given agreement would cost depending on how your income/health/whatever changed over time. Simple, once the underlying data was available. Don't hold your breath.

Posted by: paul314 | October 2, 2009 10:21 AM | Report abuse

This is a very valid point and in that sense it shows a cleaner way out even when we do not have 'plain vanilla' option:

The way out is getting rating for bank offerings. There are number of ways State can do it - either rate offerings on the scale of providing succinct information or have model / well known and well understood contracts defined and compare bank offering with that or simply rate bank on how transparent it's offerings are.

Who would provide the crucial 'information infrastructure' for the same? Either state directly or industry funded but State managed agency (something like Energy Star ratings on appliances) or even directly industry funded / managed but with State supervision.

Washington still has not caught up with the Information Technology Revolution to incorporate all these ideas in their policy making.

Posted by: umesh409 | October 2, 2009 11:57 AM | Report abuse

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