Speakers: Orly Lobel,
University of San Diego School of Law,
Kyle D. Logue, University of Michigan Law School
Daniel Schwarcz, University of Minnesota Law School
Lauren E. Willis, Loyola Law School
Lobel (paper with On Amir), Risk Management for the Future:
Age, Risk, and Choice Architecture
If we’ve shifted to individual choice, consumer autonomy and
private decisionmaking, how can policy direct sound choices. A lot of insurance/financial planning
decisionmaking is suboptimal. People don’t save optimally and rigorously for
the future. One recent study: American
households have ¼ of what they need to maintain a good financial level for
older age.
Dual system model: system 1 is fast, intuitive, affective,
automatic, reflexive; system 2: slower, cognitive, reflective. Executive resource depletion: prior unrelated
tasks exerting executive control may hinder subsequent activities, hindering
system 2’s ability to override. Risk tolerance and risk aversion are different
in the systems: hindering system 2 changes risk-taking. We don’t just assume older people are more
risk-averse: there are different states in each person, and the decisionmaking
environment interacts with that.
Experiments: hinder system 2 with previous task before focal
task. Phonetic matching v. Stroop task
(make decisions about color of color words written in different color), the
latter designed to deplete executive function.
Then asked about preferences about retirement savings. Younger people are less likely to opt into
savings. When we deplete both groups,
though, the younger doesn’t change significantly but there’s a significant
difference in the depleted older groups; older depleted subjects are less
likely to opt in.
Annuities v. lump sums: younger people opted for the annuity
versus the lump sum more than older people across all conditions. Possible explanation: The closer you are to
getting the pile of money, the more tempted you are. Depleted: both groups are more likely to want
the lump sum. Not enough literature
about what to do with the money once people retire—annuities v. lump sums.
Stocks v. bonds.
Similar results. It may be that
the risk-aversion of older people is System 2 at work. Older groups are more likely to fall prey to
gambling, addiction, etc.; when decisionmaking environment is a sound one,
helps people use System 2, older people do better/override automatic/natural
tendencies.
What happens when you offer three options instead of
two? Depleted younger people even more
frequently go for the cheaper option and middle option over the more
expensive/safer option. But the depletion
effect was less pronounced for older groups (in fact, it looked to me like the
depleted older group increased its choice of the most expensive option at the
expense of the least expensive). When a
decision is important enough, depletion is harder. The middle effect grows in relation to the
cheap one.
When cognitive resources are available, older participants
opt for more prudent savings choices. Much less so when depleted—which could
apply to sickness, fatigue, distraction, or after making other arduous
choices. In some instances, depletion
affects older people more than younger.
Policy should be tailored: most important decisions are up front and
there are sticky defaults/path dependence.
Kyle Logue: Outsourcing Regulation: How Insurance Reduces
Moral Hazard (with Omri Ben-Shahar)
How insurance companies work to reduce risk. Insurance is privatized regulation, making
insurers regulators. First party or
third party insurance is an alternative to, and can be superior to,
agency-based regulation. Contrast with
conventional wisdom: insurance is only risk spreading. Our research: aspects of private insurance
market that give it a comparative advantage as regulators. Discussions with insurers: not clear how much
they actually use the research that they show off to academics; they are
hesitant to share data.
Why do insurers want to regulate risk? Don’t they profit more when risk is
high? Yes, to a point, though they have
some incentive to reduce risk in the long run, though not to zero—there have
been debates in the industry over this.
To a point, they just price the risk, but they also try to get
policyholders to do less risky things and they lobby for certain regulations
that reduce risk. Some of the reason is
competition; maximizing size of market; avoiding regulatory overreaction if
rates get too high.
Insurers have access to information, often better than
regulatory agencies, through the underwriting process; etc. Insurers can engage
in ex ante regulation through risk-rated premiums (privatized Pigouvian tax),
discounts for good behavior; deductions and copayments; refusal to
insure/gatekeeping; coaching safer conduct; lobbying gov’t for risk-reducing
regulation. Ex post regulation: claims management/enforcing exclusions;
requiring insureds to mitigate losses.
Auto insurance: you’ve seen the Progressive ads etc. Trying to get data from consulting firm for
big auto companies about ways they can be incentivized to reduce risks. Some attempts are just attempts to find the
low-risk people; others might be lowering risks.
Speculating about new domains for insurance: first-party insurance
replacing contract litigation with consumer contract insurance? There’s not much threat of regulation, and
compelled mandatory arbitration makes it hard to sue. If we aren’t going to dramatically ramp up
the budget for the FTC/CPSC, why not insure people against small risks. eBay
Motors, SquareTrade, VRBO (vacation rental by owner). This might expand.
Limits: when criminal sanctions are needed; when risks are
uninsurable; when risks are insured primarily through group policies; when
there are information externalities (hard to patent insurance techniques);
inter-temporal problems like cliamate change; when insurance is considered an
entitlement (health insurance, which we have left aside entirely?). Also, how do we protect consumers from
insurers?
Schwarcz: Transparently Opaque: Understanding the Lack of
Transparency in State Insurance Consumer Protection
If you look at consumer protection in insurance, it’s vastly
different than in other domains in ways that raise substantial normative
problems.
Transparency can be achieved by summary disclosure, dominant
in banking & credit (APRs), important in securities and health insurance:
core rationale—empower consumers. Full
disclosure—dominant in securities; important in banking and health
insurance. Core rationale: empower
sophisticated intermediaries. Consistent
with and complementary to more aggressive forms of regulation; disclosure
doesn’t have to substitute for other regulations.
But it’s impossible to find out which insurer pays more
claims or pays faster. Regulators have
these data but don’t make them publicly available. Effective regulatory solution would combine
transparency with other regulation. Make
sure what’s actually in the contract is the coverage consumers reasonably
expect. When you buy an insurance
policy, you don’t get the summary policy until 2 weeks later. There’s no
standardized consumer tested form that explains key limits of the policy or
ways in which the insurance you bought deviates from the standard form. We
can’t even get these policies online.
They claim it’s a copyright violation to put the policy online. (I bet someone could find representation to
fight back against this.)
Regulations should require insurers to reveal their
policies; should require actual comparisons of prices (the current sites are
proprietary and tend to favor one insurer or are lead generators). Regulators’
attempts to control prices create distortions that could be limited by
disclosure of what’s actually covered and for how much. Protects vulnerable groups.
Why have we ignored this fundamental tool of consumer
protection in insurance? Path dependency; transparency requires economies of
scale that are hard to find on the state level; state regulators don’t want
transparency that would show they’re doing a crappy job at command &
control; general lack of consumer awareness.
Propose: extend CFPB’s jurisdiction to include insurance. Would create good regulatory competition:
pressure on states to get their acts together.
Threat of federal preemption is the only way to make state agencies act.
Willis: When Nudges
Fail: Slippery Defaults (recommended reading!)
Uninsured motorist coverage: NJ default to limited pain and
suffering coverage, 80% stayed with the default; PA default to full, 75% stayed
with the default: natural experiment.
What about penalty defaults? UCC:
if you don’t specify a quantity in a sales contract, the default is zero: no
good faith reasonable quantity gap-filler.
Policy defaults are hot now: 401(k) pension plans as opt-outs are wildly
successful in increasing participation rates.
Checking account overdrafts; credit card overlimit fees; etc. Privacy: web use tracking settings, social
network privacy settins.
Insurance has default rules all over the place. Why are these defaults hot? They promise
something for nothing. Not much
political resistance either because everyone can still choose.
Why do defaults stick?
You can opt out of T-Mobile arbitration/class waiver, but it’s in the
contract and nobody knows about it: people don’t read contracts. Invisibility of opt-out options;
confusion. Also loss aversion and the
endowment effect. Procrastination;
discounting over time; omission bias (you think you haven’t made a decision
yet, though you actually have by not acting) etc.
Preference formation is also important: keeping name on
marriage is part of the default, but women opt out in droves—the preferences
are clear. If the signal about what’s
expected is very strong, then the default will not stick.
Firm-set defaults work: autorenewal, default privacy
settings, autoenrollment. But rarely
noted that the firms also set the altering rules (can make confusing and
difficult) and manipulate how it’s framed (if in fine print, you may not know
you can opt out). Now though we’re trying to use defaults where firms have
interests adverse to the defaults, as
opposed to past firm use of defaults.
Looks at overdraft protection: what are firms doing in
response to a mandated default that costs them money? (Overdraft protection is costly; people don’t
understand it so competition doesn’t control it; etc.) Regulators concluded that the best option for
most people was no-overdraft for ATM and debit transactions, which should
instead be declined. (Doesn’t apply to
checks/automatic payments—people would often rather have the rent check covered
than bounce even if they do have to pay a fee.)
Thus that would be the default.
You can opt out though.
Regulation also set altering rules—consumers must take
affirmative action to opt out; can’t be hidden in the fine print, and banks
can’t bribe you to opt out, providing you the same account terms whether you
opt out or not. And framing rules: must
be given information about fees that would be charged; alternatives; must be
segregated from other documents.
The situation for defaults seems good: it’s a confusing
information environment (banks have weird names for it, like courtesy
protection) and there are uncertain preferences—consumers’ preferences are weak
if they don’t think they’ll need an overdraft, and conflicted in that they want
overdraft protection for emergency situations but not for cups of coffee. But the default is in fact incredibly
slippery compared to 401(k); about 50% of people have opted out. The people who were overdrafting 10x/year are
still doing so because they opted out.
Why? Banks
intentionally undermine each mechanism that would otherwise make a default
sticky. Make opt-out costless and the
default costly, for example by sending you gobs of annoying advertising that
won’t stop unless you opt-out—calls at dinner; screens before you reach your
online banking. (I have this same issue
with PayPal wanting to take money directly from my checking account.) Neutralize & flip judgment and decision
biases, repositioning loss aversion and endowment effect: they say “stay
protected” instead of “change.”
Eliminate procrastination with pretend deadlines on opting out. Hide that it’s a default at all. Chase’s
opt-out form makes it seem that there’s no default: it offers you a yes and a
no. Overdraft is effective immediately but
no overdraft takes 2 days—this makes no sense because no is the default! Confusing.
Plus they explicitly advise people to opt out.
Boundary conditions on policy defaults: a sufficiently
opposed party with access to the consumer can make the default slippery; the
employer is not opposed in the 401(k) situation. Confusing decision environment; preference
uncertainty. All these can make defaults
slippery.
Insurance examples: NY just put in a new default rule: life
insurance payment has to be lump sum rather than retained asset account. Looking at factors, we might think this won’t
be sticky: the insurance company is an opposed party with access to the
consumer. The decision environment: may
be confusing, may not be. Beneficiary
may focus on the lump sum. Preference
uncertainty may also vary—there’s an endowment effect. This one might be slippery.
NJ has very high default for personal injury auto
insurance. The point is to allow an
apples-to-apples comparison among insurers, but also to create a sticky
default. There’s sort of an opposed
party in that the insurer is happy to get the high policy, but also want to be
able to quote a lower price for lower coverage, and in fact they are violating
the default rule by doing so. The Ins.
Commissioner is trying to come down on this, but might work around it even if
complying with the letter of the rule. Decision environment is confusing
because people don’t know what their coverage is, and there may be preference
uncertainty.
ACPA health exchanges: there is likely going to be an
opposed party (the employer might be better off with a crappy policy); we don’t
know about access to the consumer (depends on whether you can track the
consumer); confusing information enviroment and preference uncertainty are
guaranteed.
In questions: it’s incredibly hard to monitor these phone
calls and the way they can frame the issue (plus there may be First Amendment
constraints on what the regulators can keep them from saying); regulators can
only chase behind. You may need
substantive regulation.
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