BEHAVE
A Behavioral Approach To Consumer Credit Decision-Making
Taking as starting point the results of the behavioral sciences on heuristics and biases, this project aims to investigate consumer credit decision-making, marketing strategies that exacerbate that behavior, and assess the extent to which consumer protection policy adequately takes into account heuristics people use when making complex decisions, human cognitive limitations and self-control problems Behavioral sciences, especially cognitive and social psychology and behavioral economics, have shown that people systematically deviate from the neoclassical economics model of human action that assumes complete information, unlimited cognitive abilities, and full self-control. Important departures from the model of rational action include: loss aversion; present consumption, status quo and availability biases; anchoring and framing effects, among others (Kahneman and Tversky 2000, Slovic 2000). This means that individuals tend to underestimate the risks in certain frames of mind, surrender to momentary desires, resist change, and base their decisions on available, accessible or salient information, rather than the most relevant information for the problem at hand, which lead to inferior individual and collective outcomes. The better understanding of the factors that render people more vulnerable to mistakes has promoted so-called ‘paternalistic’ approaches devoted to help people make choices more in line with rational behavior (Santos 2010a). The asymmetric paternalism approach, for example, support regulations with this aim in view, provided they impose little or no harm on those who are fully rational (Camerer et al. 2003). These proposals seem to be persuasive to policy-makers. Behavioral research and respective policy recommendations are particularly relevant to understand and assist consumers in their credit decision-making processes. The high debt rates of consumers in developed societies can be to some extent explained in terms of individuals’ failure in making sensible credit decisions due to non-transparent information which is difficult to process and to the temptation of immediate gratification, which is too salient as compared to the delayed costs of hasty decisions (Laibson 1997; O’Donoghue and Rabin 1999). Various agencies working in the area of consumer protection, such as the USA Federal Trade Commission and the Health and Consumer Directorate-General of the European Commission, have already anticipated the role behavioral sciences can play in the design of consumer protection policy. This is not surprising since the effectiveness of consumer policy requires a good understanding of both the individual and the external factors affecting consumers’ decision-making (Mulholland 2007, EC 2007). The experimental methods, on which the research on heuristics and biases is based, have limitations. They can but ground fairly generic inferences about human behavior in fairly artificial environments (Santos 2007, 2009, 2010b). More detailed information about consumer credit decision-making requires methods of research that investigate actual consumer behavior (Mulholland 2007). The four main goals of this project are, thus: 1) To investigate the heuristics and the cognitive biases that affect consumer credit decision-making, when accessing and appraising information and choosing. Indeed, people may fail obtaining relevant information due to inertia, or they may not process it accurately due to calculative inability, framing effects, myopia, over-confidence, or they may fail to act on this information due to lack of self-control. 2) To investigate the extent to which sellers’ marketing strategies manipulate heuristics and exploit consumer cognitive biases. 3) To investigate the extent to which consumer protection policy adequately addresses the identified biases and their exploitation by firms. 4) To recommend policy proposals that better address the complexity of consumer credit decision-making. In order to successfully accomplish the project’s goals we will mobilize extant psychology and economics research on heuristics and biases, as well as official reports, public opinion surveys, and other studies that provide evidence on behavioral traits of consumers regarding credit decision-making. We will moreover conduct interviews and carry out carefully designed questionnaires and experiments in order to identify relevant heuristics and biases to consumer credit. This project builds on and extends previous research by the team members on the interface of social psychology and economics, experimental and behavioral economics (Caldas et al. 2003, Costa 2008, Oliveira 2005, 2008, Santos 2007, 2009, 2010b), overindebtedness and regulatory frameworks (Frade 2006, Frade and Lopes 2009, Jesus, 2008). The multi-displinary composition of the team, involving psychologists, economists and a legal scholar, will be valuable to understand the complexity of consumer protection.
DINAMIA - CET– Centro de Estudos sobre a Mudança Socioeconómica
Ana Cristina Narciso Fernandes Costa
Catarina Frade
Cláudia Lopes
Fernanda Jesus
José Castro Caldas
José Miguel de Andrade de Pina Pereira de Oliveira
Vânia Costa