Is more financial disclosure really the answer?
One of the questions arising from the credit crisis was how to improve the financial literacy of the average consumer. One of the common threads in addressing this problem is to improve the amount of disclosure in financial products. The theory is that a fully informed consumer would more likely make better choices or, knowing the true cost of everything, would force consumers to be better educated and more informed.
While, in theory, this makes sense, I wonder if more disclosure would make truly make an impact. Disclosing an absolute cost figure without making it relative to other competitors has little analytical value.
But the much larger point is this. We assume a perfectly rational consumer would make the proper choice if given more information. But we are not perfectly rational beings. Think about this on a Monday morning. Are you a better employee or business owner with all those emails, voice-mails and instant messages? Would cutting down your work emails by half improve your decision making? In theory, providing more disclosure is a laudable goal but, when the rubber hits the road, too much information, or information revealed without the benefit of context, means little.
To state this another way, receiving financial information and utilizing it properly are two different concepts which greater disclosure for disclosure’s sake seems to overlook.
There is a model of disclosure that works to reduce harmful behavior. Cigarette warnings have successfully reduced cigarette sales to 378 billion cigarettes sold in the U.S.; Again, numbers without context mean nothing. This appears to be a staggering number until one realizes this is the lowest sales figure by unit in over 50 years.
However, even then, the Washington Post found that slightly over 1 in 5 teenagers in high school and 1 in 5 adults continue to smoke (the relative small decline between teenage and adult smoking rates tends to indicate both the addictive qualities of the product and that good decision making does not necessarily improve with age). The point being disclosure cannot save everyone and, frankly and harshly, you have to admit there will always be a subset of people you cannot reach no matter how noble the goal or rational the choice.
The principles underlying more disclosure are the same pushing for greater financial literacy. They are ultimately top down approaches requiring some person other than the consumer themselves, whether it be a government programs, school course or regulatory compliance, to do the heavy lifting. As the cigarette example shows, all the heavy lifting in the world does not necessarily promote the right behavior.
The disclosure question and financial literacy do not start from the premise that consumer should be self-educating and how does the government support those education efforts. Instead, they work the other way around- government will teach you how to be financially literate; look at the composition of one financial literacy task force: only 2 of 11 people would be considered to be taking a bottom up approach from the consumer’s perspective. True financial literacy, however much I support it, requires a fundamental rewiring of how our society works from one of entitlement to one of self-sufficiency.
If financial literacy programs fail, it is not so much because of the disclosure requirements or the contents of the program but the fact that not enough people do not truly want to take control of their lives.