Repost from Run on Toast
Last week I went to the Nudgonomics talk at Demos which saw Richard Thaler and John Kay debate whether Thaler and Sunstein's Nudge theory could help solve the current financial mess. Thaler in particular made some points that I found interesting. Some may seem quite obvious, but I'd never heard them articulated them before.
Thaler is an advocate of disclosure and transparency and the role of modern technology in faciliating better decision making. He made the point that when it comes to financial products most people have no/little understanding of what they are purchasing; come on how many of you read the small print? If you are a FS company then surely this should be a little worrying?
Part of Thaler's solution to this problem was for credit card companies/banks to send their customers two data files annually. One would contain data about your personal usage (how many times you went overdrawn, how much interest you made, how much you paid in international charges) and the other a spreadsheet of all the possible charges/gains you could get on your account. While it is unlikely that customers themselves would do anything with this information, he believes that companies would spring up to help you understand your spending and what changes you could make to be better with your money. He gave the example of Billshrink in the US, who do something similar, but rely on customer entry to gather data.
I think stuff like this is brilliant because I'm all for companies providing services that will genuinely help their customers, but the cynic in me wonders if banks would really want to do these things - because an outcome of a system like this is the Billshrink-esque sites would be able to recommend better products for users, possibly with other providers.
Anyway, back to Thaler. In a nutshell, Nudging is all about getting people to do things that are beneficial to them/society/the world without telling people what to do/prohibtion. We need to be in a place where people are 'discouraged from taking mortgages they can't afford without telling the bank what products to create/sell and without telling consumers what to do'. Err, easy peasy. The only way this can be done according to Thaler is to have detail on customers 'to the point where we start invading privacy' so lenders can make informed decisions on an individual basis.
Banks already have a lot of information about us and there is a credit rating system in place, both of which are supposed to perform this role to some extent. Obviously there has been a fail somewhere (I mean, I managed to get a mortgage), but I don't know if this is the answer.
With regards to regulating non-consumer financial markets, Thaler called for greater transparency of the dealings of institutions, obviously striking a balance between allowing them to make competitive deals and being open about their investments. The larger the company, the more they have to disclose. As he was fond of saying, 'too big too fail, too big to hide'. This would mean that more people would be acting as ratings agencies - and hopefully providing an early warning system against catatostrophes like the one we're in the middle of.
On a random tangent, what he was saying reminded me of something Clay Shirky said when I saw him talk at LSE. If we're all the rating system, where is the quality control? Shirky made a good point about how society needs people to check on councils, goverments, etc, to stop them from descending into corruption. This used to be the role of the (local) journalist, but that is role that is facing excinction as new media models take over.
I have to end this post with Richard Reeve's *excellent* quote: 'Boring is the new exciting". It made about as much sense then. And save John Kay's ideas for another time.