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11 J.L. Econ. & Pol'y 349 (2015)
Behavioral Economics and Credit Regulation

handle is hein.journals/jecoplcy11 and id is 359 raw text is: BEHAVIORAL ECONOMICS AND CREDIT REGULATION J. Howard Beales III INTRODUCTION The foundation of consumer protection policy is respect for consumer choice. Based on the economics of information and transaction costs, sound policy recognizes the need to preserve information markets and to carefully structure interventions to ensure compatibility with how consumers actually process information. Under the traditional approach, intervention in markets is appropriate only when some failure prevents the market from reaching the result that is best for consumers. Section I briefly lays out this approach to consumer protection. Over the last decade, regulators have increasingly justified intervention in markets, particularly credit markets, based not on market failure, but rather on notions that amount to consumer failure. Behavioral economics argues that consumers make systematic errors that do not serve their best interests. The behavioral challenge, and four biases commonly cited as rationales for inter- vention in credit markets-hyperbolic discounting, framing effects, the en- dowment effect, and choice overload-are discussed in Section II. Section III argues that three interrelated problems limit the applicability of behavioral economics to policy choices. First, the interaction of buyers and sellers in the market will moderate individual biases, but most behavioral analyses do not consider the impact on market equilibrium. Second, the exper- iments that are the foundation of behavioral economics may not predict real- world behavior. Third, behavioral economics offers many biases, but no theo- ry of which biases matter in what circumstances. Section V considers default rules and behavioral economics. It suggests that default rules should be chosen to minimize transaction costs, and to place the transaction costs on those who receive the benefits of making a particular choice. Section V offers brief concluding remarks on behavioral economics and regulatory policy. I. RATIONAL CHOICE IS THE FOUNDATION OF ECONOMIC ANALYSIS The fundamental result of welfare economics is that competitive market outcomes maximize consumer welfare as judged by consumers, given the mi- Professor of Strategic Management and Public Policy, George Washington School of Business, April 2015.

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