This week, President Obama issued an executive order entitled “Using Behavioral Science Insights to Better Serve the American People.” The President is directing federal agencies to utilize a field of study known as “behavior economics” in their work. The executive order, found here, gives support to an economic theory that is already playing a central role in the Consumer Financial Protection Bureau’s regulatory and enforcement agenda.
Behavioral economics posits that consumers are not rational decision makers. Rather, consumers have certain frailties or weaknesses that lead them to make poor decisions that are not in their own best interest. Behavioral economists emphasize that consumers frequently make mistakes, and companies offering financial products and services take advantage of those mistakes. According to Richard Thaler, a behavior economist that has worked with the CFPB, “It is possible to design institutions that help people make better choices.”
This is exactly what President Obama appears to want. The executive order calls for agencies, such as the CFPB, to “identify policies, programs, and operations where applying behavioral science insights may yield substantial improvements in public welfare, program outcomes, and program cost effectiveness” and to develop strategies for applying such insights to programs. It also encourages agencies to “recruit behavioral science experts to join the Federal Government.”
The CFPB is ahead of the curve on this score. The Bureau has been hiring behavioral economists since its inception. Currently, all seven members of the CFPB’s Academic Research Council are behavior economists. This tilt is the result of the influence of Elizabeth Warren, the original CFPB director, who issued a rallying cry for behavioral economics and formation of a new federal agency that ultimately became the CFPB. In contrast, the Federal Reserve predominantly employs neo-classical economists.
Behavioral economics is already an element of the CFPB’s work. For example, in its recent notice indicating that it was seeking approval from the Office of Management and Budget to conduct a national web survey as part of its study of ATM/debit card overdraft disclosure forms, the CFPB stated that the survey will explore “financial product usage, behavioral traits, and other consumer characteristics that may interact with a consumer’s experiences.” Also, the CFPB’s continuing hostility to payday loans, despite their popularity among consumers, suggests the influence of behavioral economics.