Paper on Behavioral Economic Approach to Credit Reporting Consumer Protection

Adi Osovsky, a Harvard SJD candidate, has written The Misconception of the Consumer as a Homo Economicus: A Behavioral Economic Approach to Consumer Protection in the Credit Reporting System, forthcoming in the Suffolk University Law Review.  Here's the abstract:

The significant increase in the number of consumer transactions, along with the expansion of information technology, have created massive amounts of detailed information on each individual's credit history. Consumer credit reporting agencies ("CRAs") play an important role in this financial information market.

Although the credit reporting system has significant economic benefits, CRAs have a tarnished reputation as far as consumer protection is concerned. While making their business out of gathering, compiling and analyzing consumers' information, CRAs generally do not have privity of contract with those very same consumers and thus have little or no incentive to protect consumers' privacy and ensure the accuracy of every single credit report. Such lack of incentive has resulted in numerous consumer problems, including inaccuracies in credit reports and erroneous credit scores; infringement of consumers' right to privacy; contribution to the prevalence of identity theft; and the creation of a fertile ground for consumer manipulation through targeted marketing lists.

This paper suggests that the current regulatory system has been captivated by the misconception of the consumer as Homo Economicus. Existing regulation has given consumers a significant role in facilitating the production of more accurate credit, envisioning rational, vigilant and alert consumers, who regularly monitor their credit reports, dispute errors and opt-out from marketing lists. However, studies have shown that consumers' rationality in decision making is in fact doubtful, and so too is the justification of imposing monitoring responsibilities on consumers.

The paper challenges the economic regulatory approach through the behavioral economic approach – a relatively new model that aspires to explain consumers' biases and cognitive limitations, which are absent in the standard economic framework. The paper then explores two potential consumer protection mechanisms, drawn from the behavioral economic framework: applying psychological tools, such as disclosure and framing, for a better designed system; and enhancing consumer financial literacy.

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