Áron S OMOGYI *
3. Consumer choice deviation – explanation based on behavioral economics
3.3. Other errors
In the case of credit cards, further so-called “cognitive errors” may also occur.
Consumers tend to over-rate the extent of the discount related to the initial preferential interest and to enter into an agreement and have to pay a high interest at a later stage. Several studies show that those who easily “fall” for the promised preferential interest, are also those who, on the one hand, tend to accumulate more debts, and who, on the other hand, are generally higher risk debtors than those consumers who handle the offers mentioned at their local value.14 A further problem found is that consumers typically do not understand contractual terms and conditions, and they are not able to carry out a proper comparison of these terms and conditions, which also means that they will not necessarily choose the offer that is favorable to them.
3.3.1. Informational noise and hidden conditions – banc accounts and deposits
David Laibson15 shows the relation between hidden contractual conditions and
“extra services” such as profi t centers. According to an example presented at a conference organized by the FTC16, the annual costs related to managing a bank account by ”US Trust” Bank (such as ATMs, IT tools) amount to 40 $.
Therefore, the bank account management fee for this service package is 40 $, but the bank charges no other costs for these “extra services” in this account package. In order for the bank to get further clients, it should take measures and offer different gifts to “naïve” consumers for 50 $, such as a toaster or a DVD
14 Based on the KOLTAY–VINCZE op. cit.
15 Presentation of his professional carrier: http://www.ftc.gov/be/consumerbehavior/docs/bios.
pdf.
16 A detailed description of the conference materials and related studies are available at the FTC webpage: http://www.ftc.gov/be/consumerbehavior/docs/agenda.shtm
player. Furthermore, in order for the bank to make profi t, it generates different
“extra services” for an amount of 90 $. A “naïve” consumer will not necessarily
“get” that he or she has actually paid the 40 $ fee for the use of the bank account.
A rational consumer would pay this fee of 40 $ and freely spends the other 50
$. With reference to the specifi c example of the “US Trust” Bank, it should be noted that the introduction and operation of such a product do not confl ict with any legal provision. As shown through the legal cases described in the section below, the company advertising the product should provide precise information about the product, but it is not obliged to draw the attention of the consumers to the diffi culties in comparing the offers, that is, the consumers should not be separately warned of the disadvantages of the offers.
This example also shows that in case a new operator appears on the market, it can offer a cheaper product, but this probably does not happen because if some services become free-of-charge, even only in appearance, the consumers will not repeatedly pay for these services and, at the same time, the new operator will also bear costs. The example also makes it clear that the operator has no interest to educate consumers because an informed and clever consumer is not that “profi table”, and therefore companies otherwise try to conceal information.
The issue of education should probably be solved by the regulatory authorities.
The above case presents the issue of understanding and comparing the offers by consumers.
Dean Karlan and col. have conducted an interesting experiment in the market of consumer credits, but which led to generally valid fi ndings.17 This experiment, conducted in South Africa, is summarized by the repeatedly cited Koltay–Vincze paper by stating that, based on the psychological characteristics in the offer, those who fi ll their offer with positive characteristics may afford an increase in interest up to 1-4%. This experiment confi rms that the psychological characteristics in an offer have a substantial effect on the offer, but this effect cannot be estimated with precision.
3.3.2. Additional fi ndings
The following experiment has drawn the attention to the cognitive error deriving from the regulatory context, but also made by the consumers. According to the regulation entered into force in the USA, mortgage brokers must communicate that they are paid by the creditor bank for their activities. The key element in
17 The experiment is presented on the FTC webpage: http://www.ftc.gov/be/consumerbehavior/
docs/slides/Karlan.pdf
this experiment was that some consumers were provided this information and some were not. The results showed that informed consumers do not trust the broker and choose to contact a bank branch where they will select a credit that is more expensive taken as a whole. The cognitive error consists in the failure of the consumer to grasp the fact that the income of bank employees also depends on the amount and price of the credit granted. This experiment confi rms, on the one hand, that in addition to incorrect consumer decisions, an incomplete regulation can produce signifi cant damages and, on the other hand, that correct information may be useful to the consumer.
We shall consider the regulatory environment in force known, but it should be added that a similar regulation is in force in Hungary, as well, taking into account the relevant provisions of the Credit Institutions Act, which provides that prior to the mediation of the fi nancial service, the mediator must clearly inform the potential client, in writing, about the entity on which behalf the mediator acts and that the mediator may receive a fee for the mediation of fi nancial services only from the principal.18 At the same time, Article 4(4) of Act CLXII of 2009 on consumer credits also states that the credit mediator must specify in the commercial communication on the credit the entity on behalf of which the mediator acts.19
I am not aware of studies on the extent to which Hungarian consumers trust agents. However, it can be established that there is need for personal advice, especially in case of complex products. Sales by agents are also characterized by the fact that agents contact consumers based on recommendations, and in my opinion, the relation between the person making the recommendation and the consumer plays an infl uencing role. It should also be noted that pursuant to provisions of the Credit Institutions Act in force, during the facilitation of the fi nancial service contract the agent (or more precisely, the independent mediator) must analyze and provide the client with suffi cient offers but with the service offers of at least three competitors if available on the market […].
On these grounds, I believe that trust is built until actual advice is given and that there are cases where no sales can be made through a bank branch, and therefore, no substantial suspicions are raised and the vigilance of the consumer cannot be signifi cantly infl uenced by a single line of information in a large print document. It should also be noted that, in the cases I am aware of, the agents’
18 Article 219/A(1)(e) and Article 219/C(4)(d) of the Credit Institutions Act.
19 The obligation to inform, according to the Credit Institutions Act, specifi ed in Footnote 32, should not apply if this obligation is provided for by the legislation on consumer credits.
activity is infl uenced not by the person of the principal, but rather by the amount of the commission. However, the regulation on mandatory information contains no provisions on the amount of the commission, which may have an impact on the relation between the client and the agent, if any.