Consumer Law

Fed staff reads behavioral economics literature

By Alan White

For you law (or economics) professors out there writing about behavioral economics, take heart. Sometimes people who write regulations are listening (and reading.) The new credit card unfair practices rule proposed jointly by the Federal Reserve, OTS, and NCUA makes reference to hyperbolic discounting in discussing the practice of charging penalty rates on existing credit card balances. (See fn 47 of the proposed rule, citing among others, Angela Littwin's article.) The context: the proposed rule prohibits charging an increased, penalty APR on balances owed before the event causing the APR increase (such as a late payment.) The regulators contend that consumers cannot reasonably avoid this practice, and it is therefore unfair, in part because of hyperbolic discounting. I would argue that overconfidence bias and disregarding nonsalient terms are also behavioral tendencies that support the argument for the new rule.

Full post as published by CL&P Blog on June 04, 2008 (boomark / email).