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Lehrer offers a number of comments on credit card and subprime lending.  He reports that experiments have shown that when consumers charge items on credit cards, the loss section of brain is not activated.  If I understand correctly, the prospect of paying cash for something seems like incurring a loss--the reduction in cash--and so consumers feel the cost of paying for something in cash more keenly than when putting something on plastic.  In other words, consumers feel less restraint when charging something than when pulling money out of their pockets.  Lehrer discusses an experiment in which some consumers were permitted to bid for an item and pay via credit card while others were obliged to pay cash: those using credit were willing to pay much more for the item.  Lehrer also claims that using credit cards takes advantage of the tendency of the brain to overvalue current consumption and de-emphasize future costs. Initial low teaser rates exacerbate the problem.   And, he argues, subprime loans, such as 2/28 mortgages (lower payments for the first two years), exploit the same tendencies.

Interesting, but what does it have to do with consumer law?  Well, this is the second recent book I've come across that explores how neuroscience can affect consumer decision-making (we blogged about the other, Buyolgy, here).  Much of consumer law is concerned with giving consumers the tools to resist manipulation by businesses.  For example, the Federal Trade Commission Act bars unfair and deceptive practices, and the Truth in Lending Act obliges lenders to make certain disclosures to increase the likelihood that consumers will be able to make informed decisions.  But now businesses have developed the capacity to engage in different types of manipulation, based not on dishonest behavior, but rather on irrationalities in the human brain that impair human decision-making.  It would be a huge step to, say, prohibit conduct based on such irrationalities--to bar truthful representations, or even teaser rates, because of their appeal to these irrationalities--but how do you justify prohibiting some manipulation without also barring others?  Ideally, we would find some way to simulate the same feelings about paying with plastic as we would with cash, so that consumers would feel the same restraint about purchases no matter what form they used to pay for the item.  I wonder if future interdisciplinary law review writing in consumer law will bring in the insights of neuroscience.

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