Regulators therefore need to help people manage complexity and resist temptation. A potential response to complexity would be to require simplicity - for example, by allowing only the standard 30-year fixed-rate mortgages. This would be a big mistake. Eliminating complexity would stifle innovation. A TiVo is a more complicated product than a VCR, but it is also better.
A superior approach is to improve disclosure. One reason a TiVo is better than a VCR is that it is easier to use. Regulators can reduce the chances of a future meltdown by making it easier to understand financial products. Aggressive steps should be taken to improve disclosure - for example, with mortgages, fine-print disclosure should be supplemented by machine-readable files enabling third-party websites to translate hidden details of the terms. Mandatory transparency for investment banks and hedge funds would also help.
Thursday, November 27, 2008
Thaler & Sunstein Look at the Meltdown
The authors of Nudge examine the causes and fixes of the economic meltdown.