Information disclosures are an everyday part of life for citizens and consumers in the world’s wealthier countries – especially in the fine-print-strangled Western countries.
We are constantly confronted with information that is highly important but extremely hard to navigate or understand. Repeated attempts to improve disclosure, including efforts to translate complex contracts into “plain English”, have met with only modest success. This is not a reflection of the talent or effort of those trying to implement such changes. Rather, it indicates the fundamental difficulty of explaining anything complex in simple terms.
We believe, though, that a potent mix of modern technology and new government policy is about to transform disclosure – and with it the workings of many parts of the economy. Increasingly, government-owned data and private-company disclosures will be made available in machine-readable formats, spurring the growth of new services we call “choice engines” – technologies that interpret this data.
For businesses, this can be both a threat and a huge opportunity. Firms that gain market share through deception and obfuscation may lose out as better disclosure makes markets more efficient. Firms that are providing high-value products at reasonable prices should thrive. The biggest winners will be those that build products and services using the vast new data resources – in particular, choice engines that help consumers make better decisions.
If this sounds too good – or scary – to be true, consider the history of GPS, the now-ubiquitous system that helps us find our way. Although we now take the technology for granted, it didn’t begin to take off until 2000, when the US government ordered the military to stop scrambling select data from Department of Defense satellites. The change made the data freely available to the public, and entrepreneurs took it from there. Todd Park, the US chief technology officer, recently estimated that GPS added $90 billion in value to the US economy in 2011 alone. We believe that the rise of choice engines will have an even greater and more transformative effect on the economy and on consumers’ lives.
The share-the-data approach at the heart of the GPS success is now official policy throughout the US government. In 2009, on his first full day in office, President Barack Obama issued a memo on Transparency and Open Government, stating that information collected and held by the government is a national asset and directing agencies to “disclose information rapidly in forms that the public can readily find and use.”
Following early initiatives such as data.gov (a Web-based clearinghouse for machine-readable government data sets), the administration began to establish a policy framework for how consumers and businesses interact with and disclose information about products and services. In the United Kingdom, the coalition government led by Prime Minister David Cameron has embarked on a similar effort.
In its second term, the Obama administration is likely to accelerate these efforts. But they should be embraced by Republicans, too, and by governments everywhere. By combining unprecedented access to data and technological advances, policymakers and business leaders have the opportunity to unleash a rare virtuous circle that benefits consumers, incumbent businesses and entrepreneurs. No modern economy can afford to leave that value on the table.
Smart disclosure in the private sector
As policymakers turn their attention to the private sector, they’re using a similar approach to disclosure – with, if anything, even bigger implications. Ironically, the potential gains to businesses and consumers will come about in part because of the increasing difficulty in making wise decisions about ever-more-complicated products and services.
By making the necessary data available to choice engines, we can get the most out of all the new variety we face, from complex mortgages to smart electricity meters. Just as Amazon and Netflix can help you decide which book to read or movie to watch, other choice engines can help you with decisions that have much higher stakes.
In the US, federal laws and regulations require the disclosure of product, service and other information in many domains. Sometimes disclosures are statements that must be displayed on a product (“Warning: Cigarettes cause strokes and heart disease”). In other cases, disclosures are numbers, from price (interest rates on mortgages) to basic product characteristics (calories) to government ratings (crash safety scores).
In still other cases, disclosures are notifications sent when companies or institutions take certain actions (charging overdraft fees).
Sometimes the mere disclosure of unsavoury product characteristics is enough to change the behaviour of firms and individuals. After the Food and Drug Administration required the disclosure of trans-fat content on nutrition facts labels, in 2006, a study of 229 Americans showed a 58% decrease in the levels of trans-fatty acids found in participants’ arteries, along with corresponding changes in how companies produced and advertised products.
But even subtle changes in how information is presented can have significant and predictable impacts on how people process and act on it. Labelling a food 90% fat free can have a different effect than calling it 10% fat. There is some evidence that if retirement-plan statements were to present savings in terms of the monthly income that would be available in retirement rather than the current account balance, people would increase their contribution rate.
Research also shows that financial professionals give better ratings to investments with aesthetically pleasing annual reports than to those with less attractive reports that contain exactly the same data. In fact, a spiffy report impresses the finance pros as much as a 20% increase in annual revenues does.
Unfortunately, disclosure and regulatory policies have generally been written with the implicit assumption that as long as the costs of obtaining information are relatively low, the structure and format of disclosure are relatively unimportant. The burden of deciphering and understanding disclosed information is left to consumers.
And when many complex factors must be taken into account, consumers find it especially difficult to find the product or service that best suits their needs. Neither of us could tell you what our average and peak mobile phone and data usage are – much less whether another provider would give us a better deal.
Even when the stakes are potentially much higher, such as choosing a mortgage, most people take the first offer they’re given, even though a bit of shopping could save them thousands of dollars. Companies thus have real incentives to invest time, energy and talent in competing through obfuscation. When firms can gain market share that way – by hiding product characteristics in the plain sight of fine print, for instance – market efficiency, other firms and consumers all suffer.
Richard H Thaler is the Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business. He is the co-author, with Cass R Sunstein, of ‘Nudge’. Will Tucker is a vice-president at ideas42.