Is Behavioral Economics In-Control?
by David S. Evans
MasterCard’s new In-Control Card (the name speaks for itself but more details on their Product Profile)--illustrates the good side of behavioral economics. Behavioral economics is the new (within economist-time) field that studies how and why people act the way they do and tosses out old assumption that people are rational.
Here’s the difference.
Rational-man economics can’t understand why people would ever use debit cards when they could use a credit card. People lose the float on charges when they put it on debit rather than credit, not to mention rewards. They are ahead of the game with a credit card so long as they pay their bill at the end of the month which they ought to be able to do s ince they had the money in their account to cover the debit charge.
By contrast, behavioral economics observes that lots of people with credit cards (and with credit availability on them) use their debit cards and tries to understand way. One of the leading theories is that the debit card is a self-control device—people use it to force themselves not to give in to financing purchasing the essentials of life.
One of the leading researchers and popularizers of behavioral economics, Dan Ariely, argued in his book, Predictably Irrational, that there would be massive demand for a card that people could use to control themselves. See his reminisces of meeting with bankers who he claims ridiculed the idea—not because it wasn’t good but that no one in the card business would do it because they couldn’t make money on it. Now we’ll get to see whether those unnamed bankers were right or whether the Professor was right to have egged them on.
There are lots of other ideas coming out of behavioral economics often based on a nice blend of field experiments, laboratory experiments, neuroeconomic (yup, they wire people up and play head games), and theory. My introduction to behavioral economics post provides some background to this.
Unfortunately, there’s also a bad side to behavioral economics from the standpoint of the payments card business. We’ll be hearing a lot about that too. Law professors in particular have started using behavioral economics findings to argue that the card industry designs product to profit from people’s weaknesses, so the government needs to stop them from doing that, and that people are too irrational and innumerate to be able to handle their own borrowing, so the government should nudge them to buy the right products. That’s what the folks who brought you the Consumer Financial Protection Board believe.
Good or bad, behavioral economics is something that we’ll be following for the payments industry.
David S. Evans is an economist and a business advisor to payment companies around the world. His recent work has focused on helping companies create, ignite and profit from payments innovation. He is the originator of the Innovation Ignition Framework® , a tool provides a systematic way for companies to evaluate and implement innovative ideas and achieve critical mass.