Friday, September 12, 2014
When he famously wrote 100 years ago, “Sunlight is the best of disinfectants,” Justice Louis Brandeis began a century of disclosure law. How do we protect borrowers and investors? Disclosure! How do we help patients choose safe treatments and good health plans? Disclosure! How do we regulate websites’ privacy policies? Disclosure!
In area after area, mandated disclosure is lawmakers’ favorite way to protect people facing unfamiliar challenges. Truth in lending laws, informed consent, food labeling, conflicts-of-interests regulation, even Miranda warnings, all arose because lawmakers rightly worried that uninformed and inexperienced people might make disastrous choices.
Brandeis was wrong. True, these laws have a worthy goal – equipping us to make better decisions. But in sector after sector, studies steadily show that mandated disclosure has been almost as useless as it is ubiquitous. Financial crises have bred mandates for decades — the Securities Act of 1933, truth-in-lending laws in the 60s and 70s, Sarbanes-Oxley in 2002, and, after the 2008 crisis, the Dodd-Frank Act. But each new crisis occurred despite the old elaborate disclosure requirements.
In our new book MORE THAN YOU WANTED TO KNOW: The Failure of Mandated Disclosure, we explain that mandated disclosure has become the regulatory default. It is politically easy for legislatures and convenient for courts.
Sunlight doesn’t disinfect because mandated disclosure is so ill-suited to address the problems it faces – and, in fact, can do more harm than good. Consider one of the most heroic efforts to get disclosure right. “Know Before You Owe” is a new regulation issued by the Consumer Financial Protection Bureau, the agency responsible to reform consumer credit markets. The Bureau recognized that people took bad mortgages because they misunderstood the terms. To prevent this, the Bureau heeded the Dodd-Frank mandate to promote “comprehension, comparison, and choice.” After much intelligent work, the Bureau has a new, simpler form that has done well in laboratory tests:
Gone are the tiny fonts and the overloaded lines of the old form (on right). The new form (on left) is a masterpiece of design, declaring the dawn of a new era of smart and simplified disclosure, designed by lawmakers schooled in decision sciences and cost-benefit analysis.
But mortgage disclosure has to work in the bank, not in the regulators’ lab. When borrowers arrive at a real-world loan closing, they will get the Bureau’s new form and almost 50 other disclosure forms about issues like insurance, taxation, privacy, security, fraud, and constitutional rights. The new form is part of a stack more than 100 pages high, courtesy of many laws from many lawmakers over many years. Nobody plows through all this. And no single agency has the authority to pare down the stack.
Despite failures, disclosures are growing in number and in length. In health care, informed consent sheets now look like the fine print web users click “I Agree” to, thoughtlessly. Just reviewing the privacy disclosures received in one year would take a well-educated fast reader 76 work days, for a national total of over 50 billion hours and a cost in readers’ time greater than Florida’s GDP. In banking law, to describe the many fees in a garden variety checking account, the average disclosure is twice as long (and quite as dismaying) as Romeo and Juliet (111 pages).
In internet commerce, if you want to buy an iTunes song you are told (as the law requires) to click the agreement to the disclosed terms. Do you read before clicking? Of course not. Florencia Marotta-Wurgler and co-authors have showed that only one in a thousand software shoppers spend even one second on the terms page. And if you do print out the iTunes terms, you confront 32 feet of print in 8-point font (See Ben-Shahar’s photo with the iTunes Scroll below). Hard as you read, you can’t understand the words, what the clauses mean, or why they matter.
What about simplifying with just a few scores or letters, like A, B, and C grades for restaurant hygiene? Alas, boiling complex data down to a manageable form usually eliminates or distorts relevant factors. So a recent study by Daniel Ho at Stanford found that the volatility of restaurant cleanliness and the discretion given to inspectors make hygiene scores unreliable and even misleading – and do not detectably help public health. There is almost no evidence that the simplest of all scores – the loan’s APR – has helped people make better loan decisions, and there is plenty of evidence that it didn’t.
If disclosures are so futile, why do lawmakers keep mandating them? Because disclosure mandates look like easy solutions to hard problems. When crises occur, lawmakers must act. Regulation with bite provokes bitter battles (often stalemate); mandated disclosure wins sweet accord (near unanimity). Mandated disclosure appeals to both liberals (personal autonomy and transparency) and conservatives (efficient markets). And as one financier admitted, "I would rather disclose than be regulated."
But disclosures are not just inept. They can be harmful. Disclosure mandates spare lawmakers the pain of enacting more effective but less popular reforms. Disclosures help firms avoid liability, even when they act deceptively or dangerously. Disclosures can be inequitable, for complex language is likelier to be understood by those who are highly educated and to overwhelm and confuse those who aren’t. Mandated disclosures can crowd out better information (time spent “consenting” patients cannot be spent treating them).
We are often asked what should replace mandated disclosure. If it does not work, little is lost in abandoning it. And if it cannot work, the rational response is not to search for another (doomed) panacea, but to bite the bullet and ask which social problems actually require regulation and what regulation might actually lessen the problem. We do not envy lawmakers the hard work of helping people cope with the modern consumer’s life. But persisting in mandating disclosures is, as Samuel Johnson said of second marriages, the triumph of hope over experience.
Ben-Shahar is Leo and Eileen Herzel Professor of Law, University of Chicago.
Schneider is the Chauncey Stillman Professor of Law and Professor of Internal Medicine, University of Michigan.