Comments on: Warren on Rationality, Choice, and Regulation in the Credit Card Market

By: TRUTH ON THE MARKET » Becker and Posner on “Libertarian Paternalism”

Tue, 16 Jan 2007 04:36:06 +0000

[...] But doesn’t this argument apply to all sorts of transactions? Is the literature on trans-fats and their long-term health effects all that different on these grounds from smoking, wine, red meat, soda, coffee, potato chips, or credit cards (and credit card consumers appear to be behaving quite rationally in their own interest)? The food items are not types where the costs of absorbing the information is “trivial” like the peanut oil label for the consumer with a peanut allergy. Instead, consumers frequently make tradeoffs associated with long-term health effects that appear to be quite complicated. And the rush of producers going trans-fat free without government intervention suggests at least that consumers are indeed responding to evidence of the harm from trans-fats. Becker’s response to Posner’s previous trans-fat post also contains citations to a literature suggesting that consumers respond rapidly to health news. And from Becker: Classical arguments for libertarianism do not assume that adults never make mistakes, always know their interests, or even are able always to act on their interests when they know them. Rather, it assumes that adults very typically know their own interests better than government officials, professors, or anyone else–I will come back to this. In addition, the classical libertarian case partly rests on a presumption that being able to make mistakes through having the right to make one’s own choices leads in the long run to more self-reliant, competent, and independent individuals. It has been observed, for example, that prisoners often lose the ability to make choices for themselves after spending many years in prison where life is rigidly regulated. [...]

By: M. Hodak

M. Hodak — Thu, 04 Jan 2007 05:53:17 +0000

Well, I should have just listened to Josh and gone to the comments on Warren’s post to avoid re-inventing the wheel. The very first comment there already suggested exactly what I wrote above.

I should also just start assuming that Warren’s real intent is to waste my time with her socialist musings.

By: M. Hodak

M. Hodak — Thu, 04 Jan 2007 05:34:21 +0000

Thanks. That makes more sense. So whether or not one chooses a ‘no fee’ card depends on one’s personal expected pattern of usage/payment (e.g., pay off each month vs. carry a balance)–as long as one has the choice, rather than the Soviet solution apparently favored by Ms. Warren.

It seems that the threshold for deciding the economic efficiency of choice vs. no choice, then, isn’t how “high” the error rates are, but whether the degree to which ‘choice with errors’ is less costly for the users than the one-size-fits-all solution, whereby one group of card users would be penalized for not having the other option.

Josh suggests that the total costs of ‘choice with errors’ may not be that high, and suggests that options are valuable based on consumer heterogeneity (which I think is still legal in Massachusetts). Again, not having read the study, it seems to me that this unforced option value is calculable based on the study’s results.

By: Joshua Wright

Joshua Wright — Wed, 03 Jan 2007 20:43:43 +0000

An error is the selecting the contract option that does not minimize total interest costs net of the fee.

By: M. Hodak

M. Hodak — Wed, 03 Jan 2007 20:35:18 +0000

I haven’t read the ALSC study, but am I to infer from your post that their study defines the “no fee option” as an “error” regardless of whether the user revolves debt or not? That wouldn’t seem logical.