When you get a letter from your bank or credit card company detailing a change in contract terms, do you read the fine print? When a website asks you to “click here” to accept terms and conditions, do you actually read those terms? If you answered no, you’re like most people. We’ve had years of practice being presented with nearly useless information. So, even when the information is worth reading, we’ve been conditioned to ignore it.
In a recent study, my colleagues and I looked at whether financial disclosures providing consumers with potentially valuable information do any good. We conducted a large-scale field experiment in the U.K. with 124,000 consumers to evaluate the effectiveness of various disclosure designs aimed at supporting consumer choice across savings products.
In the disclosures, we told people that if they switched savings accounts — often just taking less than 15 minutes to agree to switch to another product at their current bank — they could earn more in interest on their balances (average gains were $185 in the first year).
In other words, we made this a no-brainer type of decision. Some of the disclosures even provided a postage-paid sign-and-return form to make it as simple as possible.
But no matter how we presented that information, disclaimers were largely ignored. On average, our disclosures increased switching behavior by 0.7 percentage points, from 8.7% in the control group to only 9.5% in the treatment group.
Some designs did do better than others. Not surprisingly, disclosures on the back-page of annual statements were completely ineffective, but personalized charts with clear language in separate mailings also had only small effects on behavior. Even the most successful approaches — the pre-filled-out switching form and well-timed reminders — increased switching by only 4-9 percentage points.
Economists have long marveled that bank deposits are so “sticky” or price-insensitive. Why were consumers in our study so reticent to respond to a relatively painless opportunity to earn more interest income? We conducted a survey to follow up with several participants to understand their motivations. Many simply didn’t read our disclosures, ignoring them all together, and reported not knowing their current interest rate. Others assumed that the process of shopping for a better rate and switching their bank account would be time-consuming and tedious. Among those that did switch accounts, we find that most switched to another product with their current bank, suggesting that consumers have strong non-price preference for their current provider.
While these are significant challenges, we found three ways that companies and policymakers could improve the effectiveness of consumer outreach efforts like disclosures. Based on our study, these changes are unlikely to have dramatic effects, but these steps are worth trying to improve on the current state of inattention.
First, companies and policymakers can think about what information is important enough to merit highlighting, like with a separate communication, and they can make those decisions in a coordinated way. Different stakeholders may each have different messages they’d like to include but sending too much information will water everything down. Someone has to make the tough call about what is worth sending so that consumers are not overloaded with legalese that is unlikely to matter anyway.
Second, design is worth investing in so that messages are more readable and user-friendly. Personalizing information with easy-to-read graphs and providing easy ways to take responsive action through process improvements are not silver bullets, but disclosures can certainly be designed more effectively. Instead of fine print on the back of an annual statement, they can send notices separately and highlight what is actually important.
Third, policymakers need to consider how consumers will perceive mandated disclosures sent by a company. For example, some people may question why their own bank is offering a better interest rate. What’s the catch? If they switch, will they incur higher fees? If the information comes from a trusted third party or on a mandated standardized form as with U.S. mortgages, it may be deemed more trustworthy and worthy of careful consideration.
The design of better products that alleviate the consequences of consumer inertia is a market opportunity. If consumers are aware of their own sluggish responses to opportunities for financial gains, they may be willing to pay extra for products that delegate some of this decision-making. Target-date mutual funds, which automatically rebalance their portfolios as a consumer nears retirement, are a prime example of this.
Similarly, for policymakers, it’s important to take consumer inattention and inertia into account when designing consumer protection policy. Regulators trying to remove barriers to individual choice can’t rely on people having the bandwidth or motivation to consider all of the information mandated to be presented to them. Any reform to disclosure design is likely to improve outcomes only slowly as consumers adjust their habits and expectations around the value of paying attention.
Christopher Palmer is the Albert and Jeanne Clear Career Development Professor and an Assistant Professor of Finance at the MIT Sloan School of Management. He is also a Visiting Scholar at the Federal Reserve Bank of Boston and a Faculty Research Fellow at the National Bureau of Economic Research. Palmer is coauthor of “Testing the Effectiveness of Consumer Financial Disclosure: Experimental Evidence from Savings Accounts.”
More: People are paying to play online games that encourage them to save