Behavioral Economics and Market Function: Regulatory Intervention in Markets for Complex Products
Benjamin Handel, University of California, Berkeley
There is much recent evidence that consumers have difficulty making active and informed decisions in the markets for complex products. This includes markets for health insurance, electricity, financial investments, cellular phones, and other markets where consumers choose multi-dimensional products where consumers face uncertain outcomes.
As technology improves over time, there are greater opportunities for firms and regulators to set smart defaults, which use targeted information about each consumer to choose an option for that consumer if they don’t elect to make an active choice themselves. Smart defaults have the potential to deliver great value, and harness the power of free markets, but also make those markets more dependent on how those defaults are implemented. This means that the promise of better, targeted choices, comes at a cost of greater regulator control / influence over markets.
I will discuss smart defaults and focus on:
• Why they have the ability to substantially shape market outcomes
• Why they are just starting to be possible now in many markets
• Examples of markets where they have been successful [ e.g. 401(k)]
• Examples of markets where they may have big impacts [ e.g. health insurance, cellular phones]
• Final discussion of pros and cons