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Behavioural Economics and the Autonomous Consumer

  • Annette Nordhausen Scholes

Abstract

This chapter takes as its starting point the ‘information approach’ which is the basis of current EU consumer protection legislation. It argues that the findings of behavioural economics suggest that the ‘information approach’ does not in practice achieve the protection of the consumer which it is trying to achieve. Insights and techniques gained from behavioural economics can be used as the basis for more effective consumer protection legislation, while at the same time respecting the principle of consumer autonomy which is the fundamental (though sometimes unstated) principle of EU internal market law.

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1 EU Consumer Policy Strategy 2007–2013, COM (2007) 99 final, www.ec.europa.eu/consumers/overview/cons_policy/doc/EN_99.pdf.

2 Such as the Doorstep Selling Directive: Council Directive 85/577/EEC of 20 December 1985 to protect the consumer in respect of contracts negotiated away from business premises, OJ L372 of 31 December 1985, 31; Timeshare Rights Directive: Directive 94/47/EC of the European Parliament and the Council of 26 October 1994 on the protection of purchasers in respect of certain aspects of contracts relating to the right to use immovable property on a timeshare basis, OJ L280 of 29 October 1994, 83—now replaced by Directive 2008/122/EC of the European Parliament and of the Council of 14 January 2009 on the protection of consumers in respect of certain aspects of timeshare, long-term holiday product, resale and exchange contracts, OJ L33 of 3 February 2009, 10; the Distance Selling Directive: Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers in respect of distance contracts, OJ L144 of 4 June 1997, 19; or the E-commerce Directive: Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market (‘Directive on electronic commerce’), OJ L178 of 17 July 2000, 1.

4 Miller, G, ‘The Magical Number Seven, Plus or Minus Two: Some Limits on our Capacity for Processing Information’ (1956) 63 The Psychological Review 81 .

5 Whether information overload will lead in all cases to confusion and poorer decisions has been variously claimed and disputed. For an overview of the earlier developments see Rudd, J, ‘The Consumer Information Overload Controversy and Public Policy’ (1983) 2(3) Policies Studies Review 465 .

6 Wendland, B, ‘EC Directives on Time Sharing and for Self-employed Commercial Agents: Apples, Oranges and the Core of the Information Overload Problem’ in Howells, G, Janssen, A and Schulze, R (eds), Information Rights and Obligations: A Challenge for Party Autonomy and Transactional Fairness (Aldershot, Ashgate, 2005); generally on information duties in EU law: Kind, S, Die Grenzen des Verbraucherschutzes durch Information-aufgezeigt am Teilzeitwohnrechtegesetz, Diss. 1997 (Berlin, Duncker & Humblot, 1998).

7 The assumption that actors in economic transactions are rational and maximising is challenged by behavioural economists as an unrealistic description of how people act, Lazear, E, ‘Economic Imperialism’ (2000) 115(1) Quarterly Journal of Economics 99 .

8 See esp the work of Thaler, R and Sunstein, C, such as Nudge. Improving Decisions about Health, Wealth, and Happiness (New Haven, Conn, Yale University Press, 2008).

9 Müller-Graff, C, ‘Basic Freedoms: Extending Party Autonomy across Borders’ in Grundmann, S (ed), Party Autonomy and the Role of Information in the Internal Market (Berlin, de Gruyter, 2001) 135–50.

10 Principles of the Existing EC Contract Law (Acquis Principles): Contract IPre-contractual Obligations, Conclusion of Contract, Unfair Terms (Munich, Sellier, 2007).

11 Ibid, Art 4:101.

12 Study Group on a European Civil Code, Principles, Definitions and Models Rules of European Private Law: Draft Common Frame of Reference (DCFR) (Munich, Sellier 2009).

13 Dir 2011/83/EU of 25 October 2011 [2011] OJ L304/64.

14 Case C-339/89 Alsthom Atlantique v Compagnie de construction mécanique Sulzer SA [1991] ECR I-107.

15 Case C-212/97 Centros Ltd v Erhvervsog Selskabsstyrelsen [1999] ECR I-1459.

16 Only the 1980 Rome Convention on the Law Applicable to Contractual Obligations, consolidated version [1998] OJ C27/34, now the Rome I Regulation, and Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and enforcement of judgments in civil and commercial matters [2001] OJ L12/1, recognise autonomy explicitly.

17 Ie jurisdiction, arbitration, competition or employment.

18 The first mention is in the Single European Act 1986, becoming more explicit with almost every Treaty revision to an inclusion into the aims of the Community/Union.

19 Council Dir 93/13/EC of 5 April 1993 on unfair terms in consumer contracts [1993] OJ L95/29 (Unfair Contract Terms Directive).

20 In excluding this from its scope of application in Art 4(2).

21 Abbey National plc v Office of Fair Trading, UK Supreme Court, 25 November 2009, [2009] UKSC 6.

22 Ibid, para 88.

23 Ibid, para 47.

24 Case C-484/08 Caja de Ahorros y Monte de Piedad de Madrid v Asociación de Usuarios de Servicios Bancarios (Ausbanc ) [2010], nyr in ECR.

25 Unfair Contract Terms Directive (n 19) Art 3(2).

26 Art 5 TEU and the Protocol on Subsidiarity.

27 Radeideh, M, Fair Trading in EC Law (Groningen, Europa Law, 2005) 242 ; with reference to the Directive on Unfair Commercial Marketing at 290.

28 For a much more detailed analysis, see C Twigg-Flesner, D Parry, G Howells and A Nordhausen, An Analyis of the Application and Scope of the Unfair Commercial Practices Directive, available at www.bis.gov.uk/files/file32095.pdf; Opinion of Advocate General Fennelly in Case C-220/98 Estee Lauder Cosmetics GmbH & Co OHG v Lancaster Group GmbH ECR [2000] I-117; Case C-210/96 Gut Springenheide GmbH and Rudolf Tusky v Oberkreisdirektor des Kreises SteinfurtAmt für Lebensmittelüberwachung (Gut Springenheide) ECR [1998] I-4657; Opinion of Advocate General Mischo in Case C-210/96 Gut Springenheide.

29 Case C-465/98 Verein gegen Unwesen in Handel und Gewerbe Köln v A Darbo [2000] ECR I-2297, para 27.

30 Case C-470/93 Verein gegen Unwesen im Handel und Gewerbe Köln v Mars GmbH [1995] ECR I-1923.

31 Gut Springenheide (n 28).

32 Gut Springenheide (n 28), para 31.

33 Dir 2005/29/EC of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market [2005] OJ L149/22.

34 Lando, O and Beale, H (eds), Principles of European Contract Law (The Hague, Kluwer Law International, 2000).

35 Study Group on a European Civil Code, Draft Common Frame of Reference (DCFR ) (n 12); Schulze, R (ed), Common Frame of Reference and Existing EC Contract Law (Munich, Sellier, 2008).

36 DCFR (n 12) II.-I:102 (1).

37 DCFR (n 12) Principle 3—Freedom of contract the starting point.

38 Case C-489/07 Pia Messner v Firma Stefan Krüger [2009] ECR I-7315, para 29.

39 DCFR (n 12) Principle 8—Restrictions on freedom to withhold information at precontractual stage; Principle 9—information as to the terms of the contract; Principle 10—correcting inequality of bargaining power.

40 Dir 2011/83/EU of 25 October 2011, [2011] OJ L304/64.

41 Schwartz, A and Wilde, LL, ‘Intervening in Markets on the Basis of Imperfect Information: A Legal and Economic Analysis’ (1979) 127 University of Pennsylvania Law Review 630 .

42 Such as the European Commission in a report on consumer decision-making in retail investment services (2010), available at www.ec.europa.eu/consumers/strategy/consumer_ behaviour_en.htm.

43 See especially the debates in two conferences on the use of behavioural economics in 2008, www.ec.europa.eu/consumers/dyna/conference/index_en.htm and 2010, www.ec.europa.eu/consumers/conferences/behavioural_economics2/index_en.htm; as well as a report on consumer decision-making in retail investment services, www.ec.europa.eu/consumers/strategy/consumer_behaviour_en.htm; see also the OECD, Consumer Policy Toolkit (Paris, OECD Publishing, 2010).

44 Simon, H, ‘A Behavioural Model of Rational Choice’ (1955) 69 Quarterly Journal of Economics 99 ; Simon, H, ‘Information processing models of cognition’ (1979) 30 Annual Review of Psychology 363 .

45 See further Schwartz, and Wilde, Intervening in Markets’ (n 41) 633 , with further refer ences on the discussion of utility and other basic microeconomic concepts.

46 Schwartz, and Wilde, Intervening in Markets’ (n 41) 682 .

47 Schwartz and Wilde ‘Intervening in Markets’ (n 41).

48 Miller, ‘The Magical Number Seven’ (n 4); the number seven appears frequently, Gabaix, X, Laibson, D, ‘The Seven Properties of Good Models’ in Chaplin, A and Schotter, A (eds), The Methodologies of Modern Economics: Foundations of Positive and Normative (Oxford, Oxford University Press, 2008), also available at www.economics.harvard.edu/faculty/laibson/ files/NYU%20Methodology%20may%2020.pdf.

49 Miller, ‘The Magical Number Seven’ (n 4).

50 McCullough, J and Best, R, ‘Consumer Preferences for Food Label Information: A Basis for Segmentation’ (1981) 14 Journal of Consumer Affairs 180, 182.

51 Rudd, , ‘The Consumer Information Overload’ (n 5) 466 ; also analysing the existing research on information overload in detail: Gabaix, X, Laibson, D, Moloche, G and Weinberg, S, ‘Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model’ (2006) 96(4) American Economic Review 1043 .

52 Rudd, , ‘The Consumer Information Overload Controversy’ (n 5) 470 .

53 Eg detailed, summary, verbal or pictorial.

54 Eg product test ratings or health and safety warnings.

55 Eg print, broadcast, labels or in-store displays.

56 Rudd, , ‘The Consumer Information Overload Controversy’ (n 5) 470 .

57 For an explanation of the reasons for this, see Klick, J and Mitchell, G, ‘Government Regulation of Irrationality’ (2006) 90(6) Minnesota Law Review 1620, 1643.

58 See below.

59 Tversky, A and Kahneman, D, ‘Judgment under Uncertainty: Heuristics and Biases’ (1974) Science, ns, 185 (no 4157) 1124 .

60 Kahneman, D, ‘Maps of Bounded Rationality: Psychology for Behavioral Economics’ (2003) American Economic Review 93(5) 1449 .

61 Tversky and Kahneman, ‘Judgment under Uncertainty’ (n 59).

62 Tversky, and Kahneman, , ‘Judgment under Uncertainty’ (n 59) 1125–26.

63 Ibid, p 1127.

64 Tversky, and Kahneman, , ‘Judgment under Uncertainty’ (n 59) 1130 who compare it to the example that the information of a text is regarded as relevant, but not the statistics of the word length; Gabaix, X and Laibson, D, ‘A Boundedly Rational Decision Algorithm’ (2006) 90(2) American Economic Review Papers and Proceedings 433 .

65 Tversky, and Kahneman, , ‘Judgment under Uncertainty’ (n 59) 1128 .

66 Tversky, and Kahneman, , ‘Judgment under Uncertainty’ (n 59) 1130 .

67 Tversky, and Kahneman, , ‘Judgment under Uncertainty’ (n 59) 1125 and 1129.

68 Tversky, and Kahneman, , ‘Judgment under Uncertainty’ (n 59) 1130 .

69 Kahneman, D and Frederick, S, ‘Representativeness Revisited: Attribute Substitution in Intuitive Judgment’ in Gilovich, T, Griffin, D and Kahneman, D (eds), Heuristics and Biases: The Psychology of Intuitive Thought (Cambridge, Cambridge University Press, 2002) 49–81 .

70 Kahneman, D, ‘Maps of Bounded Rationality: Psychology for Behavioural Economics’ (2003) American Economic Review 93(5) 1449, 1450 f.

71 Kahneman, , ‘Maps of Bounded Rationality’ (n 70) 1450 .

72 Esp Laibson and others, discussed below.

73 Gabaix, X, Agarwal, S, Driscoll, J and Laibson, D, ‘Two Steps Forward, One Step Back: The Dynamics of Learning and Backsliding in the Consumer Credit Market’, paper presented at Consumer Behaviour and Bounded Rationality Conference, Institute for Fiscal Studies, London, UK , available at www.else.econ.ucl.ac.uk/conferences/consumerbehaviour/babaix1.pdf, 2006; Gabaix, X and Laibson, D, ‘Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets’ (2006) 121(2) Quarterly Journal of Economics 505 .

74 Chabris, C, Laibson, D, Morris, C, Schuldt, J and Taubinsky, D, ‘The Allocation of Time in Decision-making’ (2009) 7(2/3) Journal of the European Economic Association 628 ; McClure, S, Ericson, K, Laibson, D, Loewenstein, G and Cohen, J, ‘Time Discounting for Primary Rewards’ (2006) 27(21) Journal of Neuroscience 5796 ; Harris, C and Laibson, D, ‘Hyperbolic Discounting and Consumption’ in Dewatripont, M, Hansen, L and Turnovsky, S (eds), Advances in Economics and Econometrics: Theory and Applications, vol 1. Eighth World Congress (1) (Cambridge, Cambridge University Press, 2002) 258 ; Harris, C and Laibson, D, ‘Dynamic Choices of Hyperbolic Consumers’ (2001) 69(4) Econometrica 935 ; Angeletos, G, Laibson, D, Repetto, A, Tobacman, J and Weinberg, S, ‘The Hyperbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation’ (2001) 15(3) Journal of Economic Perspectives 47 ; Laibson, D, ‘Golden Eggs and Hyperbolic Discounting’ (1997) 112(2) Quarterly Journal of Economics 443 .

75 Angeletos et al, ‘The Hyperbolic Consumption Model’ (n 74).

76 Beshears, J, Choi, J, Laibson, D and Madrian, B, ‘Behavioural Economics Perspectives on Public Sector Pension Plans’ (2011) 10(2) Journal of Penson Economics and Finance 315 , also available at www.nber.org/papers/w16728.pdf; Albrecht, K, Laibson, D, Sutter, M, Volz, K and Cramon, D Yves von, ‘What is for Me is Not for You: Brain Correlates of Intertemporal Choice for Self and Other’ (2011) 6(2) Social Cognitive and Affective Neuroscience 207–17.

77 OECD, Consumer Policy Toolkit (n 43).

78 See, eg, the use of shrouded attributes in advertising.

79 Camerer, C, Issacharoff, S, Loewenstein, G, O’Donoghue, T and Rabin, M, ‘Regulation for Conservatives: Behavioural Economics and the Case for “Asymmetric Paternalism”’ (2003) 151 University of Pennsylvania Law Review 1211 .

80 Camerer, , Issacharoff, , Loewenstein, , O’Donoghue, and Rabin, , ‘Regulation for Conservatives’ (n 79) 1212 .

81 Even with the use of a restricted approach of ‘asymmetric paternalism’.

82 Thaler and Sunstein, Nudge (n 8); Thaler, R and Sunstein, C, ‘Libertarian Paternalism’ (2003) 93(2) American Economics Review 175 .

See also the debates in two conferences on the use of behavioural economics in 2008, (www.ec.europa.eu/consumers/dyna/conference/index_en.htm) and 2010, (www.ec.europa.eu/consumers/conferences/behavioural_economics2/index_en.htm); as well as a report on consumer decision-making in retail investment services, (www.ec.europa.eu/consumers/strategy/consumer_behaviour_en.htm); see also the OECD Consumer Policy Toolkit (n 43).

83 Klick and Mitchell, ‘Government Regulation of Irrationality’ (n 57).

84 Klick, and Mitchell, , ‘Government Regulation of Irrationality’ (n 57) 1623 , with reference to John Stuart Mill who argued that ‘restraints on behaviour should be limited to prevention of harm to others, because broader restraints may adversely affect the development of individuality’, On Liberty (1859) in J Gray (ed) On Liberty and Other Essays 1, 70.

85 Klick, and Mitchell, , ‘Government Regulation of Irrationality’ (n 57) 1631 .

86 Klick, and Mitchell, , ‘Government Regulation of Irrationality’ (n 57) 1639 , referring to an article by Scott, R, ‘Error and Rationality in Individual Decisionmaking: An Essay on the Relationship between Cognitive Illusions and the Management of Choices’ (1986) 59 Southern California Law Review 329, 326.

87 Klick, and Mitchell, , ‘Government Regulation of Irrationality’ (n 57) 1654 .

88 Klick, and Mitchell, , ‘Government Regulation of Irrationality’ (n 57) 1661 .

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