I'm at a New America event on "Regulating to Avoid the Next Financial Crisis," which is arguing for "a new approach to the way we write the rules for buying homes, getting credit cards and managing our finances is needed, one based on real-world human behavior, not just economic theory. Regulations governing these transactions can play an extremely constructive role if they are better attuned to both consumers' and producers' behavior, incentives and self-interest." In other words: Behavioral economics, meet financial regulation. The basic argument of the presenters is interesting. They hold that "regulation is largely stuck in two competing models: disclosure, and usury or product restrictions." So pages of tiny type that no one reads or can understand explaining how the consumer might be screwed, or simply regulating products. This, they say, is the outcome of "the classic model, which relies on the interaction between rational choice and market competition." They're arguing for a new model, which relies on "the interaction between individual psychology and market competition." You can download the paper here.
