Wednesday, August 18, 2010

This policy is a dud

I shouldn't really make a claim about a policy being a dud merely on a press report of what someone is reportedly about to announce, but I've been around long enough to know what looks like a stage managd bagrounder designed to get two cycles of coverage from one announcement.

This morning the Tele (or more generically the News Ltd press) reports that the ALP will announce a policy designed to improve financial literacy. It reports;

The nation's top financial watchdog will train teachers to give their pupils lessons in how to get the best mobile phone plan and the cheapest credit card.

The idea is apparently that ASIC will provide training to maths teachers on how to do this. I would like to suggest that this is a naive hope. As a person with a first degree in Pure Mathematics and a grad dip in economics I am confidant in my assertion that it is actually not possible to do such a thing.

The simple reason is that the plans themselves are largely impenetrable. As I noted recently there is no logic in the plans to begin with and the providers are able to create "headline" rates that have no basis in reality.

Meanwhile Frank Zumbo has been railing again about the big banks and the lack of competition. But it isn't so much the lack of competitors but the inability of a consumer to make an accurate comparison beteen the offers.

Thaler and Sunstein in their excellent book Nudge suggest the alternative isn't more "education". The problem that humans aren't perfect calculators isn't solved by making them better calculators, it is solved by outsourcing the calculation.

They propose a concept called a RECAP - which is a standardised electronic form of a consumer's last twelve months (or other period) of activity - for example on their mobile or their credit card. This must be provided to the consumer on request and can be presented to an alternative provider who then calculates what the consumer's outcome would be with that usage pattern in the plan under consideration.

A truly useful consumer protection policy would harness behavioural economics rather than rely upon faith in the ability of humans to make the "rational decision" if only we give them more knowledge.

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