The failure of mandated disclosure.

Author:Ben-Shahar, Omri
 
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This Article explores the spectacular prevalence, and failure, of the single most common technique for protecting personal autonomy in modern society: mandated disclosure. The Article has four Parts: (1) a comprehensive summary of the recurring use of mandated disclosures, in many forms and circumstances, in the areas of consumer and borrower protection, patient informed consent, contract formation, and constitutional rights; (2) a survey of the empirical literature documenting the failure of the mandated disclosure regime in informing people and in improving their decisions; (3) an account of the multitude of reasons mandated disclosures fail, focusing on the political dynamics underlying the enactments of these mandates, the incentives of disclosers to carry them out, and, most importantly, on the ability of disclosees to use them; and (4) an argument that mandated disclosure not only fails to achieve its stated goal but also leads to unintended consequences that often harm the very people it intends to serve.

INTRODUCTION A. The Argument B. The Method C. The Style I. THE DISCLOSURE EMPIRE: THE PERVASIVENESS OF MANDATED DISCLOSURE A. Three Paradigmatic Examples of Mandated Disclosure ......... 1. Terms of Credit 2. Informed Consent 3. Contract Boilerplate B. Other Provinces in the Disclosure Empire 1. Financial Transactions 2. Insurance 3. Health Care 4. Miranda Warnings 5. Goods and Services II. THE DOCUMENTED FAILURE OF MANDATED DISCLOSURE A. The Three Paradigmatic Cases of Mandated Disclosure 1. Terms of Credit 2. Informed Consent 3. Contract Boilerplate B. The Failures of Other Mandated Disclosures III. WHY MANDATED DISCLOSURE FAILS A. Lawmakers 1. Is Regulation Necessary? 2. Is Mandated Disclosure the Best Form of Regulation? 3. What Is the Proper Scope of the Disclosure Mandate? 4. Can the Quantity Problem Be Answered? a. The Overload Effect b. The Accumulation Problem 5. Can the Standard of Disclosure Be Articulated Effectively? B. Disclosers 1. Interpreting the Mandate 2. Assembling the Data 3. Implementing the Mandate 4. Resisting the Mandate 5. An Illustrative Vignette: The Clery Act C. Disclosees 1. Disclosures and the World of Chris Consumer 2. Acquiring Disclosed Information 3. Understanding the Information a. Illiteracy and Innumeracy b. Making Sense of Information 4. Remembering the Information 5. Analyzing the Information a. Coping with Complexity b. The Mysteries of the Mind c. Parsing Preferences d. Expertise e. Decision Aversion IV. SOME UNINTENDED EFFECTS OF MANDATED DISCLOSURE A. The Dubious Indirect Benefits of Mandated Disclosure 1. An Agency Benefit? 2. An Educational Benefit? 3. A Greater Social Benefit? B. The Costs of Mandated Disclosure 1. Implementation Costs 2. Unintended Harms of Mandated Disclosure CONCLUSION: BEYOND MANDATED DISCLOSURE A. Simple Information B. From Information Toward Advice INTRODUCTION

  1. The Argument

    "Mandated disclosure" is a regulatory technique that is much used but little remarked. It aspires to improve decisions people make in their economic and social relationships and particularly to protect the naive from the sophisticated. The technique requires "the discloser" to give "the disclosee" information which the disclosee may use to make better decisions and to keep the discloser from abusing its superior position.

    For example: You are shopping for a loan. Or told you need prostate cancer surgery. Or buying a computer online. Or under arrest and undergoing questioning. You have never faced this choice before. It turns on information you do not know. Mortgagees, doctors, vendors, and police are experienced and have interests of their own.

    Mandated disclosure is supposed to give you information for analyzing your choices critically and to choose optimally. Thus, truth-in-lending laws require your lender to highlight credit terms. The law of informed consent requires your doctor to describe prostatectomies, radiation, chemotherapy, and watchful waiting. Contract doctrine requires your vendor to reveal its contract's terms, like warranties and mandatory arbitration. Miranda requires police to tell you your rights. Thus informed, you understand your choices well enough to make an intelligent decision about your credit, your cancer, your computer, or your confession.

    Mandated disclosure is ubiquitous. Innumerable federal and state statutes, municipal ordinances, administrative regulations, and court rulings demand sometimes marvelously elaborate disclosures from businesses that issue car, student, or other consumer loans; mortgagees; home-equity lenders; credit card companies; banks accepting deposits; mutual funds; securities brokers; credit-reporting agencies; investment advisors; ATM operators; pawnshops; payday lenders; rent-to-own dealers; installment-sales vendors; insurers of property, health, life, cars or rented vehicles, serf-storage facilities, and much else; car-towing companies; car repair shops; motor clubs; residential real estate agencies, developers, and landlords; time-share programs; sellers and lessors of mobile homes; membership camping facilities; providers of home improvements, services, and repairs; home-alarm installers; vocational schools; traffic schools; agents selling electricity; immigration consultants; dog breeders and sellers; travel services and travel agencies; art dealers; police; doctors; hospitals; managed care organizations; colleges and universities; restaurants and other food establishments; halal-food dealers; and endlessly more. To say nothing, for example, of the common law obligation to disclose information prior to a contract, or federal and state campaign finance regulation, which the Supreme Court recently trimmed to little more than mandated disclosure. (1)

    Mandated disclosure addresses a real problem: modernity showers us with consequential and complex decisions about which we know little. Unsophisticated people must work with, depend on, and contend with, specialized enterprises that expertly handle complex transactions. People must manage financial matters of many kinds. They face medical choices. They buy things whose mechanisms they do not understand and whose quality they cannot evaluate under terms they do not know.

    Not only does mandated disclosure address a real problem, it also rests on a plausible assumption: that when it comes to decision-making, more information is better than less. More information helps people make better decisions, thus bolstering their autonomy. Since people can no longer customize most transactions, disclosure helps restore some individual control. It may also induce enterprises to behave more efficiently.

    Although mandated disclosure addresses a real problem and rests on a plausible assumption, it chronically fails to accomplish its purpose. Even where it seems to succeed, its costs in money, effort, and time generally swamp its benefits. And mandated disclosure has unintended and undesirable consequences, like driving out better regulation and hurting the people it purports to help.

    Not only does the empirical evidence show that mandated disclosure regularly fails in practice, but its failure is inevitable. First, mandated disclosure rests on false assumptions about how people live, think, and make decisions. Second, it rests on false assumptions about the decisions it intends to improve. Third, its success requires an impossibly long series of unlikely achievements by lawmakers, disclosers, and disclosees. That is, the prerequisites of successful mandated disclosure are so numerous and so onerous that they are rarely met.

    Because the disclosure mantra--more information is better than less--sounds plausible, we must be clear about our topic and our argument. We are not asking what information people need to make good decisions. We are asking whether a regulatory technique--mandated disclosure--works. We are not saying that information never helps people make decisions. Our argument is directed at a regulatory technique in which a lawmaker requires a discloser to give a disclosee a standard disclosure--prepackaged information that the lawmaker thinks the disclosee needs in order to choose wisely.

    Our tasks, then, are to identify mandated disclosure as a distinctive regulatory method, to show the breadth of its use, to review the evidence of its failure, and to explain why it fails. Our task is not to propose an alternative. Mandated disclosure has been used so commonly--one might say so indiscriminately--that it is asked to solve many unrelated problems in many unrelated areas. We doubt that any single regulatory method can be so widely effective. We believe commentators and lawmakers must instead undertake the intellectually burdensome and politically painful work of tailoring solutions to problems. We close by sketching some paths toward this harder but more rewarding work.

  2. The Method

    Our argument has four steps. The first is to identify mandated disclosure as a distinctive regulatory technique. The second is to show how extensive and intensive mandated disclosure is. For both purposes we searched for statutes that mandate disclosures in three states (California, Michigan, and Illinois) and located several hundred of them. Less systematically, we looked for federal statutes, administrative regulations, and case law that mandate disclosures. In Part I, we provide examples of the many sectors in which disclosure is mandated, discuss the kinds of information that must be disclosed, and examine the format that disclosure takes.

    Our third step is to ask whether these mandates work. They are used so prolifically in so many unrelated fields that we cannot assess them ourselves. Instead, we survey the empirical literature. Its gravamen is that mandated disclosure generally fails to achieve its goals.

    The fourth step, perhaps the most substantial one, is to explain that failure. We canvass the systematic factors that keep lawmakers, disclosers, and disclosees from...

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