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Disclosure: Psychology Changes Everything

Author

Listed:
  • George Loewenstein

    (Department of Social and Decision Sciences, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • Cass R. Sunstein

    (Harvard Law School, Harvard University, Cambridge, Massachusetts 02138)

  • Russell Golman

    (Department of Social and Decision Sciences, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract
We review literature examining the effects of laws and regulations that require public disclosure of information. These requirements are most sensibly imposed in situations characterized by misaligned incentives and asymmetric information between, for example, a buyer and seller or an advisor and advisee. We review the economic literature relevant to such disclosure and then discuss how different psychological factors complicate, and in some cases radically change, the economic predictions. For example, limited attention, motivated attention, and biased assessments of probability on the part of information recipients can significantly diminish, or even reverse, the intended effects of disclosure requirements. In many cases, disclosure does not much affect the recipients of the information but does significantly affect the behavior of the providers, sometimes for the better and sometimes for the worse. We review research suggesting that simplified disclosure, standardized disclosure, vivid disclosure, and social comparison information can all be used to enhance the effectiveness of disclosure policies.

Suggested Citation

  • George Loewenstein & Cass R. Sunstein & Russell Golman, 2014. "Disclosure: Psychology Changes Everything," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 391-419, August.
    • Handle: RePEc:anr:reveco:v:6:y:2014:p:391-419
    as

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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-economics-080213-041341
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    More about this item

    Keywords

    mandatory disclosure; regulation; behavioral economics; nudges; telltale heart effect; moral licensing;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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