Since opening its doors for business, behavioral economics has played a central role in the CFPB’s regulatory agenda.  Behavioral economists posit that consumers are not rational decision makers and instead have certain frailties or weaknesses that lead them to make decisions that they would later recognize as not in their own best interest.

The CFPB’s use of behavioral economics was validated by an Executive Order issued by President Obama this week that encourages federal agencies to “identify policies, programs, and operations where applying behavioral science insights may yield substantial improvements in public welfare, program outcomes, and program cost effectiveness” and to develop strategies for applying such insights to programs.  It also encourages agencies to “recruit behavioral science experts to join the Federal Government” and “strengthen agency relationships with the research community to better use empirical findings from the behavioral sciences.”  The CFPB has already hired behavioral economists and appointed behavioral economists to its Academic Research Council.

The Executive Order also directs agencies to “improve how information is presented to consumers, borrowers, program beneficiaries, and other individuals, whether as directly conveyed by the agency or in setting standards for the presentation of information, by considering how the content, format, timing, and medium by which information conveyed affects comprehension and action by individuals as appropriate.”  Behavioral science is already an element of the CFPB’s development of new disclosures.  For example, in its recent notice indicating that it was seeking approval from the Office of Management and Budget to conduct a national web survey as part of its study of ATM/debit card overdraft disclosure forms, the CFPB stated that the survey will explore “financial product usage, behavioral traits, and other consumer characteristics that may interact with a consumer’s experiences with overdraft programs and related disclosure forms.”