Smarter Information, Smarter Consumers

By - Richard H. Thaler and Will Tucker Magazine - HBR- Jan-Feb 2013 Presented by Dr. Chandan for WASS on 18/4/2013 Presidency College

Content of Presentation
Introduction Open Government Smart Disclosure in the Private Sector What Smart disclosure looks like Choice Engines Formats Principle Regulations Empowering Consumers Conclusion

Introduction

We are constantly confronted with information that is highly important but extremely hard to navigate or understand? ( Information disclosure). Many consumers including highly educated policy experts and government officials would not absorb all information sent to them/made available to arrive at a decision that maximize their self interest. Repeated attempts to improve disclosure, including efforts to translate complex contracts into Plain English have met with moderate success. This indicates the fundamental difficulty of explaining anything complex into simple terms.

 Authors believe that potent mix of modern technology and new government policy is about to transform disclosure and with it the working of many parts of the economy. Increasingly, government owned data and private company disclosures will be made available in machine readable format spurring the growth of new services Choice Engines technologies that interpret this data. For businesses this can be a threat and a huge opportunity.

Ex: Companies that gain market share through deception or just by taking advantage of consumer laziness - may lose out as better disclosure makes market more efficient. The biggest winners will be those that build products and services using the vast new data resources particularly, choice engines that help consumers make better decisions. Consider the history of GPS After 2000, the GPS data was made freely available to public, entrepreneurs took it from there. Ex: Shoppers Smartphone, Golfers watch. http://www8.garmin.com/golf/ Todd Park, the US chief technology officer estimated that GPS added $90bn in value to US economy in 2011.

Open Government

The share- the-data approach at the heart of the GPS success is now an official policy in the US government. In 2009, President Obama issued a memo on Transparency and Open Government stating that information collected and held by the govt. is a national asset and to disclose rapidly in forms that the public can readily find and use. Early initiatives such as data.gov a web based clearing house for machine readable government data sets), the administration began to establish a policy framework for how consumers and businesses interact with and disclose information about products and services.

 By combining unprecedented access to data and technological advances, policy makers and business leaders have the opportunity to unleash a rare virtuous circle that benefits consumers, incumbent businesses, and entrepreneurs. No modern economy can afford to leave that value on the table.

 Ex: Entrepreneurial success of Bright Scope(2008) employer-sponsored defined -contribution retirement plans known in the US as 401(k)- subsection of internal revenue code. Outcome - There is a lesson here: When firms are required to disclose things, they sometimes discover vulnerabilities about themselves that can be remedied. By mid 2010, nearly 30 agencies begun to release high value data sets such as food and drug administration recall, state department travel warnings, airport on-time performance report etc. At White House summit, entrepreneurs were asked after each demo as to what data set would you want to access to, and what would you do with it? Their answers highlighted numerous potential opportunities in health care, finance, energy, education and other sectors.

Smart Disclosure in Private Sector

By making the necessary data available to choice engines, we can get the most out of all the new variety we face, from complex mortgages to smart electricity meters. Ex: Amazon and Netflix can help you decide which book to read or movie to watch, other choice engines can help you with decisions that have much higher stakes. In US , federal laws and regulations require the disclosure of product, service and other information in many domains. In some cases, disclosures are statements. Ex: Product Cigarettes disclosure are statements Warning: Cigarettes causes strokes and heart diseases. In other cases, disclosure are numbers Ex: Price (Interest rates of Mortgages), basic product characteristics (calories) to Government ratings( crash safety scores)

In some cases disclosures are notifications When companies or institutions take certain actions (charging overdraft fees or holding elections at publicly traded companies). Sometimes the mere disclosure of unsavory characteristics is enough to change the behavior of firms and individuals. Ex: Disclosure of trans-fat content on nutrition fact labels came into effect in 2006. Even subtle changes in how information is presented can have significant impact. Ex: Labeling a food 90% fat free can have a different effect than calling it 10% fat. Ex: Retirement plan statements were to present savings in terms of monthly income that would be available in retirement.

 Ex: Financial professional give better ratings to investments with aesthetically pleasing annual reports. The goal of good electronic disclosure regime should be to ensure that consumers know what they are getting and can compare products. Thaler and the legal scholar Cass Sunstein put forward the RECAP framework.. The US calls it Smart Disclosure that enable consumers to make informed decisions. The British focuses on individual banking, energy and mobile phone usage data as midata. Companies thus have real incentives to invest time, energy and talent in competing through obfuscation.

What Smart Disclosure Looks Like

In 2011, the consumer privacy bill of rights established the right of consumers to access their personal data. Ex: Tesco Report by World Economic Forum titled Rethinking personal data argues that personal information represents a new asset class. The US smart disclosure and UK midata regimes may serve as models for data policies around the world.

Choice Engines

Smart disclosure falls in 4 broad categories 1) Government release of data it collects on products and services Ex: For instance, the Department of Health and Human Services releases hospital quality ratings, the Security and Exchange Commission releases public company financial filings in machine-readable formats at XBLR.SEC.gov, or the Department of Education puts data about more than 7,000 institutions online in a College Navigator for prospective students.

2) Government release to individuals of their personal data ( such as social security contribution and tax returns) For instance, when the Department of Veterans Affairs gives veterans access to health records using Blue Button or the IRS provides citizens with online access to their electronic tax transcript. The work of BrightScope liberating financial advisor data and 401(k) data has been an early signal of how data drives the innovation economy.

3) Government facilitated electronic disclosure by private sector companies of price or attribute data on products and services or private company releases information about products or services in machine readable formats. Entrepreneurs can then use that data to empower consumers. For instance, both Billshrink.com and Hello Wallet may enhance consumer finance decisions. 4) Government facilitated release to consumers of personal data held by the companies providing the products and services or private company releases personal data about usage to a citizen

 For instance, when a power utility company provides a household access to its energy usage data through the Green Button or when banks allowing customers to download their transaction histories in a machine readable format to use at Mint.com or similar services. As with the Blue Button for healthcare data and consumer finance, the White House asserts that providing energy consumers with secure access to information about energy usage will increase innovation in the sector and empower citizens with more information.

 So far, success has come in the first two categories. Ex: Veteran Administrations Blue Button initiative allows veterans to download their VA hospital records on a smart phone or computer. Ex: When cities began making the location of trains and buses available in real time, app developers were quick to launch products for commuters. Traffic Genie is here to save you from Bangalore traffic woes [App] http://www.mobigyaan.com/trafficgenie-is-here-to-save-you-frombangalore-traffic-woes-app

Ex: Travel agents have been largely replaced by websites such as Expedia and Travel velocity. These services are complemented by aggregators such as Kayak.com. Ex: Not sure whether you should buy a new laptop now or wait until the price drops? Go to Decide.com https://www.decide.com/

 Worried that a subscription you no longer want will automatically renew? Sign up for Bill Guard. Want to make sure your purchases meet certain environment and social consciousness standards? Use GoodGuide to help you pick products from sunscreen to peanuts.

Third party intermediaries like these are competing with one another to present consumers with relevant information in user friendly ways.

 Ex: Grocery store shoppers clubs Many store offer customers discounts on certain items as an incentive to join. Store benefit by learning about customers purchasing habitsknowledge they can use. This data could have multitude of uses for customers. Ex: Have a family member allergic to glutten? Get a choice engine analyze your food purchases and highlight items to avoid. Ex: Want to lose weight? Get a choice engine to suggest which foods to drop and what to replace then with.

 When customers have access to and control of their personal data companies will begin to respond to the demand of individuals instead of aggregate markets. Disclosure of user data raises the important issues of privacy and data security. Efforts to incorporate personal data into new choice engines are already under way. Ex: Green button initiative online access to personal energy usage data. Third party intermediaries like these are competing with one another to present consumers with relevant information in user friendly ways

 It is not the lack of technology or lack of demand for information or lack of innovative ideas or price of data storage and processing power the missing ingredient is easy access to data. In many contexts, choosing the right calling plan, a choice engine needs 2 kinds of data. First terms of the sale: price, penalties, length of time to pay and so forth. Second usage data Ex: Bill Shrink - that analyze your cellphone-usage data and provide a costsaving recommendation for your next contract.

Billshrink helps people compare credit cards

Search one and done

Help people to make good choices about food

Newly designed automobile fuel economy labels

Data Science extracting meaning and services from data

Formats

Pages of fine print that we now call disclosure to be replaced by machine readable files. Sellers need to report the details of their price and contractual terms in a manner that choice engines can digest, translate and analyze. Ex: SEC (2009) requiring corporations, mutual funds and credit rating agencies to report information in eXtensible Business Reporting Language(XBRL) such formats are used to improve investment decision making and help analysts, auditors, investors and regulators.

Principle

Regarding disclosure of personal data if a firm is collecting usage data on an individual, that person has a right to access the data. In Britain, consumers already have the right to receive the data in an intelligible format. Unfortunately businesses have chosen to interpret Intelligible to mean in a large printed document that is of little use to anyone. Parliament is now considering a law that would replace intelligible with machine-readable and upload able.

Regulations

The challenge for policy makers will be to develop measures that improve smart disclosure without imposing significant costs on firms. A primary principle of regulation should be ensuring that choice engines business models are transparent. Choice engines have strong incentives to prevent sellers from manipulating published reviews (think of Yelps Sting operations). Profit aggregators or nonprofits such as Consumer reports could use tactics like secret shoppers to see what kind of advice choice engines are providing.

 Another issue that may require regulatory intervention. Ex: Mattresses usually have long complicated names like Ultra soft yet firm plush posture- friendly fit for a queen deluxe? It is nearly impossible to compare the mattress you see at Macy with the one you try at Joes mattress warehouse. In principle, smart disclosure could solve this problem if manufacturers were required to identify which products are equivalent., but in practice any such rule can be evaded by making inexpensive cosmetic changes to the models sold to large retailers, rendering the new versions technically unique. Authors think this problem deserves more attention and hope technology and ambitious choice engine entrepreneurs can solve it.

Empowering Consumers

Smartphone's, adjustable rate mortgages and credit cards provide us with more options but also make it much harder to sift through the choices and make good decisions. Technology offers society an opportunity to help consumers make the best of the rich variety of options available to them. Smart disclosure alone wont make people better decision makers but it will get machines and complex options working for consumers, just as big data can help companies improve business strategy. This innovation has the potential to be a win-win-win.

Consumers can win by getting the products that best suit their preferences. Businesses can win by competing on high quality products at good prices, without the risk of losing out to less scrupulous firms that compete through deception. Entrepreneurs and innovators can win by devising new ways of serving consumers. Another potential benefit better disclosure and the accompanying growth of choice engines offer the prospect of revolutionizing the way government interact with citizens and businesses. According to estimates by the office of management and budget the US government requires individuals and companies to spend about 9 bn hrs filling out paperwork each year.

Conclusion

The rise of choice engines will do more than create super shoppers. It will make markets more efficient, create new businesses and improve the way government serve their citizens. Big Stuff.