Warren: Consumers Too Simple-Minded to Understand Credit

In “Making Credit Safer,” a 2008 Pennsylvania Law Review article co-authored with Owen Gill, Massachusetts Democratic Senate candidate Elizabeth Warren argued that American consumers are, in essence, too simple-minded to understand credit and therefore must be protected by the federal government:

We harness both theory and data to demonstrate that sellers of credit products have learned to exploit the lack of information and cognitive limitations of consumers in ways that put consumers’ economic security at risk, turning them into far more dangerous products than they need to be. [emphasis added]

Warren and Gill used the term “cognitive limitations” to describe the intellectual inability of consumers to understand their own credit options. Psychologists use the term “cognitive limitation” to describe a subject’s inability to comprehend, understand, or learn.

Warren and Gill also used the term “cognitive errors” several times in their article:

Use-pattern information creates opportunities for creditors to tailor their products to match individuals’ cognitive errors, thus magnifying consumer risks…

Theory predicts and data confirm that markets for credit products are failing. Consumers, their families, their neighbors, and their communities are paying a high price for systematic cognitive errors. Creditors have aligned their products to exploit such errors, driving up costs for many consumers. [emphasis added]

John Berlau, Senior Fellow for Finance and Access to Capital at the Competitive Enterprise Institute, alleged Warren and her co-author displayed condescending “paternalism”:

This article is reflective of the paternalism in so-called behavioral economics – but uses somewhat more stark terms to state what its adherents really believe. Namely, that consumers must be protected not just from fraud and deception – a premise everyone agrees on – but from their own stupidity.

The premise of this article, which also refers to the ‘limits of learning’–is that consumers are just too stupid to decide for themselves which financial products are appropriate, and a government elite must decide for them. The article, as well as many behavioral economists, are dismissive of things like financial education because of the belief that consumers just have too many ‘cognitive limitations’ to become financially savvy. The central flaw in that argument is that there is no evidence that government bureaucrats are somehow inherently smarter than the rest of us.

Berlau links the “paternalistic premise” of Warren’s article to the Dodd-Frank financial regulatory bill: 

Unfortunately the paternalistic premise of this article is embedded in the Dodd-Frank financial overhaul and its creation of the Consumer Financial Protection Bureau, which is structured along  the lines of the powerful and unaccountable agency suggested in this article. Dodd-Frank gives the CFPB the power to ban not just “unfair” and “deceptive” lending practices, but loans or credit terms it deems “abusive.” This is one of the factors holding back our recovery and limiting opportunities for consumers, as lenders are afraid many financial products they’ve offered to satisfied consumers for years will suddenly be deemed “abusive” by this all-powerful bureau.