License to deceive: Using psychology to explain financial decisions

Think back to the last contract you signed. Did you read it all the way through? Even if you did, did you fully understand all of it? If not, you’re not alone. Recent research shows that consumers often rely on conversations with salespeople more than the content of a contract, a process which we believe has encouraged the development of deceptive-by-design financial products accompanied by incomprehensible fine print.

Clearly, as new consumer protections are debated, lawmakers must ask some tough questions, not the least of which is: Which deserves more punishment—a misplaced trust in the process, or an active intent to deceive?

In their paper, “A License to Deceive: Enforcing Contractual Myths Despite Consumer Psychological Realities,” authors Debra Stark and Jessica Choplin of the John Marshall Law School and DePaul University make the claim that in “consumer transactions where the consumer does not negotiate over the terms of the contract and is not represented by an attorney,” consumers tend not to read the contract and, instead, heavily rely on the representations of salespeople. Their survey found:
…[O]n average, 67% of the consumers reported that they failed to read all of the terms of the contracts they signed among the six different categories of consumer transactions surveyed (agreements relating to computer software, rolling contracts, car rentals, apartment leases, home purchase and home loans).
Some of the reasons for this reliance on the salesperson include difficulties reading and comprehending the contract based on the way many of them are drafted (the fine print), a strong desire for whatever good or service they were agreeing to that blinds them to the particulars of the contract, and sunk cost effects—people are reluctant to turn back when they’ve invested time, energy, or money in the process already.

Additionally, social psychology encourages our tendency to skim contracts: there may be a misplaced trust that the salesperson would not actively mislead them (exacerbated when there is a disparity in socioeconomic status), social norms that make it uncommon to read contracts in certain settings, and a perceived—or real—inability to negotiate the terms of the contract.

Stark and Choplin conclude that courts create a “license to deceive” when they expect consumers to solely rely upon the contract instead of the salesperson’s statements, removing the business from any responsibility for fraud based on what their employees say.

A Consumer Financial Protection Agency would have the authority to lower some of the barriers inherent in the contract-signing process. Contracts for products like credit cards and mortgages would be clearer and simpler for people to understand without the aid of an attorney.  The agency would also have the power to prohibit deceptive and discriminatory practices by salespeople.

As much as we would like to believe that we behave in fully rational, conscientious ways at all times, especially with major financial decisions, the reality is that we often cut corners or are simply unable to fully comprehend the situation. As Stark and Choplin ask, “Even if in some cases the consumer was simply failing to act in a prudent fashion, does the policy of promoting certainty of contract and ‘discouraging negligence and inattention to one’s own interests’ trump the policy of discouraging and remedying fraud?” Moving forward, the ability of consumers in general, and low-wealth consumers in particular, to get fair treatment in the contractual process hinges on policymakers’ willingness to insure against the consumer’s well-documented and extremely common psychological slip-ups, not protect businesses’ ability to exploit those weaknesses.