Behavioural Economics in Consumer Policy: The Economic Analysis of Standard Terms in Consumer Contracts Revisited

Before the credit crisis swept across global economies, affecting all nations and almost all individuals, rational choice was quite well established as the main paradigm to inform policy making. While occasionally criticism did occur, on the whole this paradigm continued to be regarded as the most helpful in predicting human behaviour, partly because it is a lean and simple theory that can be used to make very general predictions. In the real world, people were thought not to behave irrationally. According to rational choice theory, people will weigh their options more carefully when decisions really matter; when decisions have considerable consequences. Irrational behaviour may be found in some experiments, but it tends to disappear when things really matter, or so it was argued.3 Recent developments however, most significantly the credit crisis but also other factors such as issues pertaining to deregulated markets, have created an understanding in policy discussion and economic theory not only that people are not that rational after all, but more importantly that public policy should account for that. Several commentators argue that perhaps economic theory should be based upon another paradigm, at least when regarding some contexts in which individuals are prone to suffer from biased decision making.4 These new insights suggested that policy making based upon classic economic theory should also be adjusted in certain cases, and be based upon a more realistic view of individual behaviour. The unconditional belief in the rational behaviour of mankind and the predictive value of traditional economic insights is waning. The research that is presented in this dissertation has the dual aim of assessing two main and interrelated research questions. The first discussion focuses upon the addition of behavioural insights to the economic insights regarding consumer policy. In behavioural literature, it is argued that especially in the realm of consumer protection the insights derived from behavioural economics can have far-reaching implications. However, behavioural literature in its aim to influence theory and policy literature has also evoked some valid points of critique. This research therefore first aims to answer the following research question: To what extent can the application of insights from behavioural economics and empirical research to economic analysis be relied upon to improve consumer policy from a social welfare perspective? The second research question assessed in this dissertation is therefore the following: To what extent can consumer policy regarding standardised consumer contract terms be improved by re-assessing policy on the basis of behavioural economic insights and proposing corresponding interventions from a social welfare perspective?