Schneider on the Failure of Mandated Disclosure

Mandated disclosure is everywhere. Undisclosed contract terms are generally unenforceable; hence the fine print. 

So every “I agree” clicked, every dotted line signed, is a disclosure moment. Mandated disclosures adorn food labels, travel tickets, leases, copyright warnings, time-share agreements, house sales, store-return policies, school enrollment and graduation data, college-crime reports, flight-safety announcements, parking-garage stubs, product and environmental hazards, and car and home repairs. A core response to a financial crisis is to ratchet up (already considerable) disclosure mandates. Much health care reform requires that patients be told about health plans, insurance, doctors, hospitals, treatments, and costs so that they can choose thoughtfully and thriftily.

Nevertheless, mandated disclosure is a Lorelei, luring lawmakers onto the rocks of regulatory failure. 

Mandated disclosure is alluring because it addresses a real problem, the problem of a world in which non-specialists must make choices requiring specialist knowledge. Its solution is charmingly simple: If people face unfamiliar and complex decisions, give them information until the decision is familiar and comprehensible.

Mandated disclosure, however, routinely fails to achieve its ambitious goals. For example, Loyola Law School Professor Lauren Willis concludes that “disclosures currently mandated by federal law for home loans neither effectively facilitate price shopping, nor do they result in good deliberate decision making about risk.” The National Research Council acknowledges that “[d]espite decades of research” there has been “little progress” toward “achieving informed consent.” The Brookings Institution’s Clifford Winston’s review of the empirical evidence on “federal and state information policies, including but not limited to disclosure policies, suggests that they have not made consumers significantly better informed and safer.”

Mandated disclosure’s failure is as plausible as its success. Who has not derided disclosures as fine print? Who has not joked—ruefully or resentfully—about clicking “I agree” without reading the terms?

At base, mandated disclosure is ill-suited to its ends. Exactly because the choices for which it seeks to prepare disclosees are unfamiliar, complex, and ordinarily managed by specialists, novices cannot master them with the disclosures lawmakers usually mandate. Consider the arcana the Federal Reserve Board thinks consumers should understand to select adjustable-rate mortgages: “indexes, margins, discounts, caps on rates and payments, negative amortization, payment options, and recasting (recalculating) your loan.”

Mandated disclosure fails because it depends on a long chain of fragile links. It works only if three actors—lawmakers, disclosers, and disclosees—play demanding parts deftly. Lawmakers must correctly conclude that a problem needs a regulatory solution and that disclosure is a good one. They must correctly gauge what disclosure to mandate. They must articulate the mandate correctly and comprehensibly. Disclosers also face challenges. Even under the sweetly optimistic assumption that disclosers try to obey mandates, they must read, understand, and heed the mandate; create or assemble data; and explain them effectively.

More Than You Wanted to Know: The Failure of Mandated Disclosure

But the lawmaker’s and discloser’s roles look blessedly simple next to the disclosee’s. Suppose that people really make decisions the way disclosurites imagine—that they (1) want to make them and (2) want to assemble the relevant information, identify the possible outcomes, assess their own preferences, and determine which choice best serves those preferences. Disclosees would still need to understand disclosures. But even experts can struggle. Massachusetts Senator Elizabeth Warren, former special adviser for the Consumer Financial Protection Bureau, said of a credit-card disclosure: “I teach contract law at Harvard, and I can’t understand half of what it says.”

Many people flatly cannot read most disclosures. More than 40 million adults are functionally illiterate; another 50 million are only marginally literate. In one study, 40 percent of patients could not read instructions for taking pills on an empty stomach. Innumeracy is worse. In a test of basic numeracy, only 16 percent could answer the three (really) simple questions. Yet financial- and medical-privacy notices are generally written at a college level, and only a tiny percent of the population can understand ordinary contractual language.

Then there is the “quantity question,” which comprises the “overload” problem and the “accumulation” problem. The overload problem arises when a disclosure is too copious and complex to handle. The accumulation problem arises because disclosees daily confront so many disclosures and yearly confront so many consequential disclosures that they cannot attend to (much less master) more than a few.

Furthermore, many people avoid making decisions. Patients take their doctor’s advice instead of reasoning to their own conclusion; employees duck retirement planning. This may be imprudent, but people are not deciding machines. Their family, friends, work, play, and prayer more than fill their lives. Mastering just one complex and unfamiliar choice is a struggle and a distraction; taking on even a trickle of the flood of disclosures can mean drowning.

Furthermore, many people make decisions with scant information and slight deliberation. They overlook, skip, or skim disclosures. Far from gathering information, people strip it away to make choices manageable. Thus, for instance, many women base their choice of breast cancer treatment on a single factor. Furthermore, experience teaches people how little they may gain from studying disclosures and how little they may lose by ignoring them.

In short, mandated disclosure seems plausible only on logically reasonable but humanly false assumptions. When buying software online, how many people click on the terms of sale, much less read them, much less try to understand them, much less succeed? In one study, only one or two shoppers in a thousand spent even one second on the terms page. At a mortgage closing, how many people even skim the stack of documents they sign, much less understand them? Surely nobody, since for a simple fixed-rate mortgage that pile can include 69 pages with 36 disclosures requiring 54 signatures. How many people given the Miranda warning understand its implications? Yale faculty members and graduate students interrogated by the FBI in the 1960s did not.

Mandated disclosure’s unreliability might not matter were it harmless. Mandates look free because they cost government little, because disclosure is rarely a line item in a discloser’s books, and because disclosees do not realize they pay its costs. Even if the administrative costs of one mandate are modest, the aggregate cost of thousands of mandates is not. And mandates can do harm. Not least, bad law drives out good: Mandates spare lawmakers the struggle of enacting better but less popular reforms. Disclosures can be inequitable: Complex language sometimes may help the affluent and sophisticated but is useless for the poor and naive. Disclosures can shield disclosers from other regulation, like tort liability or anti-fraud and deception statutes. And complying with mandates can take costly time and effort (like disclosures to research subjects, which have become so detailed and disruptive that valuable research is slowed, damaged, and even stopped).

Mandated disclosure is a regulatory response to the problems of nonspecialists facing unfamiliar and complex decisions. It is broadly, almost indiscriminately, used. But it fails to achieve its goals because unfamiliar and complex decisions are much harder than disclosurite ideology assumes. Giving consumers information about such decisions cannot equip them to make the truly informed decisions disclosurites desire. Mandated disclosure is a fundamental failure that cannot be fundamentally fixed.

Carl E. Schneider is the Chauncey Stillman Professor of Law and professor of internal medicine. This piece is excerpted and condensed from More Than You Wanted to Know: The Failure of Mandated Disclosure, coauthored by Omar Ben-Shahar (Princeton University Press, 2014).