Consumer Information: Is It Enough?

The Federal Trade Commission (FTC) hosted a conference on Consumer Information and the Mortgage Market on May 29, 2008. You can access the program at:

http://www.ftc.gov/be/workshops/mortgage/index.shtml

and also watch some it on CSPAN

http://www.c-spanarchives.org/library/cache/ASX_205746-2-0-0.asx

FTC certainly deserves credit for organizing such a conference. There was a lot of discussion about how to inform consumers and I came away from the conference pretty convinced that information alone is not enough. We need not only to find ways to communicate in an effective way, but also to simplify information. Some ideas proposed by the speakers were rather intriguing. If we look at other fields—and health is one recurrent example— we have put labels on many food items to make sure people make good decisions when they go shopping. More than this type of information, I like “rating” systems. For example, we use a star system to evaluate safety of cars. While this is not so easy when considering financial products (but Morningstar does it for mutual funds), I think it is important to think of ways not just to provide information but also to process that information and deliver it in a simple and intuitive manner. Two researchers from Vanguard, Gary Mottola and Steve Utkus, have done something similar for the classification of portfolios: they have used a stop-light system: red, yellow and green to classify portfolios. Red is a stop sign, it signals investors they need to stop and reconsider their portfolio; yellow indicates there are problems although not as severe as in the “red light” case. And green means that investors can continue cruising with the current portfolio allocation. In my view, that is a brilliant idea and it is worth a thousand statistics. We have to look for such easy ways to provide information. Note this is not simply information, there is some “mild” advice in it: Red means “stop.” I like that too as I believe this is what consumers are looking for.