Behavioral Economist Appointed To Senior Position in US Consumer Financial Protection Bureau

The appointment of a Harvard behavioral economist to a consumer finance regulatory leadership role was a bit of a head-scratcher for many in the mainstream media, but it makes tremendous sense. A big part of the problem with mortgages and consumer lending packages was the psychology used to convince guileless borrowers what a deal they were getting.

Professor Mullainathan and his colleagues will be able to apply their insights to determining what sorts of marketing appeals are appropriate and which are abusive. Despite financial sector misgivings, this benefits the entire economy. It could help prevent the practices that led to the financial crisis and it helps the banks, as well. Voters have made it clear they will not tolerate another banker-friendly bailout, so the risks taken previously are not likely to be cleaned up at tax-payer expense next time around. A little knowledge of brain science could go a long way to ending that destructive cycle.

Justin Lahart reports in the Wall Street Journal (hat tip Barry Ritholtz):

"The Treasury Department announced the hiring of senior leadership for the Consumer Financial Protection Bureau. Among the hires: Harvard University economist Sendhil Mullainathan.

The leading behavioral economist of his generation, his research has focused on how people’s biases and weaknesses lead them to make bad economic decisions. He is also a founder, with Esther Duflo and Abhijit Banerjee, of MIT’s Jameel Poverty Action Lab.

His research has provided much of the intellectual foundation for the establishment of the CFPB, which is tasked with making “markets for consumer financial products and services work for Americans.”

“He’s more or less exactly what the CFPB should be: evidence based, appropriately suspicious of concentrated interests, and he understands that real people can make mistakes,” said Wharton School economist Justin Wolfers.

Mr. Mullainathan, 38, got an early lesson in how regulatory changes can affect people’s lives, and how fragile their livelihoods can be when a new rule in the 1980s disallowed foreign aerospace workers from doing defense-related projects. In practice, this meant that foreign workers couldn’t work on aerospace at all, since the delineation between defense and nondefense projects was fuzzy. His Indian father, an engineer at McDonnell Douglas, lost his job.

“There was this feeling of fragility, wow if my dad doesn’t get a job, then what?” Mr. Mullainathan recalled in a recent interview. “I still have that feeling very strongly, I understand it. It informs my thinking on this stuff and my motivation to work on it.”