How Nudges Can Help Regulate New Technologies

New technologies are being introduced in markets around the globe.  Disruptive innovations such as blockchain, cryptocurrencies, the Internet of things, automated cars and other products that support decision-making based on artificial intelligence (AI) are offering a creative take on traditional markets. Yet these technologies frequently require regulatory intervention to protect consumers or prevent systemic risks. One of the main challenges for regulating new technologies is insufficient technological knowledge by the regulators. The industry is invariably more informed about the subject matter than the regulators and is more likely to tailor regulation by private ordering. In these circumstances, we argue, “nudge” can be a useful approach,

A nudge is “any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.”[1] Nudging can steer an industry or consumers towards or away from new technology and be useful for regulating potential harm caused by technologies to users and third parties. According to the literature, in the regulatory area several forms of nudge exist, ranging from disclosure requirements to default rules to social norms.

Disclosure Requirements. Take, for example, peer-to-peer (P2P) lending platforms, where information is crucial. Lenders need the credit history of the borrowers, and borrowers need to know the interest rate they will be required to pay, the number of payments they will have to make, and the other fees the platform charges. All participants should be notified in advance of any change the platform makes to the terms and should be able to easily opt out in case they do not agree to the new terms, just as they can with credit cards.[2] We might also require manufacturers to label a new technological product, such as drones, with details about their safety, height, and durability. And it would be helpful if regulators announced at important conferences what technologies they believe are promising or dangerous.

Default Rules and Simplifications. If a new technology-based financial product is introduced, regulators can offer a draft of a default contract between the consumer and producer. Studies have shown that when a default exists, diverting from the default is more difficult and therefore would be done only with the careful consideration of both sides.

Increased Salience. It is frequently possible to shift consumers’ behavior by drawing attention to certain features of a product or situation that makes these features more salient to them.  Take, for example, electric bikes, also known as e-bikes. Forcing the manufacturer to place a picture on the e-bike of someone hurt by riding without a helmet together with a warning that helmets should be used might prompt consumers to wear helmets when using the product. A good example of a regulatory authority already using this technique is the mock initial coin offering called HoweyCoin by the SEC. The SEC launched a fake ICO website in order to educate investors. Users who try to invest in HoweyCoin are directed instead to the regulators’ educational tools, which highlight the signs of a fraudulent token sale.

Using Social Norms. Assume that in the future you will be able to fuel your car with energy produced from waste. Social pressure – perhaps through public-service advertisements showing the environmental benefits of doing so – might prove useful in encouraging people to take advantage of the new technology.

The choice of the direction of the nudge might still be based in part on the gut instinct of regulators. However, unlike binding regulations, if that gut instinct is wrong, that will quickly become apparent through people’s reactions. They may embrace the nudge, ignore it, or accept it in part, thus tailoring the private ordering to each business model in the industry.

ENDNOTES

[1] See RICHARD H. THALER & CASS R. SUNSTEIN, NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS 6 (2008). In his book six years later, Sunstein delved deeper into the debate about the rationales and objections of nudges. See: Cass R. Sunstein: Why Nudge? The Politics of Libertarian Paternalism 58 (2014).

[2] The Credit Card Accountability, Responsibility, and Disclosure Act of 2009.

This post comes to us from Nissim Cohen at the University of Haifa, and Hadar Y. Jabotinsky, Cegla Visiting Research Fellow at Tel Aviv University Law School. It is based on their recent article, “Nudge Regulation and Innovation Policy,” available here.