andrewducker (![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
andrewducker) wrote2008-10-28 03:32 pm
andrewducker) wrote2008-10-28 03:32 pm
How much handholding do you want?
There was a discussion recently on my journal that started with my usual divisive poll (Who is to blame - banks or borrowers?) and ended up with two definite camps - one that held that people were responsible for the contracts they had made the choice to sign, and one that held that most people were incapable of understanding these contracts and therefore there had to be strict regulation and a duty of care.
The problem is that _some_ people are incapable of making an informed choice about anything involving a percentage sign*, and other people are perfectly capable of making an informed choice about hedged derivatives. Offering the same range of choices to both of these groups of people is either going to lead the former group to unwittingly walk off a financial cliff or punitively restrict the options of the latter group.
Most of my friends are social liberals and economic authoritarians - assuming that people are capable of making social choices but not financial ones.** Most people would agree that _some_ protection was needed to prevent people from signing up to things they don't understand - but there would clearly be large areas of disagreement over where that line should be drawn. One could argue that we'd be safer if everyone on the planet was wrapped in cotton wool, but that would make it awfully hard for mountain-climbers. And studies have consistently shown that the people most likely to overestimate their competence are those who lack it.
One thought I had was that you could mandate fixed-rate mortgages as the standard for everyone - that way people can't sign up for discount rates that land them in trouble two years later, or be left in trouble when rates rise. People would then become eligible for variable-rate mortgages only if they could show a rudimentary grasp of percentages and interest rates, and then further products being unlocked to people that could prove they understood statistics, economics, etc.. Eventually you end up at the level where people people with PhDs in maths have fully self-invest pensions and properties leveraged against derivatives on the international debt markets. It's not likely to happen, but frankly that kind of shading is the only thing that can both protect the ignorant and allow freedom for the educated.
Someone want to offer me a better suggestion?
[Poll #1286669]
*I can't find the data now, but some startling proportion of the population don't actually understand percentages.
**Of course, one can argue that most people are capable of making their own social choices. But even that assumes all sorts of things about people's ability to weigh up short and long-term costs, and most people's lack of understanding of the way that society reacts to their actions. A quick survey of my friends regarding some of _my_ social choices would show that they hadn't always been as well-reasoned as I might like.
The problem is that _some_ people are incapable of making an informed choice about anything involving a percentage sign*, and other people are perfectly capable of making an informed choice about hedged derivatives. Offering the same range of choices to both of these groups of people is either going to lead the former group to unwittingly walk off a financial cliff or punitively restrict the options of the latter group.
Most of my friends are social liberals and economic authoritarians - assuming that people are capable of making social choices but not financial ones.** Most people would agree that _some_ protection was needed to prevent people from signing up to things they don't understand - but there would clearly be large areas of disagreement over where that line should be drawn. One could argue that we'd be safer if everyone on the planet was wrapped in cotton wool, but that would make it awfully hard for mountain-climbers. And studies have consistently shown that the people most likely to overestimate their competence are those who lack it.
One thought I had was that you could mandate fixed-rate mortgages as the standard for everyone - that way people can't sign up for discount rates that land them in trouble two years later, or be left in trouble when rates rise. People would then become eligible for variable-rate mortgages only if they could show a rudimentary grasp of percentages and interest rates, and then further products being unlocked to people that could prove they understood statistics, economics, etc.. Eventually you end up at the level where people people with PhDs in maths have fully self-invest pensions and properties leveraged against derivatives on the international debt markets. It's not likely to happen, but frankly that kind of shading is the only thing that can both protect the ignorant and allow freedom for the educated.
Someone want to offer me a better suggestion?
[Poll #1286669]
*I can't find the data now, but some startling proportion of the population don't actually understand percentages.
**Of course, one can argue that most people are capable of making their own social choices. But even that assumes all sorts of things about people's ability to weigh up short and long-term costs, and most people's lack of understanding of the way that society reacts to their actions. A quick survey of my friends regarding some of _my_ social choices would show that they hadn't always been as well-reasoned as I might like.
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Protection is out there. The reason is to avoid companies misrepresenting themselves or their products or not making their clients fully aware of the risks. Beyond these protections the company only needs to make a decision based on whether it is profitable and within their company policy to offer their product to that person.
The person buying the product (mortgage, pension, car finance agreement etc) should go into the dicussions with an idea of how much money they have, how much they can spare for payments and a basic idea of what they are after. The company should make them aware of the financial implications of the product, any penalties for forfeiture, the cost per month, overall cost and benefits of this product over another. Beyond this, the buyer has FULL responsibility. If the company has been negligent of any above protections then they should cover any losses but not just because the person cannot afford to keep up repayments or hasn't researched the market better.
If someone doesn't understand something about the financial markets even beyond the company's guidelines and their own research, there is a bloody good reason for the job title "Financial Advisor". If they can't be bothered to source one and get their expert advice and absorb it, tough shit.
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