Simplified communication may not fix incomprehensible disclosures.
Incomprehensible! makes two superbly clear claims. First, it describes a big problem: Mandated disclosures are so common, complex, and extensive that their intended audience cannot understand or use them. Second, it offers a solution, called “cooperative communication,” in which speakers must be “encouraged to communicate their messages in a way that the ‘reasonable or median target audience’ will understand.”
The key to the solution, the book explains, is to require disclosers to speak “effectively” and to “engage in meaningful communications.” This will ensure success because disclosures designed under such shifted responsibility will be informative and useful.
I do not dispute the first claim of the book. Five years ago, Carl Schneider and I published a book, More Than You Wanted to Know, which makes a similar claim about the failure of mandated disclosure laws. Incomprehensible! agrees with that thesis, which is not surprising, since the evidence for mandated disclosure’s failure is abundant. Information disclosure has been mandated across a wide range of practices with hopes of liberating people from ignorance and equipping them to make well-considered decisions. It continues to be the most common and least successful regulatory technique.
There are two possible responses to the failure of mandated disclosure. One, which Schneider and I recommended in our book, is to put scholarly efforts and ingenuity to more rewarding enterprises, such as developing better regulatory methods. But the more common response is to refuse to abandon mandated disclosure’s promise and potential, instead putting hope in various fixes.
The most common fix is to require the information disclosed to be simplified and delivered in a comprehensible manner. Commentators have advocated “smart” disclosure, “fair” disclosure, “meaningful” disclosure, and “lay-meaning” disclosure, and have developed criteria of best practices for simple information. It is to this simplification campaign that the book Incomprehensible! creatively contributes.
The book diagnoses the failure of disclosures as the result of bad incentives for information disclosers. These “speakers”—banks, sellers, hospitals, and manufacturers, for example—benefit from using long and incomprehensible language, which usually shields them from liability while also hiding the less flattering but critical information that their customers need. Many disclosers are indifferent to, and even benefit from, people’s ignorance.
If the reason for disclosures’ failure is disclosers’ craftiness, then the solution is apparent: alter the incentives of these speakers by requiring them to be comprehensible. They should not be allowed to draft their disclosures in unending and technical language. They must instead use communication methods that their audience—borrowers, buyers, and patients—can understand. This solution is the core of Wagner’s thesis and it echoes what lawmakers have increasingly recognized. The Dodd-Frank Wall Street Reform and Consumer Protection Act, for example, directs disclosers to give borrowers “timely and understandable information to make responsible decisions about financial transactions.” Other commentators advocate disclosures to be “concrete, straightforward, simple, meaningful, timely, and salient.”
This recommendation is where I disagree with the book’s thesis. Unfortunately, experience so far does not lend much confidence that simplification and comprehensibility—the central values of contemporary advocacy for greater disclosure—will succeed. I have previously discussed the evidence of simplification’s failure, and have examined at length the long history of failed simplification attempts.
In contrast to the book’s diagnosis, my own suspicion is that the failure of comprehensibility is due not to bad incentives of disclosers, but to a profound and insoluble problem. The problem is not the complexity of texts but the complexity of decisions and choices.
Simplification fails because the choices that the texts try to illuminate are not simple. Complex decisions that non-experts must make can rarely be described simply. Choosing loans, medical treatments, investments, and warranties are complicated matters because so much affects a well-considered decision.
Disclosers can make things more comprehensible by providing less information, but they may then omit things that are sometimes necessary for the consumer’s decision. Disclosers could, instead, present more decision-making factors, but this may cause people more difficulty in understanding, remembering, and deciding. Decades of consumer protection laws have been dedicated to making loan disclosures simple and comprehensible—what is simpler than an annual percentage rate?—but to no avail. People, especially the least educated and least affluent, continue to make uninformed and often poor borrowing decisions, because making a good decision is complicated.
Incomprehensible! does not demonstrate how a duty of cooperative communication would succeed where prior simplification ideas failed. How should regulators ensure that firms “communicate their messages in a way that the reasonable or median target audience will understand”? Could it be done?
Because prior efforts to simplify found only flickers of success, I hoped the book would dedicate more space to the proof of concept, showing how complex legal issues could be explained simply to an average person. How, for example, could eBay—which really does try to make its legal terms clear—make the statement “you grant us a non-exclusive, worldwide, perpetual, irrevocable, royalty-free, sublicensable (through multiple tiers) right to exercise any and all Intellectual Property Rights” more comprehensible? The few examples that the book regards as success—such as Nutrition Facts and restaurant health inspection grades—are evidence more for defeat than victory. They are indeed comprehensible, but the decisions and outcomes they hoped to inform have not improved.
What if comprehensibility does not work as intended? What if disclosers were to make every effort toward comprehensibility, but people still failed to understand? This circumstance is not a hypothetical scenario. Many labels and disclosures are pre-tested in laboratories to demonstrate comprehension, but when used in real market settings, they fail to inform their audience. The book wants disclosers “to take full responsibility” for people’s understanding of the texts, but it stops short of proposing strict liability for incomprehensibility.
I would have taken a more radical approach to the problem of unfixable incomprehension, by exploring other legal techniques which do not rely on information disclosure. Sunshine, even of the comprehensible variety, may not be the best of disinfectants.
This essay is part of a six-part series, entitled Creating Incentives for Regulatory Comprehensibility.