A Behavioral Economic Analysis of Payday Lending Regulation in Canada

Payday lending regulation in Canada assumes that if borrowers are provided the statistical determinants of a prospective loan, they will make efficient borrowing decisions. This paper argues this disclosure framework is misguided. Specifically, it rests on the notion that consumer-decision makers are inherently rational actors. However, behavioral economics helps demonstrate that most borrowing decisions are guided by cognitive biases that cloud people's ability to make informed decisions. In turn, payday borrowers routinely incur unexpected additional costs, often resulting in financial paralysis. Moreover, payday lenders, keenly aware of consumer psychology, design and package their loan products to exploit these biases. Accordingly, this paper suggests that Canadian policymakers adopt a correlative strategy, namely, applying mandated disclosure regimes that employ cognitive biases to counteract others. These measures would make the potential consequences of payday loan related overindebtedness more apparent to borrowers, improving the accuracy of their evaluation of the likelihood of the occurrence.LL.M