In late November I talked about how credit cards specifically, and the consumer financial system more generally, was fee and ‘trick and traps’ based and how that amounted to a transfer from the poorest to the richest in our country. I found this to be a really bad thing, one that gave terrible incentives to financial firms to find innovations that would make prices and information more opaque and less transparent for consumers.

Instead of challenging the argument itself, or arguing that this system was a necessary evil to get the poorest in our country access to financial markets, I was amazed at the amount of feedback I got that argued this was a great system, because instead of ripping off the poor to give benefits to the rich, it really transferred “from the ignorant and foolish to the informed and prudent”, or as one emailer put it, in a manner representative of many other emails: “It’s the irresponsible borrowers – who are often poor – that are penalized and the ultra-responsible borrowers that are rewarded. I fail to see the problem there.” The argument is that the system works to punish those who are cognitively weak and financially irresponsible and reward those with good cognition and a sense of responsibility. Perhaps you agree, or perhaps you are on the fence but leaning towards agreement.

Maybe it is because I’ve binged on Michael Sandel’s Justice series on youtube over the holidays, but I want to create a moral dilemma to see how far you are willing to go in thinking this justification works for our current financial system. But first I’ll need to go into Evil Financial Rortybomb mode. Ever see that Star Trek where in the Mirror Universe everyone is evil and has a goatee? It’s like that.

< EVIL >



I want to pitch to the credit card and financial industry a new innovative online survey. It is targeted for older, more mature long-time users of our services. We’ll give a $10 credit for anyone who completes it. Here is a sense of what the questions will look like:

– 1) What is your age?

– 2) What day of the week are you taking this survey?

– 3) Many rewards offered are for people with more active lifestyles: vacations, flights, hotels, rental cars. Do you find that your rewards programs aren’t well suited for your lifestyle?

– 4) What is the current season where you live? Are any seasons harder for you in getting to a branch or ATM machine?

– 5) Would rewards that could be given as gifts to others, especially younger people, be helpful for what you’d like to do with your benefits?

– 6) Would replacing your rewards program with a savings account redeemable for education for your grandchildren be something you’d be interested in?

– 7) Write a sentence you’d like us to hear about anything, good or bad!

– 8 ) How worried are you you’ll leave legal and financial problems for your next-of-kin after your passing?

Did you catch it? Questions 1,2,4,7 are taken from the ‘Mini-mental State Examination’ which is a quick test given by medical professionals to see if a patient is suffering from dementia. (It’s a little blunt, but we can always hire some psychologist and marketers for the final version. They’re cheap to hire.) We can use this test to subtly increase limits, and break out the best automated tricks and traps mechanisms, on those whose dementia lights up in our surveys. Anyone who flags all four can get a giant increase in balance and get their due dates moved to holidays where the Post Office is slowest! We’d have to be very subtle about it, because there are many nanny-staters out there who’d want to coddle citizens here.

Here’s the important thing. I hate to write this right before lunch, because it’s going to make your mouth water, but check out this article, “Dementia threatens aging boomers’ portfolios”:

David Laibson, a professor at Harvard University, Cambridge, Mass., and noted expert in behavioral economics, found the prevalence of dementia among Americans “explodes” after age 60, doubling every five years to more than 30% of the population over age 85. Worse yet, many adults without dementia still experience “substantial cognitive impairment,” making it difficult for them to manage their portfolios. “This is a huge problem, and we’re really doing nothing to prepare for the large number of wealthy Americans nearing retirement,” Mr. Laibson said in an interview. “In fact, we’ve really gone the opposite way, by encouraging and liberating people to take care of their own finances.” There’s certainly a lot of wealth at stake. According to the paper, for households with a head age 65-74, the median net worth — including net home equity and excluding public and private defined benefit assets — was $239,400 in 2007.

I smell money – it’s like walking down a sidewalk and turning a corner and then there is suddenly money all over the sidewalk. One problem with hitting up sick people, single mothers, college kids who didn’t plan well and the cash-constrained poor with fees and traps is that they’re poor. Hitting up people with a lifetime of savings suffering from dementia is some real, serious money we can tap as a revenue source. Indeed someone who forgets what they were doing between reading “Bullshit Surcharge: $40” on their statement and calling the customer support number to complain is our ideal customer – it’s the person who will be most profitable to us going forward.

< NOT EVIL >

There’s a lot of bad stuff in me. (That Laibson paper is fantastic, and we’ll talk about it more in 2010.) Isn’t it a too perfect fit though, in terms of how our consumer financial industry does a disservice to customers, and the forthcoming major health crisis of dementia in this country?

So to get back on point: The people in at the beginning of this post who are excited about how the current financial service industry excels because it punishes the ignorant and irresponsible: on what specific grounds could you not have to embrace, much less oppose, the Evil Rortybomb Plan above? I got a sense of proportionality in those arguments, that the most ignorant should have to pay the most. I don’t think anyone would argue against the idea that those suffering from dementia will be the most ignorant of their actual situations and most irresponsible in the sense that they aren’t capable of being responsible. The extra fees and traps they pay will in part also go to those enjoying extra bonuses and continued free financial services. It’s a win-win from this point of view, no? One must be consistent.

I assume that they would argue that there’s a difference in ignorance here: one the one hand they are happy with punishing what they consider sloth and laziness but unhappy with punishing what is essentially old age. I think that’s a self-interested dodge though; it would strike me that the person can’t see themselves in situations where a $40 surcharge makes a big difference in the monthly budget, but can easily see themselves in a situation where mentally he or she starts to slip. How are these not made of the same thing, of the same bad draws in life fortunes? It’s like taking a quick peek at one’s situation in life before determining what kind of financial service sector best meets our purposes. Either you can manage your situation or you can’t, and if you are fair hunting season if you can’t in one form of poor cognition or life situations then you are fair hunting season in all states of poor cognition and life situations. And all the current incentives are to go further in this direction.

When I was much younger, an elderly family member who was starting to show signs of dementia was ripped off by a stranger. My extended family, mostly law enforcement who all loved serving stories about crimes at holiday dinners with the turkey and thus were largely inoculated to the idea that people can do terrible things to one another, was caught off guard by this. It seemed to contain an extra level of inhumanity to take advantage of someone like that. It worries me that that one strand of our consumer financial system works on much of the same level. I understand those who think technology will be the driver of changing this for the better rather than legislation, but before any of that, we all agree it is a problem, right?

UPDATE: I added a follow-up here, discussing vanilla options as a solution to this particular problem.