The vanilla option

Rortybomb expands on his Evil Rorty scenario with a solution:

And that solution would be mandating financial services to provide Vanilla Option financial products. Boring, low-reward trap-fee products you’d probably have to pay a yearly fee for.

So much of our financial services are predicated on tricks and traps but also have a lot of benefits. You get free checking, but if you overdraft you lose more than you gained. Now with a vanilla option, you could pay more upfront to not take the risk of losing later. This is banking how it used to be, boring. And this is exactly the kind of product that people with weak cognition would want to have available. Someone approaching older age, but before getting there, could opt for the “extra boring” financial services package. People buy renter’s insurance; some might view a yearly-fee on their checking account or credit card as a “trap insurance.”

And not just them: Me too! And I’m a fairly smrt guy. And probably tons of you. Wired had a fascinating piece on the “Good Enough Revolution”, and I’m sure market research people at these financial services places are hearing a ton about how everyone would really just like a simpler product that they can worry less about, rewards be damned. Is “Good Enough” Financial Products better marketing than “Vanilla”?

If this solution is so market friendly, then why doesn’t it already exist? As this excellent paper, “Shrouded Attributes and Information Suppression in Competitive Markets” points out, (MR summary here) the market have a terrible time creating a vanilla option. Especially when confused or cash-constrained consumers subsidized sophisticated and rich consumers, there’s no incentive for the sophisticated to move. And a bank advertising something as being “trap-free” might be the product with the most traps in it, hidden deep within a terms of service that lawyers could read any such way. Having a credible stamp by the government saying “boring” is one way to cut through this double trap problem.

It makes sense to me.  And it beats the public option, which I know has been floated as an idea for credit cards as well.