Guest Post: Cognitive Dissonance and APR Caps

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Guest Post: Cognitive Dissonance and APR Caps

By Andrew Morrison, Sun Loan Company

There was an excellent article in The Atlantic this month on The Role of Cognitive Dissonance in the Pandemic. Its focus, naturally, was on the refusal among certain otherwise rational members of the political right to wear masks, even in the face of overwhelming evidence of the seriousness of the crisis and the potential for face-coverings to mitigate its spread.

The article shows how we become attached to a particular narrative and then simply ignore evidence which is not consistent with that narrative. We all do it. No party has a monopoly on either virtue or reason.

That got me thinking about examples of the same phenomenon on the left. Perhaps the clearest example is price caps on Annual Percentage Rates (APR) for installment loans. The more “progressive” a Democrat is, the more they seem to want to advocate a policy which all the actual data shows disproportionately harms the poor.

For years I had put their support of APR caps down to the fact that the facts themselves were counter-intuitive. Much like otherwise intelligent members of society used to believe that the sun went round the earth, because at first sight, it looks that way.

These same progressives who advocate price caps, have tended to boast that they were deeply attached to data.  All one needed to do, I assumed, was to show them the data and they would understand.

The data shows conclusively that there is an inverse relationship between cost and rate, as NILA has explained elsewhere on this website. An APR  cap acts as  a floor under costs. It cuts off access to the cheapest, lowest cost loans. APR is a measure of time, not cost. Cost measures cost.

Surely this is not difficult to understand. But the support for APR caps persists. Now, thanks to The Atlantic, I understand the problem.

The reason that those people in  centuries past were so resistant to the science of astronomy was not that they were less rational. It was that the data did not fit with the narrative to which they had an overwhelming devotion. The problem was cognitive dissonance.

It is clearly the same with rate caps today.

Does this mean we should feel encouraged or discouraged? The more loyal a person feels to a specific cause or viewpoint, the more stubbornly they cling to positions which are wrong. We see that with both masks and APR caps.

But people do change. If groups like Pew Charitable Trusts and the Financial Health Network can move beyond APR caps towards an emphasis on structure and other more important considerations, then presumably so can others.