Britain’s Financial Conduct Authority will tap into behavioral economics to bolster regulation of markets through better knowledge of common blunders by financial consumers, such as overconfidence in their ability to pick winning stocks.
The FCA, which replaced the Financial Services Authority on April 1, released two reports today signaling its intention to apply the discipline to its work, including the results of its first field study.
“Some errors made by consumers are persistent and predictable,” FCA chief executive Martin Wheatley said in the foreword to one of the papers. The field “can help the FCA assess problems in financial markets better, choose more appropriate financial remedies and be a more effective regulator.”
Regulators on both sides of the Atlantic have applied behavioral economics to improve their understanding of people’s financial choices. Behaviorists reject the assumptions in conventional economics that people always choose the best option for themselves, and study what motivates good and bad decisions.
The FCA’s research team includes former Yale and Harvard behaviorist Stefan Hunt, while the U.S. Consumer Financial Protection Bureau has put the field to work when writing rules for mortgages, credit cards and payday loans. Hunt was one of the authors of the two FCA papers released today.
The first FCA paper, “Applying Behavioral Economics at the Financial Conduct Authority,” outlined trends that regulators can spot. Those include projection bias or the difficulty consumers have in working out their future ability to repay loans; and overconfidence, an “excessive belief in one’s ability to pick winning stocks,” researchers wrote in
Recognizing such biases can help the FCA ban products that are exploitative, or force firms to provide information that allows consumers to make an informed choice.
The second paper revealed the results of a so-called randomized controlled trial, examining how customers responded to real letters informing them of a company’s sales failures.
Letters with clear bullet points and simplified language increased responses, while including an executive’s signature reduced them, according to researchers. They didn’t identify the firm concerned. “Subtle changes to the presentation of information can have large effects,” they said.
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