Behavioural Economics Workshop

OECD, Paris 31 March 2014

Initial example 1

• Scientific studies show that decision-makers are drawn to default options

• Companies can default consumers into additional products

• New EU Consumer Rights Directive now prohibits this

• Companies must offer an “active” choice

Initial example 2: fuel efficiency labelling

• The “MPG” illusion (Larrick and Soll, 2008)

• May distort product comparison

• New US EPA label aims to “correct” the illusion

• Possible to test empirically for effectiveness prior to adoption

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What is behavioural economics?

Dictionary definition: BE is the application of psychological insights to economic analysis. For the purposes of this review: BE is the application of the inductive scientific method to the study of economic behaviour.

Behavioural economics ≠ “nudges”

• Thaler and Sunstein (2008) – Do not deny people choices – Manipulate the context to promote better

choices, through “choice architecture” – Two initial examples are nudges – Note: they do involve some prohibition and

restrictions on choice

• This is only one way to use BE – Nudges may not be enough – BE findings can be used to support some

bans or other limits on choice – Evidence may show that a more

paternalistic policy is better – E.g. OECD recommends compulsory

second tier pension

US example: CARD Act 2009

• Credit Card Accountability Responsibility and Disclosure Act signed in May 2009

• Behavioural evidence suggests consumers: – Discount or fail to attend to potential costs – Too optimistic about avoiding fees

• New “behaviourally informed” regulations – Ban certain types of fee – Default to not honour limit-busting purchase – Calculations on bills to nudge repayments

• Early evidence suggests large consumer gains from the act – More from the bans than the nudges

• For other US examples of “empirically informed regulation” read Sunstein

• Aim is often to avoid more regulation

UK Behavioural Insights Team

• Internal unit of behavioural researchers based in the UK Cabinet Office... now “spun out”

• Designs behaviourally informed policies and conducts experiments and trials Fine collection Subsidised loft clearance

• Empirical approach integrates policymaking and evidence gathering

• Some general principles emerge

Other examples

DG SANCO Joint Research Centre

Productivity Commission

Competition and Consumer Agency iNudgeyou Swedish Consumer Agency

• Over 60 behaviourally informed policies cited in review as a whole • Many events designed to raise awareness of behavioural

principles among policymakers • Influence of BE is often implicit rather than explicit

GreeNudge Centre d’analyse stratégique

Office of Fair Trading Financial Conduct Authority

Consumer Financial Protection Bureau

Regulatory design: simplification

• Two common forms of mandated simplification: − Simplified information (product descriptions)

In US, CFPB on mortgages, student loans, cards − Simplified choices (product ranges)

In UK, OFGEM’s plans to limit energy tariffs

• Backed by evidence on “choice overload” − Complexity can reduce engagement − Complexity can result in poorer choices

• Mixed evidence of positive effects In UK, MCOB increased prices without reducing

dispersion In US, experiments found SEC “Summary Prospectus”

had little impact on mutual fund choice But in Massachusetts, standardisation of health insurance

products appears to have been effective

Regulatory design: convenience

• Decision-makers drawn to default options − Auto-enrolment into pensions

In NZ, led to greatly increased coverage In Australia, aim to get workers onto good default

policies − Organ donation

In UK, active choice required for driving licence

• Decision-makers drawn to convenient options − Make as option easy and more people take it − Small frictions can have large effects

Regulatory design: salience

• Need to get attention has long been understood Consumer warnings on cigarettes etc. In Sweden, “orange envelope” pension information

• Salience can alter impact of taxes In US, decisions affected by alcohol tax on tag or at till

• Bigger issue may be “shrouding” − Hidden charges in financial products − Drip pricing − Mandated total cost pricing − Banning “hidden fees”, e.g. Card Act

Regulatory design: debiasing

• Regulations can be designed to correct mistakes

− Mandated worked examples of compound interest − Mandated disclosure of loan default probability − Disclosure of usage information in telecoms and

energy markets

• Big issue: how to identify mistakes? − “Biases” can counterbalance − One person’s unhealthy overeating is another’s

personal choice − How do we know whether decisions after a debiasing

intervention are better than before it?

Three (related) observations on regulatory design

1. It is much easier to show a behavioural effect exists than to measure its overall impact on a market

2. With decisions over risk detriment is likely but hard to show − Gambling − Insurance markets − Financial investment risk

3. Regulators are becoming more empirical

Regulatory delivery: BE principles

• Simplification, convenience and salience relevant to good regulatory delivery too

• Conversely, complexity, inconvenience and inattention may frequently underlie breaches of regulations

• Compliance depends on perceptions of fairness – People will act against their own interests

when they perceive unfairness – Compliance may depend on whether others

are seen to comply E.g. Tax compliance experiments

• Conduct of market studies requires behavioural skills

• Empirical testing of regulations

Conclusions

• BE is increasingly employed in regulatory policymaking in many countries

− Including in exploring alternatives to rules − Especially in consumer and competition

policy

• BE suggests benefits to a more empirical approach

− Context specific research − More integration of evidence gathering

and policymaking

Thank You