On March 29, 2017 the Ontario Securities Commission (OSC) published OSC Staff Notice 11-778 Behavioural Insights: Key Concepts, Applications and Regulatory Considerations, a report on how leading practitioners and regulators around the world are using behavioural insights to address issues in capital markets and improve outcomes for investors and market participants.
The research study identifies important insights that form the basis of some key principles stakeholders may consider to help millennials overcome barriers to investing. These insights reveal that many millennials are at a life stage where it is difficult to picture one’s future self, often compare themselves to their peers, are overwhelmed with too many options to know where to begin, and lack opportunity to practice their investing skills. From these insights, the study identified six key principles stakeholders may consider when looking to engage millennials.
On July 27, 2018 the OSC published Encouraging Retirement Planning through Behavioural Insights, which identifies ways in which organizations can apply behavioural insights to promote retirement planning. The research report, prepared by the Behavioural Insights Team (BIT) in collaboration with the OSC, looks at the primary challenges people experience in moving from the intention to create a retirement plan to actually having one, and offers simple, low-cost interventions to make retirement planning easier.
As part of the Asset Management Market Study, the FCA wanted to understand the impact of different ways of presenting charges on investors’ decision-making and their understanding and awareness of charges. Authors: Lucy Hayes, William Lee and Anish Thakra. Lucy Hayes works in the Behavioural Economics and Data Science Unit and Anish Thakrar and William Lee work in the Competition & Economics Division of the Financial Conduct Authority.
On December 15, 2015 the MFDA issued a consultation paper in respect of expanding the requirements under Rule 5.3.3 and the implications for doing so (see Bulletin #0671-P: Report on Charges and Compensation – Consultation Regarding Cost Reporting for Investment Funds). The majority of comments received were in support of expanding cost reporting to include total costs paid by clients, including ongoing costs of owning investment funds. However, commenters suggested MFDA wait until Members issued Reports on Charges and Other Compensation to their clients before considering whether further amendments were necessary. In light of these comments, in 2017 MFDA performed a review of certain Members’ Report on Charges and Other Compensation (see Bulletin #740-C: CRM2 Report) and identified areas for potential policy development, such as expanding cost reporting.
This May 2018 publication reports the results of complementary surveys of members of both the International Organization of Securities Commissions (IOSCO) and the Organisation for Economic Co-operation and Development International Network on Financial Education (OECD/INFE). These surveys explored the extent to which behavioural insights are used to guide financial literacy and investor education policies and practice.
By Alain Samson (2014), this Introduction is part of The Behavioural Economics Guide 2014, which includes selected behavioural economics concepts, resources of interest, and applied perspectives. Guides from 2014, 2015, 2016, and 2017 are available for download on the site upon subscription to their newsletter.
From Hershfield & Kramer (2017): Construal-level theory suggests that individuals draw on more cognitive and less emotional thought processes with increased social distance. Building on these links, this study finds investors are less vulnerable to the influence of emotions on their financial decisions as an increasing function of the social distance between the decision maker and the decision target.
By Lisa Kramer, contributed to the Globe and Mail and published May 1, 2018: Would you rather pay a 1-per-cent fee or a $1,000 fee on $100,000 invested in a mutual fund? Before you congratulate yourself for noticing that 1 per cent and $1,000 amount to the same fee in this example, I ought to tell you that you may be making a related mistake in your own investment accounts that could be costing you buckets of money.
This brief essay by Cass R. Sunstein offers a general introduction to the idea of nudging, along with a list of ten of the most important “nudges”. It also provides a short discussion of the question whether to create some separate “behavioral insights unit”, capable of conducting its own research, or instead to rely on existing institutions.
Lerner, Small, and Loewenstein (2004) examined the impact of specific emotions on the endowment effect, the tendency for selling prices to exceed buying or ‘‘choice’’ prices for the same object. As predicted by appraisal-tendency theory, disgust induced by a prior, irrelevant situation carried over to normatively unrelated economic decisions, reducing selling and choice prices and eliminating the endowment effect. Sadness also carried over, reducing selling prices but increasing choice prices—producing a ‘‘reverse endowment effect’’ in which choice prices exceeded selling prices. The results demonstrate that incidental emotions can influence decisions even when real money is at stake, and that emotions of the same valence can have opposing effects on such decisions.
Jin and Scherbina (2008) show that new managers who take over mutual fund portfolios typically proceed to sell off inherited momentum losers. They sell losers at higher rates than stocks in any other momentum decile, even after adjusting for concurrent trades in these stocks by continuing fund managers. This behavior persists even when managers take over well-performing funds and funds with positive fund flows where it is unlikely that they are expected to change fund strategy or sell holdings to meet redemption demand.
From Thaler's (1979) abstract: The economic theory of the consumer is a combination of positive and normative theories. Since it is based on a rational maximizing model it describes how consumer should choose, but it is alleged to also describe how they do choose. This paper argues that in certain well-defined situations many consumers act in a manner that is inconsistent with economic theory. In these situations economic theory will make systematic errors in predicting behaviour. Kahneman and Tversky's prospect theory is proposed as the basis for an alternative descriptive theory. Kahnemen and Tversky's prospect theory is proposed as the basis for an alternative descriptive theory. Topics discussed are: underweighting of opportunity costs, failure to ignore sunk costs, search behavior, choosing not to choose and regret, and precommitment and self-control.
From Thaler, Sunstein, & Balz's abstract: Decision makers do not make choices in a vacuum. They make them in an environment where many features, noticed and unnoticed, can influence their decisions. The person who creates that environment is, in our terminology, a choice architect. In this paper we analyze some of the tools that are available to choice architects. Our goal is to show how choice architecture can be used to help nudge people to make better choices (as judged by themselves) without forcing certain outcomes upon anyone, a philosophy we call libertarian paternalism. The tools we highlight are: defaults, expecting error, understanding mappings, giving feedback structuring complex choices, and creating incentives.