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What is Behavioural Economics?

What is Behavioural Economics?

  • application of psychological insights to economic problems
  • the study of cognitive, emotional and social factors that affect people's observable economic behaviour

(Source: OSC Investor Office Behavioural Insights report)

Regulators and Behavioural Biases

Regulators and Behavioural Biases

Behavioural insights recognize how people actually behave versus traditional economic and market theory of people as rational actors. People are:

  • influenced by readily-made information, whether that information is novel or relevant, and whether it automatically generates good or bad feelings;
  • making decisions in the moment, as many people prefer to continue with their current behaviour and often do not consider the future impact of their choices;
  • poor predictors of future behavior and are subject to people's distorted memories; 
  • affected by physiological conditions and emotional states;
  • shaped by social norms and expectations (such as trust, reciprocity and fairness) and social emotions (such shame or empathy), and are susceptible to social influences (such as peer pressure); and
  • affected by social biases and mental models, such as stereotypes.

(Source: OSC Investor Office Behavioural Insights report)

The chart below is an example of an investor "emotional rollercoaster" and how it can impact investment decisions:

(Source: Investopedia)

Regulators and other authorities are using the insights provided by these disciplines to learn more about how:

  • consumers make choices and how their decisions and behaviour affect retail market outcome;
  • financial professionals interact with retail customers, and the impact that their incentives, information and various other factors have on consumer behaviour; and
  • regulations and policies have intended and unintended impacts on both of these groups.

(Source: OSC Investor Office Behavioural Insights report)

IFIC and BEworks publish report on effective disclosure 

  • As regulators aim to improve investor outcomes with initiatives such as the client-focused reforms, measuring the success of regulation already in place can identify areas for improvement. A new report from the Investment Funds Institute of Canada (IFIC) and BEworks sheds light on the success of CRM2 disclosure and offers suggestions for better investor outcomes.