Towards Behaviorally-informed Financial Consumer Protection
Behavioral economics is the science of human decision-making and how people’s biases and weaknesses can lead them to make harmful economic decisions. Behavioral research in consumer finance can help improve financial consumer protection. As Rafe proposed in the first blog post in the series, if we want to design policies that improve consumers’ outcomes in the marketplace, we need to understand their choices and motivations.
Some policy-relevant behavioral research has already begun. Financial literacy of low-income populations, for instance, has traditionally been addressed by training programs that emphasize principles of accounting and financial management. The underlying assumption is that people enlist all of their knowledge when making financial decisions, so the best way to improve decision-making is to provide more information.
Behavioral research tells us that more information does not typically translate into better decisions. People often make quick decisions and rely on general rules of thumb (heuristics), which suggests that changing the delivery of financial education to a heuristics-based approach might be an effective approach to building financial capability. A recent randomized control trial in the Dominican Republic tested the effects of a financial heuristics model against a traditional financial education curriculum and a control group of clients who received no training at all.
The field test demonstrated strong positive outcomes for the heuristics group and no change in outcome for the group that received the traditional course.[1] Policymakers interested in promoting improved consumer capability can employ this low-cost, easy-to-implement rules of thumb approach to all types of consumer education – not just financial education.
Another key pillar of financial consumer protection is improved transparency and disclosure of financial product terms. A traditional model of consumer behavior might assume that the cost of reading and understanding a disclosure form is minimal compared to the financial benefit of picking the right financial product, and conclude that the format, timing and framing of disclosure is irrelevant to decision-making.
However, a great deal of evidence from behavioral research contradicts this view and suggests that the way clients select financial products is heavily influenced by the context in which choices are presented. Factors that influence decision-making include the use of plain versus legal language, how financial figures are displayed (e.g. APR versus Total Cost of Credit), and who presents the information to the client. Policies that require institutions to share financial product information using transparent and “smart” disclosure formats will likely help consumers make better decisions.
These examples and others are only the beginning of the path to better policy, and as solutions emerge they are unlikely to be standard templates that apply equally to all consumers of all financial products in all countries. Designing, implementing and evaluating effective behaviorally-informed policy will require close partnerships between policy-makers and empirical researchers who are sensitive to context.
Early results in the sector show great promise in developing initial frameworks of financial consumer protection, but there is much work to be done in the specific areas of financial capability, disclosure and transparency, over-indebtedness and recourse resolution. CGAP and ideas42 are committed to promoting a behavioral approach to consumer financial protection and we look forward to supporting the design of action-research projects that inform improved policies.
Comments
Interesting blog. It
Interesting blog. It stimulated a couple of questions. What other proof do you have that these rules of thumb work? I question whether it is apporpriate to generalize from one study. Also how many training sessions did the target population attend? If more than one,what were the incentives offered to get people to attend all the training sessions and receive the same messages at each.
Monique Cohen
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Interaction between value system and human behavior at HH level
Dear Alexandria ans Louis
Human behavior research in micro finance arena is the need of the hour. Thanks for this posting on the subject. In this regard I like to share my views
While moving towards behaviorally informed financial consumer education particularly in poverty segment, there is a need to go beyond the models such as traditional financial education, financial heuristic model, and consumer education with product disclosure. Although these factors influence the behavior but not significantly , it is a kind of cognitive value system followed by the target group / community which powerfully drive the decision making process at household (HH)level. To elaborate further, two types of value system – internal and external to the target household matter here. . While the former is influenced by myths , belief , nature of vulnerabilities and personal ethics , the latter driven by market , media and Advertisements. Due to interaction of these kinds of value system in the decision making process at house hold level, there is difference between intentional behavior and actually performed behavior. To illustrate , the poor client may require micro credit with declared intention of buying farm inputs for cultivation at the time of financial access but subsequently after access to it, actually performed behavior may be different in terms of utilizing the money for health purposes or any other purposes as per value system contextually at house hold level. Further supply oriented mono product designing based on ‘ one size fits for all’ approach without taking cognizance of real needs of the poor client in the demand side also aggravates the intensity of said problem . Ultimately this situation again leads to misutilization of credit , ( as per bank’s parlance) over indebtedness, NPA etc
This kind of field realities at micro level with the conflicting social situation after financial access, incompatibility of values at client level reinforced by market /media influence , human behavioral changes as per the contextual needs in the demand side on one hand, and structured product like micro credit for multiple utility options in the supply side on the other, suggest an imperative need for kind of prudent micro management of value satisfaction at individual level through proper sequencing multiple diversified pro poor MF products integrated with welfare goods such health This would facilitate for keeping the stable human behavior there by reducing cognitive limitations. . It therefore demands a change and not only the change in outcome , but also change in the process too which works for such change particularly in human behavior. Here it may be noted that besides financial/consumer education , two factors namely ethical nurturing of poor client for prudent micro value management system in the demand side and accessibility to integrated products ( micro credit plus for reducing household vulnerability ) from financial institution in supply side also appear to be inevitable ensuring disciplined and moral human behavior of both individual and households without much biases and eventually a benign financial empowerment to the poor segment at large. This could also serve as a kind of responsible client protection service to the MF client
Dr Rengarajan
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