Financial regulators, public authorities, and other organisations are increasingly using behavioural insights to educate investors to make more informed financial decisions, according to a report published today by the International Organization of Securities Commissions (IOSCO) and the Organisation for Economic Co-operation and Development’s International Network on Financial Education (OECD/INFE).
The accelerated growth of new and innovative technologies, an excessive amount of available financial information, and increasingly sophisticated financial products make it progressively more difficult for retail investors to navigate today’s complex financial markets. Although many organisations offer education and financial literacy programs, investors often fail to make rational financial choices because of their own cognitive, social and psychological biases—all of which can act as barriers to sound financial decision making.
The IOSCO-OECD report, The Application of Behavioural Insights to Financial Literacy and Investor Education Programmes and Initiatives, examines how findings from behavioural sciences can be used to develop investor education and financial literacy initiatives that may be more effective than traditional programs, largely by mitigating the effects of behavioural biases. Behavioural sciences focus on the way individuals think and behave, based on empirical evidence from a range of social sciences, such as economics, psychology, and social marketing, as well as from other fields like neuroscience.
The report draws on an extensive literature review of strategies that use behavioural insights to help break down the barriers to satisfactory or rational decision making and nudge consumers towards better financial planning and investment. The report also builds on the input from more than 80 IOSCO and OECD/INFE member institutions and includes a wide variety of practical applications of behavioural insights, ranging from “debiasing” applications for educational purposes (e.g. online comparison and simulation tools) to the development of campaigns and targeted messaging.
The report also provides various approaches for regulators, policy-makers, and practitioners to choose from when considering whether and how to apply behavioural insights. These approaches include such things as: gaining a full understanding of the problem that consumers or investors face before designing a solution; taking the context of financial decision making into account; conducting small-scale pilot and field tests before implementing and scaling up initiatives; evaluating outcomes rigorously; sharing knowledge and experiences within organisations and with stakeholders and keeping track of this information; preparing the groundwork within organisations before starting to consider behavioural insights; combining traditional approaches and behavioural insights; and reviewing programs and initiatives regularly.
The IOSCO-OECD report highlights the effectiveness of conducting evaluations against a control group (e.g. randomised controlled trials) to gauge the impact of different initiatives on investors´ behavioural responses and to learn and build on those experiences.