Tuesday, 30 October 2018
Stephen Young gave a talk this month at an event hosted by Investec Wealth and Investment for Independent Financial Advisors (IFAs). For many commentators, and those present in the splendid surroundings of The Ned, formerly the Midland Bank HQ, autumn 2018 is significant as the 10th anniversary of the Global Financial Crisis. But 2018 is also the tenth anniversary of the publication of Nudge, the breakthrough book that propelled behavioural economics to global recognition by policy makers and regulators. All the more ironic, considering that Richard Thaler has recently commented that it was a struggle to find a trade publisher for Nudge, which he co-authored with Cass Sunstein.
Despite its relatively recent prominence, the talk on ‘The Rise and Rise of Behavioural Economics’ (edited version of slides here) started with the surprisingly long evolution of behavioural economics - beginning in the 18th century and came bang up to date with Daniel Kahneman and Richard Thaler - although both have won the Nobel Prize for economics, only one, Thaler, who won in 2017, is actually an economist.
The talk covered the big ideas of the main thinkers before looking at how these ideas are now being used to understand consumers’ financial decision making, showing that complexity, biases and cognitive errors can lead to flawed decisions. The result of financial decision-making being biased and error-prone is that governments and regulators are more likely to intervene in choice behaviour, to increase the likelihood that consumers will make better decisions.
The conclusions showed how regulators, including the UK’s Financial Conduct Authority, are increasingly using insights from behavioural economics to understand what leads people into flawed decisions, and how to avoid them. The result is financial regulation that more accurately reflects how people actually behave rather than the sometimes unrealistic assumptions of standard economics.
Behavioural economics has become mainstreamed, and is informing policy-making and regulation in the UK and around the world. It’s already affecting the UK financial services sector – expect to see more of it.