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.
