Wednesday, March 07, 2012

Can Policy Improve Our Financial Decision-Making?

Pete Lunn from the ESRI recently published a paper looking at policy measures to improve consumer financial decision making. The full paper is available here.


This paper examines international and domestic evidence on consumers’ financial reasoning and asks whether policy can improve it. Disadvantageous consumer decision‐making was probably instrumental in both the Irish and global financial crises. Evidence suggests that many consumers lack basic financial knowledge and that their choices of financial services are subject to systematic biases. Regulations designed to ensure accurate and intelligible product information appear to be insufficient to solve the problem, while financial education and information campaigns generally have modest impacts at best. Alternative “behaviourally informed” regulations have been proposed, which aim to foster better choices by changing the decision‐making environment for consumers, but there is limited evidence thus far about their effectiveness. Some recent changes to Ireland’s financial regulations may partly assist consumer decision‐making, assuming they are enforced. Overall, the evidence points to the need for a tougher regulatory regime that incentivises providers to assist consumers, failing which more rigid product regulation may ultimately be called for.

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