Applying behavioural insights to regulated markets

The Behavioural Insights Team released a report recently on "Applying behavioural insights to regulated markets". Details below. Readers of the blog and current/former students here should find this very useful.

"This report is structured as follows:

Section 1 sets out the traditional justification for regulatory design, and makes the case to redefine this to reflect behavioural market failures.

Section 2 details the ways in which consumers’ decision making systematically deviates from what would be expected from a ‘rational actor’ in regulated markets (specifically energy, telecoms, personal finance and pensions). It describes eight behavioural biases and explains how they influence consumer behaviour within regulated markets. These biases are: status quo bias; anchoring effects; choice overload; framing effects; present bias; temporal effects; overconfidence; and scarcity mindset. The biases are organised in order of magnitude against two measures: the amount of damage the bias causes the consumer, and the potential effectiveness of remedies. This section also briefly assesses examples of current regulatory approaches to address these biases, and concludes that a more systematic and deliberate approach is needed.

Section 3 puts forward a new vision for the regulation of consumer markets, focussing in on four key areas. First, set the criteria for what a well-functioning market looks like from a consumer perspective. Second, collect and publish data to see whether the market is performing on a ‘well functioning’ scale, and identify behavioural market failures. Third, design remedies to overcome identified behavioural market failures. These include more innovative approaches to consumer education like designing and promoting simple heuristics, setting smart defaults, creating timely and smart disclosures, aligning supplier and consumer penalties, and supporting and enabling the work of choice engines and complaint aggregators. Fourth, test if the remedies are actually leading to better outcomes for consumers, and iterate.

Section 4 concludes by offering recommendations for how Citizens Advice can advocate for and develop this new vision with regulatory partners, as well as directly with consumers.".