Australian regulators are stepping up their use of behavioural economics to gain greater insight into how both investors and the industry process and respond to information and make decisions.
The Australian Securities and Investments Commission (ASIC) released a couple of reports Wednesday detailing the results of experiments in behavioural economics that it commissioned from the Queensland Behavioural Economics group (QuBE) to better understand market and consumer behaviour.
One of the experiments aimed to examine possible behavioural ‘biases’ impacting consumer decisions about investing in hybrid securities rather than bonds or shares. It found that investors that are subject to an ‘illusion of control’ or ‘overconfidence’ bias increased their allocations to hybrid securities in a mock portfolio. The ASIC says that the research enhances its understanding of how hybrid securities are sold to investors, and will inform its efforts at improving investor education about hybrid risk.
The second experiment looked at ways to increase compliance by improving communication with directors of firms that are in liquidation. It found that small changes in the format of communications with these people can influence their level of compliance. It aims to identify ways to increase compliance through targeted ‘nudges’.
‘Undertaking evidence-based studies about how people think and behave in the real world is going to be increasingly important to smarter regulation. These studies provide valuable insights into how people make decisions and how ASIC can improve outcomes,” said Greg Medcraft, ASIC chairman.
In addition to these reports, the ASIC indicates that it is committed to applying insights from behavioural economics to help identify consumer problems and to detect when firms take advantage of consumer biases. To that end, it says that it is developing its first field-based randomized control trial; and, running trials with its financial industry to test innovative disclosure models.
“As ASIC continues to develop insight into how and why people behave the way they do, we will be in a better position to develop responses that are potentially less interventionist whilst having greater impact,” Medcraft added.