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KNOWLEDGE FOR POLICY

Competence Centre on Behavioural Insights

We support policymaking with evidence on human behaviour

Topic / Tool | Last updated: 15 May 2023

Behavioural insights for finance

Behavioural factors other than profit maximisation influence our financial decisions. Understanding these factors can improve market regulation and policies aimed at protecting investors.

Why behavioural insights matter

Financial decisions can be quite complex. We decide which investment products to buy and sell, where to open a bank account, or which type of mortgage to buy. In addition, we have to make up our minds about saving money for the future.

These are no easy tasks. For example, when choosing a mortgage, key factors include its duration, whether it comes with insurance and additional services, and the type of contract. All this, taking our expectations about future market developments into account.

Behavioural factors can influence financial decisions in various ways

  • Often, financial decisions create losses now but promise gains in the future. Impatience can lead us to settle for smaller immediate rewards instead of greater future ones (this is called present bias).
  • Many financial decisions require us to consider vast amounts of information. This requires a lot of thinking; something we don’t always have the energy for. And too much information can actually hamper decisions rather than improve them.
  • Once we’ve chosen a mortgage or investment product, we are prone to keep it. This inertia can prevent us from reaping benefits in situations where switching is beneficial.
  • Other aspects than profit can guide our financial decisions. For example, we often value sustainability and environmental impact as well as monetary gain.

Understanding these behavioural factors can lead to better financial policies for all parties active in financial markets.

How behavioural insights can help

Behaviourally informed policy can help people make informed financial decisions. For instance

  • Information on investment products
    Small investors benefit from simple information on complex investment products. EU Regulation 1286/2014 requires sellers of such products to provide investors with certain key documents, containing clear, simple information, so they can make informed decisions.
    The regulation is based partly on input from a 2015 consumer testing study and another study from 2020, which both show how simple information leads to better investment decisions.
  • Dealing with inertia
    Policies can be designed to improve financial decisions when people are inactive. Automatic enrolment in saving plans with default contribution rates can increase savings, since people stick to the default and are unlikely to drop out of the saving plan (see Optimal Defaults and Active Decisions).

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