Is Behavioral Finance Relevant to Policymaking?

13 June 2012

As we have discussed previously on this blog, there is growing interest in—and evidence of—the role that behavioral economics can play in improving consumer financial protection policies. Part of this interest is self-intuitive, if we want to design policies that improve consumers’ outcomes in the marketplace; we need to understand how they act currently. Another part of this may be based on recent experiences in many markets, where traditional policy interventions have not been able to have the desired effect on improving consumer behavior, outcomes, and market conduct. This has placed research on behavioral finance at the top of the reading lists of many a policymaker worldwide.

And it’s starting to show impact through behaviorally-informed financial policymaking, as evidenced by recent efforts by agencies such as the US Consumer Financial Protection Bureau.

At the same time, much of the field research on behavioral finance to date has remained concentrated in high-income countries , where many of the universities and researchers leading these efforts are also concentrated. This has left a vacuum of locally applied behavioral knowledge in emerging markets like Brazil, China, and Mexico, where financial consumer protection risks may be just as pressing as they are in the US or Europe.

So the time has come for greater coordination between behavioral finance researchers and policy makers from emerging markets who are working on consumer protection. By connecting findings from research with regulatory approaches we can develop a better understanding of what makes a difference in consumer protection, and just as importantly how to measure this change. By expanding this behavioral research into other markets, we will also be able to adapt learning to different consumer segments and financial product types, as well as identify which behavioral traits are “universal”—i.e. what will be the same for a consumer in New York and a consumer in rural Africa.

This week CGAP and ideas42—the leading behavioral consultancy and research lab globally—are convening a cohort of leading researchers and policymakers to explore the nexus between consumer financial protection and behavioral research, in search of the next series of key findings and success stories from this growing field. As part of this event, we will be hosting an open-to-the public event in Washington, DC on Wednesday, June 13 (details here). In addition, with this post, a special short series on the topic is being launched. Watch this space for a new post every week over the next month.


Submitted by Jami Solli on
Hi Rafe, really sorry to have missed the Ideas42 & CGAP conference in June. Did anyone discuss the infusion of behavioral economics into consumer education materials specific to financial services? I see lots of articles regarding the capacity of BE to inform regulators, but I am looking for publications on how it can improve financial literacy materials for consumers. Thanks for any input! best, Jami

Submitted by Dr V.Rengarajan on
Dear Rafe and Prakash I agree with Rafe on the imperative need for conduct of consumer research for different segments. Since the MF customer in poverty segment belong different ethnic groups with diverse vulnerabilities and following varied cultures and values system, these factors basically influence the behavioral pattern be it financial or non financial ones for that matter with different implications at household level. This fact calls for different approaches with appropriate education and products & services tailoring to the needs of the target segment in the demand side. . Therefore it is relevant for policy making albeit recognized belatedly In this regard your kind attention is drawn to my comment on Hsin Ying’s post in this blog on this subject and my response to Kate Mckee as they throw some hypothesis for the research on behavior economics from customer protection perspectives. I shall be glad to respond for any further clarification on the subject . Dr Rengarajan .

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