Applying Behavioral Insights in Consumer Protection Policy
Policy makers in emerging markets and developing economies (EMDEs) can draw on new consumer and behavioral findings and research tools to develop policies that better protect financial consumers while enabling advances in financial inclusion. By seeking to understand how personal, social, and environmental factors shape human behavior, behavioral research helps to reveal why individuals do not always act as one would expect or as they themselves intended to, and sometimes not even in the way that might be best for their welfare. Years of experiments conducted by academics and practitioners have identified common behavioral biases many people face. (Some of these biases help explain consumer financial behaviors.) This deeper understanding of some of the most commonly observed behavioral biases in EMDE markets also helps to identify and test new ways to improve financial behaviors and decision-making, often through relatively small changes in financial product design and delivery or regulations.
While behavioral research is relevant for consumer protection policy in all markets, the increased use of behavioral research to develop consumer protection policies is especially important in EMDEs due to the nature of both their financial markets and many of their financial consumers.
This Focus Note presents emerging evidence on selected behavioral biases relevant to financial consumer protection, their consequences, and how market conduct regulation and other measures might best reduce abuse and produce better services and ultimately better outcomes for consumers. It also proposes specific ways to incorporate insights from behavioral research into policy-making and implementation of consumer protection regulation and supervision.
This Focus Note explores how behavioral research can offer important tools for effective policy-making in four priority consumer protection topics that are relevant in virtually all settings, but have specific implications in base-of-the-pyramid settings: (1) disclosure, transparency, and product choice; (2) complaints handling and recourse; (3) credit market regulation and debt stress; and (4) fair treatment. Each of the four sections reviews emerging evidence and experience from behavioral research and offers specific advice for policy and regulation deriving from these behavioral insights (although the current level of knowledge varies considerably across these topics). The paper closes with reflections on consumer protection-related priorities and challenges in EMDEs that would benefit from further applied behavioral research and field experimentation.