A paper from a United Kingdom regulator, the Financial Conduct Authority, highlights that people don't always act the way they should when it comes to money decisions. However, there are steps that can be put in place to help people navigate tricks and traps encountered. FCA chief executive Martin Wheatley also addressed the topic of behavioural tweaks in a speech in April 2013.
He encouraged a “more human face to the regulation of financial services” – or in terms familiar to fans of the Star Trek movies being “a little more like Captain Kirk, perhaps a little less like Mister Spock”. Here are five dos and don’ts interpreted from the material.
1. Do use the power of the reminder Wheatley gives an example from a trial the FCA ran with a firm voluntarily writing to almost 200,000 customers about a mistake in the way it had sold a product. They found small amendments in the letter – or nudges – increased response rates by up to ten percent. The nudges included explaining that claiming compensation would only take five minutes and sending out a second, reminder letter within three-to-six weeks. An idea for recipients of important letters could be to set your own reminder – penciling a date in your diary as a prompt to follow up in the future.
2. Don’t pay too much attention to who’s writing In the same trial, another of the findings was that “including the chief executive’s signature instead of the customer service team actually reduced response rates, particularly amongst women”. A lesson might be to care less about the signature and more about the content of the letter.
3. Do think the worst In the occasional paper, the FCA highlights overconfidence as a factor for some people who borrow too much when taking out a mortgage. It suggests information about mortgages is framed in a different way to highlight risks. Borrowers might also take steps to challenge their thinking, “stress testing” how their finances would hold up if interest rates hiked or household income fell.
4. Don’t automatically go for the default In the speech, Wheatley said that during work on a type of car insurance one supplier explained the biggest factor affecting purchase was “the default” – or whether buyers were automatically signed up for the insurance and had to actively opt out. “If customers were opted-in then 80% bought the add-on insurance. If customers were opted-out and had to actively purchase then just 40% bought it.”
5. Do use the default when it’s good for you In the occasional paper, the FCA gives examples of tweaks that might help “protect consumers from their own mistakes”. One is the “present bias” – or the tendency to spend now and not save enough for the future, decisions people may regret in retirement. A suggestion is to automatically enroll people in a default pension system, meaning inertia may then work to their advantage.