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Member of the European Commission, responsible for Health and Consumer Policy
BEHAVIOURAL ECONOMICS CONFERENCE
Albert Borchette Centre, Brussels, 22 November 2010
Ladies and Gentlemen,
Let me start by saying that I am very pleased to join you today at this conference on the subject of behavioural economics.
I am also very pleased to see that this initiative has generated such wide interest amongst policy-makers and stakeholders.
In 2008 the Commission Health and Consumers Directorate General organised the first conference on behavioural economics to raise awareness on this subject.
Since then we have moved on and made progress.
First, in 2008 the conference looked at the main problems experienced by consumers. This time, we will be considering possible solutions and policy remedies, in particular, the potential role of behavioural tools in delivering smarter regulation. That is, regulation that achieves public policy goals more effectively but which also reduces businesses' administrative costs.
Second, the last conference looked at the main biases affecting consumers largely from a theoretical point of view. In the meantime, more applied research has been conducted, so today I hope you will have practical and sector-specific discussions.
Third, behavioural insights have been used in a variety of policy fields. It seems clear that this has a role to play beyond consumer protection – for example, in health, competition and environment as well as other policy areas.
I expect that in this conference we will make progress in mapping out the tools that will help us to better understand behaviour and design behaviourally-smarter regulation.
Now, let us take each of the three main points in turn, starting with the first – problems and solutions.
Problems and solutions
The financial crisis showed that "even sophisticated investors got things badly wrong" (and here I am quoting Alan Greenspan, no less).
We should bear in mind that many of those who were hurt by the crisis were not vulnerable consumers, they were professionals with the deepest knowledge of the market. In the face of this, can we still take as our basic assumption that ordinary consumers of investment services are perfectly informed and rational?
What happened leads us to make a reality check. It also shows us that a poor understanding of human behaviour can have large macro-economic consequences.
I am convinced that consumers have a vital role to play in making markets work competitively. Informed consumer choice drives innovation and competition which are key to stimulate progress and increase wellbeing.
It is therefore crucial to empower consumers to make the right choices.
What is interesting in behavioural economics, and in its potential applications, is the fact that it does not seem to lead to more or less intervention, but to a different type of intervention.
In this sense, the book "Nudge", whose co-author, Professor Sunstein, will be speaking this afternoon, introduces the concept of libertarian paternalism: an approach that "nudges" consumers towards better decisions – as judged by themselves – without infringing their freedom of choice.
As an example, I can tell you that behavioural thinking has been used by the Commission in a recent competition case, in relation to the bundling of the Microsoft Internet Explorer web-browser with Windows.
In this case, in contrast with what the Commission had done in the past, a different remedy was adopted. Users of Windows-based PCs were provided with the option to choose an alternative browser, via an on-screen ballot box.
This remedy pushes consumers to make an active choice of their preferred browsers, and implicitly removed the impact of the default option.
But was the remedy effective? The available evidence suggests that it was.
Among the users who viewed the ballot box, one in four downloaded an alternative browser. We could conclude that a simple device that imposed no antitrust fee and virtually no programming cost to Microsoft de facto translated into an EU market for browsers which is substantially more competitive. And the recent increased rate of innovation in this sector supports this finding.
Empirical evidence from the financial services sector
Let me now address the second point and the sectoral evidence that we are currently gathering, with particular reference to retail investment services.
Every year the Commission publishes the Consumer Markets Scoreboard, which ranks 50 consumer markets – from financial services, to electricity and food – across all EU countries.
The ranking is based on several dimensions – comparability, consumer trust, consumer satisfaction, problems, complaints, the ease of switching providers, as perceived by consumers with recent experience of each market.
The 4th Edition of the Scoreboard was published last month. It shows that the market of "Investments, pensions and securities" ranks the lowest and performs poorly from a consumer perspective. This is why we decided to conduct a behavioural in-depth study of this sector.
We wanted to identify the main individual behavioural traits and the external factors which most influence consumers' decision-making. We also wanted evidence on the potential effectiveness of different policy remedies in helping consumers make better decisions.
The final report was just published today. This morning you will learn about it. This study provides a wealth of data that is impossible to summarise in a few words. This data will be used to inform the current review work on pre-contractual disclosure and sales practices in financial services.
Amongst other things, this study shows that standardised and simplified information about what consumers may get back, lead to better investment choices.
It also shows that consumers are not well-equipped to deal with the complex financial issues they come up against every day. They do not have the kind of financial know-how to choose the safest financial products which would give a good return on their investment. In a demographic context which will require more saving for old age, this is an important and worrying finding.
Clear and comparable pre-contractual information is essential for informed choices. The Commisison adopted this approach in consumer credit, in investment funds and in the area of mortgages. We intend to continue this approach for pensions.
Besides information, consumers also need sound financial advice and financial education. A Commission "mystery shopping study" on investment advice, which is now near completion, will provide evidence to support the work of the Commission in this field. This study targets investment advisors and aims to see whether the advice process is comprehensive and useful for consumers.
As Commissioner for consumers, I attach particular importance to contributing to build a healthy and competitive environment in which consumers are confident and empowered to choose the products that they need and can switch providers if they are not happy.
Behavioural economics beyond consumer protection
I will now turn to the third key issue. Not only has behavioural economics gained significant momentum worldwide, but its current and potential applications go beyond consumer protection.
Regulatory bodies across the world have already started to take behavioural economics into consideration. Many have already carried out behavioural studies to inform some of their regulatory policies. For example:
But behavioural economics could find wide application in a number of other areas. For example, in sustainable consumption and health: we know in fact that people are short-sighted in their behaviour and over-discount the future benefits of today's good habits. Behavioural insights could also be applied to design better labelling and, more generally to understand information processing.
More generally, the insights of behavioural economics could be applied to any policy intervention where the individuals' response to it helps determine its effectiveness.
Ladies and Gentlemen,
To conclude, what I would like to see unfold today is:
1. A debate on the integration of behavioural techniques and a clear identification of what sort of tools we need to better monitor and measure behaviour and design behaviourally-smarter regulation. Should we make greater use of experiments to test policy remedies before they are adopted?
2. An open discussion on the key findings from our recent studies in retail investment services; and on the wider applicability of these tools and techniques; and
3. A debate on how behavioural research and policy design can be used in other policy areas.
I look forward to, and I wish you, a stimulating and fruitful debate which will feed in our future work.