Regulation in certain areas of financial services is essential. Here, however, Brendan Llewellyn outlines what he sees as the dangers of the FCA getting involved where it is not needed (or wanted)
Life may be too short to stuff a mushroom, and much too short to read the 78-page Financial Conduct Authority (FCA) occasional paper on behavioural economics. I've done both but I'll focus on the latter.
The synopsis is that some consumers are prone to buying rubbish products for dodgy reasons so this might encourage firms who can spot this to build rubbish products to take advantage. And this might be something the FCA would wish to regulate.
The highly active FCA chief executive, Martin Wheatley, notes in his introduction that the regulator is now charged with promoting effective competition - which it believes should be based on price and quality.
The dangers of regulatory scope-creep
The paper describes the potential regulatory options with a clever use of framing - a device it refers to as part of the potential armoury of behavioural psychology.
Consumers make decisions on a whole raft of criteria, many of them irrational. But we cannot really define what a rational goal is so we cannot prescribe what a rational man would do in order to meet these goals.
Decision making is a complex mesh involving various explicit and implicit goals, some emotional drivers, a few rational elements and plenty of rationalisation which we interpret as truly rational.
The notion of emotional intelligence as clearly distinct from rational or cognitive intelligence is equally mechanistic - it's the complex interplay between the two that makes the whole decision.
So, investors buy when the market's high, less so when the market's low. That costs them about 20% of their potential gains from investment.
Some of them are inappropriately loyal to a firm they've insured with forever. They are famously reluctant to move banks. They run savings accounts paying 3% alongside long-term credit card debts costing them 15%. Lots of them don't make wills and the majority don't have an up-to-date one.
This article continues...
An ambitious objective
'Something completely new'
'Illusion of control'
Reasons to be cheerful
Total investment reaches £9m