MODULE 1 INTRODUCTION TO BEHAVIORAL POLICYMAKING

Transcription

1 MODULE 1 INTRODUCTION TO BEHAVIORAL POLICYMAKING 1

2 Acknowledgments This deck was researched and prepared by Rafe Mazer and Alexandra Fiorillo (GRID Impact). The authors would like to thank our colleagues at CGAP. Specifically, the authors would like to thank Silvia Baur and Greg Chen (CGAP), Katherine McKee (World Bank), and Stanislaw Zmitrowicz (Central Bank of Brazil). This is a culmination of more than five years of work by CGAP to pioneer behavioral research methods for consumer protection in emerging markets. This includes technical assistance with consumer protection policy makers in more than 10 jurisdictions and training of hundreds of policy makers on behavioral research and design methods. Please visit cgap.org's publications page for even more on this topic. This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) By using the content of this publication, you agree to be bound by the terms of this license. All queries on rights and licenses should be addressed to CGAP Publications, 1818 H Street, NW, MSN IS7-700, Washington, DC USA; cgap@worldbank.org; CGAP.org. Consultative Group to Assist the Poor/World Bank Group

3 Behavioral Research Behavioral research seeks to understand the predictable but often unintuitive ways people make decisions, form intentions, and decide whether to follow through with them.

4 This course will help policy makers and those who support policy makers build better consumer protection policies that reflect how consumers and financial institutions really behave.

5 The Big Three Behaviors That Matter in Financial Consumer Protection 1. People have inconsistent preferences. 2. People have inconsistent behaviors. 3. Factors that are non-economic, small, and often overlooked can play a large role in our behavior. How do these behaviors affect the decisions we make in our daily lives?

6 Inconsistent preferences can block us from doing what we intended to do Nighttime Me prefers to go running in the morning but when I wake up the next day, Morning Me prefers to sleep in.

7 1 Inconsistent preferences can lead us astray of our financial goals I may want to save money for my business, my children s education, or any other good, productive use but when my children ask me to take them out to eat, my preference to save becomes secondary to my preference to not miss out on the experience with them.

8 But there is good news Inconsistent preferences across time or context are often consistent, which makes them predictable. If we understand these preferences, we can design solutions for both Nighttime Me and Morning Me to reduce the risk of poor decision-making.

9 Inconsistent behaviors can lead to an intention-to-action gap For example: What I say I want to do is not always what I do. I can tell you that I want to shop around to find the best deal on a loan Source: CGAP video on Behavioral Research for Policy Makers

10 but then I go to the bank closest to work because it is convenient, and I decide not to check other banks offers.

11 But there is good news here, too Inconsistent behaviors are often consistent across individuals, which makes them predictable, meaning we can design new tools like an app that compares bank products available in a certain location to help consumers achieve their stated goal of shopping around for a savings account.

12 Non-economic factors can play a big role in our economic decisions In consumer finance, we may expose ourselves to greater financial risk because of decisions we make that have very little to do with finance.

13 For example, An Indonesian bank tested several different ways of presenting their customers with new credit cards. Customer were offered the chance to upgrade their credit card. Some of them were offered credit cards labeled "Platinum". Others were offered a nondescript card. Both cards offered the same benefits, but consumers did not see it that way.

14 21% of customers who were offered the Platinum card accepted the offer. 14% of those who were offered the nondescript card accepted the offer. Lower-income consumers showed more interested in the Platinum card than did higher-income customers. Platinum cards were more likely to be used in social settings (bars, restaurants, etc.) than were the nondescript cards consumers may have wanted to signal their Platinum status to their peers. How financial products are framed and positioned can greatly influence customer behavior.

15 Behavioral research can identify challenges and it can solve them, too. Can a simple change in how disclosures are made help consumers avoid debt traps? Here s a real-life consumer protection design from the payday lending industry in the United States

16 A payday lender in the United States worked with researchers to test different types of disclosures of payday loan costs and repayment obligations to see how they affected borrower behavior.

17 One of four approaches was randomly assigned to payday loan consumers: 1. Showing the number of consumers who rolled over their payday loans, which leads to extra costs for the borrower. 2. Using a calendar to increase saliency of the loan due date. 3. Comparing the APR of payday loans to other sources of credit (e.g., credit cards or auto loans). 4. Showing how the costs of a payday loan compared to that of a consumer loan through a credit card increased over time.

18 Which disclosure format reduced repeat use of payday loans the most? 1. Portion of consumers who renew their loans 2. Reminder of loan due date IMPORTANT LOAN DOCUMENT 2 1/2 people will pay it back without renewing 2 people will renew 1 or 2 times 1 1/2 people will renew 3 or 4 times 4 people will renew 5 or more times Remember your loan is due on: Out of 10 people taking out a new payday loan Benchmarking of interest rates of other loans Medium Annual Interest % (From government surveys) Payday Loan 443% Payday Loan 18% Payday Loan 16% Payday Loan 10% Annual interest rates on different types of loans 4. Accumulation of cost over time PAYDAY LENDER (assuming fees is $15 per $100 loan) If you repay in CREDIT CARD (assuming a 20% APR) If you repay in 2 Weeks $45 2 Weeks $ Month $90 1 Month $5 2 Months $180 2 Months $10 3 Months $270 3 Months $15 Cost in fees or interest if you borrow $300

19 Format 4 was the most successful and used two important behavioral concepts Saliency. Instead of using percentages as in Format 3, using dollar values makes costs easier to understand. Present-bias. Showing future costs in a simple way helps consumers overcome the tendency to ignore future consequences when making financial decisions. 11% reduction in repeat borrowing PAYDAY LENDER (assuming fees is $15 per $100 loan) If you repay in CREDIT CARD (assuming a 20% APR) If you repay in 2 Weeks $45 2 Weeks $ Month $90 1 Month $5 2 Months $180 2 Months $10 3 Months $270 3 Months $15 Cost in fees or interest if you borrow $300

20 Common Behavioral Biases in Consumer Protection Policy Behavioral research sheds light on the choices and behavior of consumers and providers. It helps policy makers test new policies and rigorously measure how they impact consumer and provider behavior. The next four slides describe the most relevant behavioral biases for consumer protection. You can use these key insights to improve your consumer protection policies.

21 Decision-Making Hassle Factors Information/Choice Overload Consumers must submit yet another form to enroll in an insurance product tied to their savings account. Consumers find comparison tables overwhelming and end up not bothering to compare products because there is too much information to process. Loss Aversion Consumers overvalue benefits of their existing insurance plan and do not switch plans. Mental Accounting Consumers spend $100 from their salary more carefully than $100 they find on the street.

22 Personal and Social Context Social Norms Consumers enroll in a savings account because their co-workers have done so. Psychology Of Scarcity The extra stress of making a financial decision when consumers have limited finances causes them to either ignore the decision or make a bad decision. Status Quo Bias Consumers do not opt out of their existing insurance plan during an annual renewal window. Reciprocity Consumers feel obligated to take a loan from an institution that gives them a small token gift.

23 Time Inconsistency Planning Fallacy Consumers underestimate the time it will take to develop a financial plan for their household and they give up part of the way through. Present Bias Consumers choose a lower return investment that pays out in 6 months over a higher return that pays out in 12 months. Hyperbolic Discounting Consumers ignore the high cost to repay a loan and focus on the ability to access cash immediately.

24 Belief Biases Availability Bias Consumers overvalue their last experience with a bank when considering taking a new product with this bank. Anchoring Consumers decide a loan is good value because it costs less than the other two loans next to it in an advertisement. Salience Consumers Consumers do not appreciate the cost of a loan because they do not understand the concept of annual percentage rate.

25 Summary This course comprises four short learning modules that connect behavioral concepts to consumer protection priorities policy makers face and share use cases from policy makers across the globe: Disclosure and transparency Fair treatment and sales practices Recourse and complaints handling Financial capability

26 Let s get started! Learn how behavioral research helps you address four key consumer protection policy challenges, click on one of these Learning Modules: Transparency and disclosure Sales practices and fair treatment Recourse and complaints handling Financial capability