Friday, 27 December 2013

The Financial Conduct Authority sends itself up most gloriously

One of my fellow 'bloggers asked me several months ago what I thought of the FCA's Occasional Paper #1 Applying behavioural economics at the Financial Conduct Authority, and I have finally got round to reading it.

Most of it is quite sensible actually, even though it only scratches the surface and there is a spelling mistake at the top of page 45. The inside joke is on page 35:

Box 3: Detecting inconsistencies in choices

The following can help us identify whether consumers are making mistakes…

ii. Consumers’ choices changing in response to variation in irrelevant factors, such as how information is presented. For example, greater willingness to take up a personal loan offer when a photograph of a woman is added to a letter.

Inevitably, the one single photograph in the whole 71 page document is on the front page:


Ian Hills said...

The frosty femme should be put on all contracts, to make people think again.

Mark Wadsworth said...

IH, woah! Do I detect an undertone of Gingerism there? From my point of view, she is One Of Us.

Ian Hills said...

So now the world knows.....

Lola said...

I have also read it - and I think it is just stating the bleedin' obvious.

Various people use 'behavioural economics' in various ways. e.g. it is taught as a way of getting more sales, or IM's use it as a market timing tool, and regulators use it to justify more interventions.

Personally I don't think it is 'economics' at all. I think it is a branch of psychology. And writing this paper has given lots of work - paid by the taxpayer - to people who enjoy sitting around thinking about stuff. It's sort of mental masturbation for intellectuals.

But as a tool on which to base public policy, especially regulatory policy, I think it is toxic.

Mark Wadsworth said...

L, yes it is stating the obvious, that does not stop it being true.

And I don't think you can possibly draw an absolute clear line between "psychology" and "economics", it's all about "what do people do and why".

For comparison - when you are designing traffic layouts, you also have to know how and why drivers behave, sign posts have got to be where people are most likely to look for them, some drivers are stupid and need extra signals and instructions etc.

It's not sufficient to be aware of what a sane normal driver would do in a well serviced vehicle on a clear day.

Clearly, lots of consumers have been ripped off by banks etc over the centuries, it's one scandal after another after another, so there's no harm in investigating why people keep falling for it time after time.

Lola said...

MW Did you know that I am also a highway engineer, letters after my name and everything?

And as such I can state categorically that 80% of traffic management is bollocks. It's just remote control road rationing by ignorant bureaucrats. The best 'traffic management' is to leave all highway users to sort it out for themselves as much as humanly possible and supply some clear route guidance and hazard awareness. That and 'rules of the road' like priority from the right are all that is needed. The developments in 'shared space' recognise this and they work well.

I agree (and you know I do) about rip off banks, but that is because of regulationism (and crony capitalism) not despite it. You only need two words to know this is true - Hector and Sants.

And, all this regulationism creates stupendous quantities of moral hazard - people no longer think for themselves. If you don't understand a contract - don't sign it. On the other side banks behave badly because they are encouraged to do so (they were told to sell PPI by the FSA). They are part of the whole gummint/central bank/commercial bank nexus.

No, I agree, there is no clear line between psychology and economics, human action is about how people react and act, but making a special segment of economics 'behavioural', is just self serving logic chopping.

Mark Wadsworth said...

L: "Did you know that I am also a highway engineer, letters after my name and everything?"

Yes of course, that's why I used it as a reference.

And we both know that traffic lights by and large are a complete disaster, you do not need to apply deeper logic to it, you just observe what happens.

But we also know that clear road signing telling people where to go is a huge plus - there is no point saying that regulars and locals will know where to drive and newcomers and out of towners will magically follow them.

The bit which the FCA erroneously take as a given is that there is some sort of demand for "financial products" in the first place, and implicit is the notion that "people should save more for retirement" for example.

Well, if people paid less tax on their incomes, there'd be less need for "tax breaks for pensions" and so on, people with a few bob to spare and a bit of foresight would save and poor people and stupid people get their Citizen's Pension, job done.

So the weakness in the FCA thing is that they don't point this out, they are merely trying to find the best way of achieving the wrong objective.

Lola said...


Otherwise - precisely.