Applying Behavioral Insights to Public Policies A ... Financial empowerment policies trilogy can

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  • Flore-Anne Messy Deputy Head of DAF/FIN Division Executive Secretary of the International Network on Financial Education OECD Financial Affairs Division

    Applying Behavioral Insights to Public Policies

    A financial education (and consumer protection) perspective

    FINANCIAL EDUCATION AND INVESTOR EDUCATION

    CONFERENCE HOSTED BY CVM

    7-8 December 2015

  • 1.THE OECD/INFE PROJECT ON FINANCIAL EDUCATION

    2. WHY FINANCIAL EDUCATION (COUPLED WITH FINANCIAL

    CONSUMER PROTECTION) POLICIES MATTERS .. BUT MAY BE

    CHALLENGING

    3. HOW CAN BEHAVIORAL ECONOMICS SUPPORT MORE

    EFFECTIVE FINANCIAL EDUCATION (AND CONSUMER

    PROTECTION) POLICIES

    4. A PLAN TO MAKE FINANCIAL EDUCATION

    MORE EFFECTIVE

  • 1.THE OECD/INFE PROJECT ON FINANCIAL EDUCATION

    2. WHY FINANCIAL EDUCATION (COUPLED WITH FINANCIAL

    CONSUMER PROTECTION) POLICIES MATTERS .. BUT MAY BE

    CHALLENGING

    3. HOW CAN BEHAVIORAL ECONOMICS SUPPORT MORE

    EFFECTIVE FINANCIAL EDUCATION (AND CONSUMER

    PROTECTION) POLICIES

    4. A PLAN TO MAKE FINANCIAL EDUCATION

    MORE EFFECTIVE

  • INFE

    113 economies 260 public authorities

    A technical committee

    An advisory board

    Outreach to other communities through

    INFE Research Committee

    Partnerships with IOs, NGOS and

    the private sector

    Global and regional policy platforms and

    roundtables

    Asia

    Latin America

    MENA

    OECD/International Network on Financial Education (INFE) :

    A broad project with wide outreach and partnerships

    Work started in 2002! serviced by 2 OECD Committees

    International Gateway for financial education

    For more search : www.financial-education.org

  • OECD/INFE main work directions

    Framework : National Strategies (high-level principles, publication, policy handbook)

    Evidence & tools Financial literacy indicators adults youth (PISA) Evaluation Benchmarks : Core competencies

    Effective delivery INFE Research Committee Peer review Practical guidance Partnership & capacity building

    Target audiences Youth Women Migrants SMEs Vulnerable groups

    Sectoral issues

    Credit

    Saving & investment

    Pensions

    Insurance

  • The Overall Framework (2012) OECD/INFE High-level Principles and Policy handbook (NEW!)

    on National Strategies for Financial Education

    General instruments 2005

    Principles and Good practices on Financial Education and Awareness

    2014 OECD/INFE Guidelines for private and civil stakeholders in financial education

    Sectoral Good Practices 2008

    2 Good Practices for Financial Education relating to Private Pensions & for Enhanced Risk Awareness and Education on Insurance issues

    2009

    Good Practices on Financial Education and Awareness relating to Credit

    Methodological tools

    2011

    High-level Principles for the Evaluation of Financial Education Programme

    2013 & 2015 Toolkit on measuring Financial Literacy and inclusion

    2015 Core competencies on financial literacy for youth

    Target Audiences

    2012

    OECD/INFE Guidelines for Financial Education in Schools

    2013

    OECD/INFE Policy guidance on addressing womens and girls needs for financial education

    OECD/INFE policy and practical instruments

  • 1.THE OECD/INFE PROJECT ON FINANCIAL EDUCATION

    2. WHY FINANCIAL EDUCATION (COUPLED WITH FINANCIAL

    CONSUMER PROTECTION) POLICIES MATTERS .. BUT MAY BE

    CHALLENGING

    3. HOW CAN BEHAVIORAL ECONOMICS SUPPORT MORE

    EFFECTIVE FINANCIAL EDUCATION (AND CONSUMER

    PROTECTION) POLICIES

    4. A PLAN TO MAKE FINANCIAL EDUCATION

    MORE EFFECTIVE

  • Why Financial Education

    and Consumer Protection Matters

    A changing financial landscape

    More inclusive : but with some room for improvement !

    More risky : uncertain future and more individual responsibilities

    More innovative : increasing role of technology

    Without proper public policies: Negative spill over effects for all !

    Individuals and small businesses: Exclusion, overindebtedness, lack of savings for short & long term needs lack of trust, fraud & misselling

    Financial Industry: Missed market opportunities

    Governments : Remedy is more costly than prevention

  • Financial empowerment policies trilogy can help..

    Global recognition

    Financial Education

    Financial Consumer Protection

    Financial Inclusion

    G20 (2010) Principles

    for Innovative

    Financial Inclusion

    G20 (2011) High-Level

    Principles on Financial

    Consumer Protection

    developed by the OECD

    OECD/INFE(2012)

    High-Level Principles on

    National Strategies for

    Financial Education

  • On the demand side

    Low level of financial literacy in all parts of the world

    Overconfidence in once abilities and in the environment

    Different needs of individuals

    Lack of appetite for financial issues

    Difficult to change behaviors in the short term and to obtain lasting effects

    On the practitioner/policy side

    (Still) limited expertise and relevant research

    Not enough rigorous evaluation : uneasy and costly measure of outcomes

    Financial education (especially) like all education policies is a long term process while

    Resources and commitment at the policy level are often short term..

    But may be challenging

    This goes for both financial education and consumer protection

    The ultimate goal of both policies is to improve

    individuals financial wellbeing... but this is hard to define.

    and there are a number of operational issues

  • Low knowledge of key concepts and overconfidence

    Limited understanding of :

    the concept of compound interest

    Importance of risk diversification

    Consumers overestimate their knowledge :

    75% of US citizens have positive perceptions of

    their own financial knowledge, only 14% are

    able to answer all 5 simple financial literacy quiz questions correctly.

    Difficulty in several areas of financial behaviours

    Use of formal services

    Planning ahead for unexpected life events as

    well as important one such as retirement

    Responsible use of credit

    Groups at risks and in need

    young

    elderly population

    women

    low income

    Migrants

    MSME

    Still low and uneven level of financial literacy (OECD/INFE 2012 survey, OECD PISA, 2014)

  • Low level of adults financial knowledge worldwide : The example of the concept of compound interest (OECD, 2010, 2014)

    More data at www.financial-education.org

    Next OECD/INFE survey in 2015

    http://www.financial-education.org/http://www.financial-education.org/http://www.financial-education.org/

  • 15%

    23%

    30%

    22%

    10%

    OECD average-13

    Distribution of student performance

    625 and above

    550 to

  • 1.THE OECD/INFE PROJECT ON FINANCIAL EDUCATION

    2. WHY FINANCIAL EDUCATION (COUPLED WITH FINANCIAL

    CONSUMER PROTECTION) POLICIES MATTERS .. BUT MAY BE

    CHALLENGING

    3. HOW CAN BEHAVIORAL ECONOMICS SUPPORT MORE

    EFFECTIVE FINANCIAL EDUCATION (AND CONSUMER

    PROTECTION) POLICIES

    4. A PLAN TO MAKE FINANCIAL EDUCATION

    MORE EFFECTIVE

  • Policy handbook on national strategies for

    financial education, G20, OECD, 2015

    (based on INFE member contributions and

    accumulated research)

    Review of research on what works on financial

    education for long-term saving and investments,

    OECD/INFE, 2015

    Behavioral economics and financial consumer

    protection, 2015, G20/OECD Task Force on

    Financial Consumer Protection

    Can behavioral economics be used to make

    financial education more effective? In Improving

    Financial Education Efficiency, OECD, 2011

    Global database of financial/investor education

    initiatives : www.financial-education.org

    Selected (OECD) sources :

  • Individuals biases (Della Vignas taxonomy, 2009)

    Non-standard preferences

    Time inconsistency

    Present bias

    Problems with self control

    Reference dependence

    Statu quo bias (loss

    aversion & endowment

    effect)

    Mental accounting

    Social preference

    Non-standard beliefs

    Overconfidence

    and over-optimism

    Non-standard

    probalistic thinking

    Non-standard decision making

    processes

    Limited attention

    Emotions and Affect

    Behavioral economics: the basics

    Bounded rationality we are not homo economicus

    Use psychology, cognitive and social sciences to identify :

  • Public interventions are needed if the situation is :

    Significantly harmful for either consumers, the market (unfair competition) or the overall economic situation

    Due to non-standard consumer behaviors (or biases)

    Different possible levels of (cheap) intervention :

    Framing information to induce a particular behavior

    Change the choice environment (limited, auto-enrolment, default option)

    Control product marketing to avoid competition based on consumers biases rather than their interests

    Control/ban of