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 Flore-Anne Messy Deputy Head of DAF/FIN Division Executive Secretary of the International Network on Financial Education OECD Financial Affairs Division
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
OECD/International Network on Financial Education (INFE) : A broad project with wide outreach and partnerships Work started in 2002! serviced by 2 OECD Committees Global and regional Outreach to other INFE policy platforms and communities through roundtables 113 economies Asia INFE Research 260 public Committee authorities Latin America A technical committee Partnerships with IOs, NGOS and MENA An advisory board the private sector → 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) Sectoral Evidence & Effective Target issues tools delivery audiences Credit Financial INFE Research Youth Committee literacy indicators Women Saving & Peer review adults investment youth (PISA) Migrants Practical guidance Pensions Evaluation SMEs Insurance Partnership & Benchmarks : Vulnerable capacity building Core groups competencies
OECD/INFE policy and practical instruments The Overall Framework (2012) OECD/INFE High-level Principles and Policy handbook (NEW!) on National Strategies for Financial Education General Sectoral Good Methodological Target Audiences instruments Practices tools • 2011 • 2012 • 2005 • 2008 High-level Principles for the Principles and Good 2 Good Practices for OECD/INFE Guidelines Evaluation of Financial practices on Financial Financial Education relating for Financial Education in Education Programme Education and Awareness to Private Pensions & Schools for Enhanced Risk • 2013 & 2015 Awareness and Education • 2014 on Insurance issues • 2013 Toolkit on measuring OECD/INFE Guidelines for private and civil • 2009 Financial Literacy and OECD/INFE Policy stakeholders in financial inclusion guidance on addressing education Good Practices on Financial women’s and girls’ needs Education and Awareness • 2015 for financial education relating to Credit Core competencies on financial literacy for youth
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 OECD/INFE(2012) High-Level Principles on National Strategies for Financial Financial Education Education G20 (2011) High-Level Principles on Financial Consumer Protection developed by the OECD Financial Financial Consumer Inclusion Protection G20 (2010) Principles for Innovative Financial Inclusion
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 On the demand side On the practitioner/policy side • Low level of financial literacy in all • (Still) limited expertise and relevant parts of the world research • Overconfidence in once abilities • Not enough rigorous evaluation : and in the environment uneasy and costly measure of • Different needs of individuals outcomes • Financial education (especially) like • Lack of appetite for financial all education policies is a long term issues process while • Difficult to change behaviors in • Resources and commitment at the the short term and to obtain lasting policy level are often short term .. effects
Still low and uneven level of financial literacy (OECD/INFE 2012 survey, OECD PISA, 2014) Low knowledge of Difficulty in several areas Groups at risks key concepts and of financial behaviours and in need overconfidence Limited understanding of : young • the concept of compound Use of formal services interest • Importance of risk elderly population diversification women Planning ahead for unexpected life events as Consumers overestimate well as important one their knowledge : such as retirement low income 75% of US citizens have positive perceptions of their own financial Migrants knowledge, only 14% are able to answer all 5 simple Responsible use of financial literacy quiz credit questions correctly. MSME
Low level of adult’s 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
Distribution of student performance PISA financial literacy (OECD, 2014) Gaps in financial literacy performance among 15-year-old students OECD average-13 625 and Top performers 10% above 550 to 22% <625 475 to 30% <550 400 to 23% <475 Less than 15% Baseline 400 points More data at : http://www.oecd.org/pisa/keyfindings/pisa-2012-results-volume-vi.htm Next exercises in 2015 & 2018
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
Selected (OECD) sources : • 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
Behavioral economics: the basics Bounded rationality – we are not homo economicus … Use psychology, cognitive and social sciences to identify : Individuals’ biases (Della Vigna’s taxonomy, 2009) Non-standard Non-standard decision Non-standard preferences beliefs making processes Overconfi Non- Time Reference dence standard Limited Emotions Social preference and over- probalistic attention and Affect inconsistency dependence optimism thinking Statu quo bias Problems Present Mental (loss with self bias accounting aversion & control endowment effect)
Behavioral findings and public interventions 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 Nudging 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 unsuitable products (or require to include special features)
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