The aim of this Occasional Paper is to help us estimate the benefits of our interventions, while recognising the challenges.
In retail financial markets, given the complexity of products, a lack of complete and transparent information, and the presence of behavioural biases and cognitive limitations in our decision making, we as consumers may make decisions that are not in our best interests.
For example, we may purchase a financial product at a price higher than we might have secured had we been better informed about the product, or had better considered our long-term needs. In the words of Thaler & Sunstein (2008):
“In many cases, individuals make pretty bad decisions – decisions that they would not have made if they had paid full attention and possessed complete information, unlimited cognitive abilities, and complete self-control.”
Many of the problems observed in retail financial markets may be underpinned by such “suboptimal” behaviour. Estimating the extent to which consumers’ decisions diverge from their best interests, and how far regulatory intervention can address such problems, is a difficult task. Regulators seek to do both to identify and reduce consumer harm in these markets.
This paper discusses how it might be possible to estimate and assign monetary values to the benefits resulting from regulatory interventions aimed at addressing behavioural distortions and informational asymmetries.
The paper finds that all the available techniques for assessing choice suffer from various implementation, data availability, and resource issues. Judgement is therefore required to determine which approach to adopt on a case-by-case basis.
More importantly, given their respective limitations, these valuation techniques can best be used as complementary measures for providing a more complete view for the policy maker of consumers’ true preferences and the likely benefits of intervention.
William Lee works in the Competition & Economics Division of the Financial Conduct Authority.
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