A practical application of behavioural experiments in financial regulation.
Why are we publishing this paper?
We are committed to encouraging debate among academics, practitioners and policymakers in all aspects of financial regulation. To facilitate this, we publish a series of Occasional Papers in financial regulation, extending across economics and other disciplines.
As demonstrated in our Occasional Papers 1 and 2, we have been exploring practical ways of using behavioural economics to improve our regime. As part of this exploration, this paper discusses the pros and cons of using behavioural experiments in creating regulatory policy. It finds that these experiments have an important role to play, often providing insights into the way markets work that may not be possible to obtain otherwise.
The paper illustrates this by describing an innovative experiment developed for the FCA’s first competition market study, which examined how consumer behaviour is affected when general insurance is sold as an add-on product to a primary purchase.
The paper also describes the results of this research, which show that the ‘add-on mechanism’ weakens consumers’ ability to discipline firms by shopping around and comparing products effectively. This in turn has implications for possible remedies.
- Key results graphic
- Full technical report on the experimental design and results (London Economics)
The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Financial Conduct Authority (FCA). All errors or omissions are the authors’ sole responsibility.
Need more information?
- General insurance add-ons market study
- Occasional Paper No.1: Applying behavioural economics at the Financial Conduct Authority
- Occasional Paper No.2: Encouraging consumers to claim redress: evidence from a field trial
- Making competition king – the rise of behavioural economics at the FCA speech by Martin Wheatley (March 2014)
- Human face of regulation speech by Martin Wheatley (April 2013)