Our insights - Henry Davis York

World leading behavioural economist – setting the agenda with Professor Cass R. Sunstein

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HDY is proud to have recently hosted Professor Cass R. Sunstein, the Robert Walmsley University Professor at Harvard and former Administrator of the White House Office of Information and Regulatory Affairs.

On 23 November, Professor Sunstein joined a gathering of senior banking executives and counsel at HDY to speak on behavioural economics, and the application of 'nudging' in the financial services sector.

He discussed common investor mistakes, such as availability heuristics, unrealistic optimism, myopia, overconfidence, loss aversion and herd behaviour. Professor Sunstein had 4 key words for making choice architecture more likely to produce good decisions: automatic, simple, intuitive and meaningful.

To illustrate his point, Professor Sunstein used a few examples:

  • People may make poor investment decisions because they take a myopic or short term view - but make better decisions if they must discuss with an advisor before trading
  • A comprehensible home energy report, particularly when coupled with information that a household uses more energy than average, is more effective at reducing energy use than a significant price increase
  • People eat a healthier meal at a cafeteria if presented with healthier foods ahead of less healthy options

Professor Sunstein’s address at HDY followed his earlier keynote speach at the HC Coombs Forum Public Policy Conference at ANU. At this conference, Assistant Cabinet Secretary Scott Ryan announced that the Government will establish a Behavioural Economics Team of the Australian Government - to be known as BETA and housed inside the Department of the Prime Minister and Cabinet.

BETA will be headed by Professor Michael Hiscox of Harvard University. In establishing BETA, specific reference was made to the 'nudge' approach to policy which has been adopted with vigour in the US since 2008 after Professors Sunstein and Thaler published their bestseller, Nudge.

At the launch, Assistant Cabinet Secretary Scott Ryan said he found this area of research "fascinating" and "behavioural sciences, particularly as they are applied to economics, can provide fascinating insights into how current policy settings drive and deliver particular responses or results".

Both the ATO and NSW Behavioural Insights team are already applying behavioural economics principles to support their initiatives. BETA will take behavioural economics further into the regulatory space at a federal level.

Professor Sunstein's tour of Australia continued with presentations to superannuation industry leaders at the ASFA Inaugural Leadership Symposium and QUT's Business School, with an audience of over 200 people.

Professor Sunstein is the author of many books, including most famously Nudge: Improving Decisions about Health, Wealth and Happiness (with Richard H. Thaler, 2008) and Why Nudge (2014). These books use an analysis of behavioural economics to explore the idea of a 'nudge' - being choice architecture that influences the decisions people make. In Why Nudge, Professor Sunstein goes on to consider when and how a nudge might be used by government to achieve better regulatory outcomes.

Behavioural economics part of regulatory agenda

Behavioural economics and its implications for financial institutions and regulators will be central to the regulatory debate and are now firmly entrenched on the Turnbull Government’s agenda.

The study of behavioural economics can provide valuable insights into the predictable biases and inherent cognitive limitations of how and why customers make financial decisions. With these behavioural insights, institutions can develop strategies, products and information which encourage customers to make better financial decisions, improving the financial outcomes for customers, building greater customer-centricity and ultimately building trust.

The regulatory imperative of putting customers at the heart of business and a comprehensive change in the direction of regulatory pressure has brought behavioural economics to the forefront of the financial services industry.

Principles of behavioural economics are already being used by the FCA in the UK and ASIC in Australia as tools for future investigations and reviews. Consider ASIC's reports in 2015 regarding hybrid securities and interest-only loans. As recently as August 2015, ASIC Chairman, Mr Greg Medcraft delivered a speech entitled 'Trust and confidence, culture and ethics: The right nudge in shaping communities globally and locally.'

An understanding that supports practical integration of behavioural economics into strategic thinking presents a considerable opportunity to forge a productive and effective relationship with regulators.

HDY's Regulatory Risk + Strategy Team look forward to leading the discussion.

 

Our Regulatory Risk + Strategy Team

Scott Atkins

Partner

61 411 441 234

61 2 9947 6059

scott.atkins@hdy.com.au

Nikki Bentley

Partner

61 422 004 806

61 2 9947 6245

nikki.bentley@hdy.com.au

John Martin

Partner

61 418 229 942

61 2 9947 6318

john.martin@hdy.com.au

Kathy Merrick

Partner

61 407 214 611

61 2 9947 6341

kathy.merrick@hdy.com.au

Claudine Salameh

Partner

61 402 451 770

61 2 9947 6489

claudine.salameh@hdy.com.au