ASIC increasing use of behavioural economics across its regulatory business

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ASIC yesterday released two reports of behavioural economics (BE) research experiments conducted as part of its push to better understand market and consumer behaviour.

The behavioural experiments conducted by the Queensland Behavioural Economics group (QuBE), were commissioned to explore:

  • possible behavioural ‘biases’ impacting consumer decisions about investing in hybrid securities rather than bonds or shares. A hybrid security is one that looks like debt but has the risk characteristics of equity, and
  • how to improve ASIC’s communication with directors of firms in liquidation to increase their compliance with the law.

ASIC Chairman Greg Medcraft said, ‘Undertaking evidence-based studies about how people think and behave in the real world is going to be increasingly important to smarter regulation. These studies provide valuable insights into how people make decisions and how ASIC can improve outcomes.’

Report 427 Investing in hybrid securities: Explanations based on behavioural economics (REP 427) provides insight into people’s decision making when investing in hybrid securities rather than in bonds and shares. In the experiment QuBE found participants who were subject to an ‘illusion of control’ or ‘overconfidence’ bias relatively increased their hybrid allocation in a mock portfolio.

This research complements ASIC’s work on understanding how hybrids are sold to investors and increasing investor education about hybrid risk. The findings are also consistent with earlier research showing a desire for control is a strong driver among SMSF investors when deciding to set up and manage their own super fund. About two-thirds of Australian hybrid investors are SMSF investors.[1]

BE insights can also be used to help ASIC’s communication by presenting information in a way people can process more easily.

Report 428 Improving communication with directors of firms in liquidation (REP 428) suggests even small alterations to communication, such as the order of messages in a letter to directors of companies in liquidation, can increase compliance. The report highlights there are likely to be two types of directors who fail to comply: those wishing to comply but who are overwhelmed and those intentionally non-compliant. It identifies opportunities to increase compliance through targeted ‘nudges’ and help for those wishing to comply.

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[1] According to Investment Trends, in November 2013 SMSFs accounted for ‘68% of the market by investor numbers’ (Investment Trends, November 2013 Investor Product Needs Report, p 22, November 2013).

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