As the application of behavioral finance becomes more mainstream in Western nations, and agencies like the U.S. Consumer Financial Protection Bureau are working on behaviorally informed policymaking, behavioral finance has also captured the interest of emerging market countries, where policymakers are equally keen to apply some of its ideas and principles as they formulate key legislation for consumer financial protection.
Many of these countries are still relatively near the beginning of their journeys toward becoming market economies, says Rafe Mazer, a financial sector analyst at CGAP, an independent policy and research center housed within the World Bank in Washington, D.C., that’s dedicated to advancing financial access for the world's poor. They have just begun to develop the proper institutions and correct policies for consumer financial protection, but behavioral finance can improve these laws and policies and make them more meaningful and effective as these markets evolve, he says.
“Most of the research on behavioral finance comes out of the [United States] and Europe, so there’s a real vacuum in places like Brazil, Mexico and China, where financial consumer protection is just as important as it is in the West,” Mazer says.
CGAP, together with global behavioral consultancy group Ideas42, recently hosted a workshop in Washington, D.C., that brought together leading behavioral finance researchers and policymakers from emerging market nations who are working in the area of consumer protection.
“We wanted to get together researchers on one side, and policymakers who are interested in the research on the other, to exchange ideas and thoughts and be able to discuss consumer behavioral traits across the world,” Mazer says.
This sort of exchange would provide policymakers with the tools they need to come up with measures to help consumers take better and more informed financial decisions. By connecting the findings from the vast body of research now available in the West with regulatory approaches being tried out in emerging markets, “we can try to figure out what makes a difference in consumer protection by identifying universal behavioral traits, and applying that to different consumer segments and financial product types,” Mazer says.
Financial over-indebtedness, for instance, widely documented as a common behavioral trait in the developed nations, is rapidly becoming one in the emerging markets as well, because of the huge proliferation of credit in all its shapes and forms – bank loans, credit cards, direct deposit accounts and the like. Research that’s been done in the United States on the causes of over-indebtedness and the behavior that drives it can help countries like Brazil and Mexico as they formulate policies, Mazer says, particularly with determining within different socio-economic groups how much of it is due to behavior and not necessity.
Another very common consumer behavioral trait is the tendency to complain. It cuts across jurisdictions and socio-economic classes, Mazer says, and is truly personality driven. To the extent that policymakers can reach out to people who are complainers regardless of their socio-economic class, they have a better chance of creating measures that have greater impact.
“When you get into policy making, you are really trying to get down to what the universal consumer behavioral traits are with respect to consumer finance,” Mazer says.
As much as every country is at a different stage in its financial sector development, studying consumer behavior and being able to find commonalities across jurisdictions can go a long way toward more informed policy making and consumer protection legislation. Emerging market nations can learn a great deal from the research and experiences of Western Europe and the United States, Mazer says, and CGAP intends to continue its efforts to bring both researchers in behavioral finance and consumer protection policymakers together.