Behavioural economics suggests that, in contrast to traditional economic models, consumers do not act in a perfectly rational manner. Consumers have limits to their ability to take in information; they are influenced by how things are presented, often to the extent of making bad decisions; they tend to be bad at anticipating the future; they care about other people and fairness; and they care more about losses than gains. Regulators in the UK, including Ofcom, have been looking at the implications of behavioural economics for how they approach regulation. The Panel welcomed this, but was concerned that vulnerable consumers may be more likely to display some of the biases identified by behavioural economics, and that these potential differences should be identified and taken into account.
To examine the principles of behavioural economics (BE) to ensure that policy makers take into account how consumers, particularly disadvantaged consumers, make decisions as part of policy making.
Vulnerable consumers, particularly low income consumers and, to a lesser degree, older consumers, are more likely to display the biases identified by behavioural economics. This can put them at particular disadvantage in complex markets such as communications. It is crucial therefore that regulators and policy makers:
Behavioural economics and vulnerable consumers: Panel introduction, Dec 2010
Behavioural economics and vulnerable consumers: summary of evidence, Dec 2010
The Panel's work influenced the Ofcom team working on this area. Ofcom amended its internal literature review and policy guidance to reference the Panel's work and the particular needs of vulnerable consumers that this work highlighted. These guidelines are used by project teams across Ofcom when thinking about the implications behavioural economics has for their work.
The report influenced the Panel's response to a number of issues in the communications sector, with Panel advice emphasising the need to be cautious of the use of information and think carefully about how information will be used by consumers. For instance, this was one of the key themes of the Panel's responses to the Ofcom and EU consultations on net neutrality. This was taken on board by Ofcom, who are planning to use behavioural economics experiments to test what kinds of information provision would be appropriate, including for more vulnerable consumers.
The Panel's report generated debate among consumer bodies more widely, including consideration of the appropriate role of information in consumer protection and empowerment.
The Panel will be using the paper to inform its approach to a range of policy issues and will continue to encourage Ofcom, and regulators in general, to take the real behaviour of different groups of consumers, particularly vulnerable consumers, into account.
Across 2009 the Panel was involved in a number of discussions with Ofcom about its approach to consumer information and empowerment. In March 2009 Panel members received a discussion paper from Ofcom setting out Ofcom's approach to consumer information. The Panel advised Ofcom that its process for making decisions about information provision appeared to be fragmented rather than global, and that there could be value in looking at the entire set of consumer information requirements. The Panel therefore requested a strategic discussion with Ofcom's project director responsible for its consumer information work streams.
In April 2009 it was agreed that there would be a Panel brainstorming session with Ofcom colleagues on consumer information. This meeting took place in July 2009 and explored ways in which Ofcom could take a more holistic approach to consumer information and empowerment, rather than approaching it on a project by project basis.
At its November 2009 meeting the Panel noted that the consumer empowerment project had dropped down Ofcom's list of priorities. They emphasised that this was an area of priority to the Panel, and that is was important to gain a strategic view of all the issues in this area by identifying how consumers use information. In light of this, the Panel decided to consider doing research to better understand consumer behaviour and how consumers actually use information.
The Panel noted that Ofcom was compiling a literature review on the implications of behavioural economics for regulation and that the findings of the review would be included in Ofcom's revised policy guidelines. The Panel engaged regularly with Ofcom colleagues involved in this work, providing written input and advice.
The Panel was keen to ensure that this work took account of any specific differences in the behaviour of vulnerable groups of consumers. In February 2010 the Consumer Panel therefore commissioned Dr. Pete Lunn and Dr. Sean Lyons from the Economic and Social Research Institute (ESRI) to review the latest findings of international academic research into behavioural economics, with a particular focus on whether those consumers traditionally seen as more vulnerable, e.g. the elderly, people with a disability or people on low incomes, are more likely to display biases in their decision-making, and if so what the implications are for those consumers and for approaches to regulation.
The Panel discussed the issues with other consumer groups, including Which?, the Legal Services Board Consumer Panel and Consumer Focus, sharing knowledge and identifying cross-sectoral implications.
The Panel published a report setting out the key findings and recommendations from the work in December 2010. The main findings of the work were incorporated into Ofcom's revised policy guidelines.