Behavioural Economics and Vulnerable Consumers Bookmark and Share Button

The Issue...

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. 

Our Objective...

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.

Our Current Position...

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:

  • Work harder to understand the differences in behaviour for different groups of consumers, particularly vulnerable consumers.
  • Identify where these different behaviours may lead to different outcomes for different consumers and where this may cause vulnerable consumers to be particularly disadvantaged.
  • Identify where the market and/or current regulator interventions are failing to address this disadvantage and adapt policies and interventions to respond to these differences in behaviour and address differential outcomes, testing these policies and interventions with experiments where possible.
  • Are cautious about relying solely on providing information as a way of responding to differences in behaviour or addressing differential outcomes.Some evidence suggests that too much information or information that is too complex can lead to poorer consumer decisions and may thus havea detrimental effect on consumer welfare.

Relevant Links...

Behavioural economics and vulnerable consumers: Panel introduction, Dec 2010 (PDF)

Behavioural economics and vulnerable consumers: summary of evidence, Dec 2010 (PDF)

Our Impact...

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. 

Future Action to be Taken...

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.

>> Our Actions, Outputs and Stakeholder Engagement