Since its inception, the UK's Financial Conduct Authority (FCA) has shown a keen interest in Behavioral Economics. Its first Occasional Paper, released in April 2013, was based on “Thinking, Fast and Slow” by Professor Daniel Kahneman, and focussed on consumer choice and the ways in which consumers’ decisions can be knowingly—or unknowingly—shaped by firms.
In its most recent publications on the topic (Occasional Papers 24 & 25), the FCA transfers this thinking into the world of compliance within firms. While the paper draws from a number of sources, it is firmly based on the work of Professor Dan Ariely.
Rationalizing Poor and Improper Choices
In works such as the “The Honest Truth about Dishonesty”, Ariely has discussed our ability to rationalize imperfect choices. He demonstrates this through a simple honesty test through which he finds that good, ordinary, decent people (just like you and me) are able to rationalize a mild level of dishonesty.
The key point is that these rationalizations such as “Everyone does it”, “It’s only fair”, “It doesn’t hurt anyone” and “It’s not my responsibility” sit at the heart of almost every enforcement action we have seen in recent years. Ordinary, fundamentally honest individuals are capable of making poor decisions that then lead to adverse consequences for both them and their firms.
What is perhaps more interesting is what can be done to counter these rationalizations. Here, Ariely’s work is more optimistic. In particular, he has found that value codes, and reminders of value codes, create that vital pause between “can” and “do” into which the word “should” forces its way.
Behavioral Economics and Compliance Training
Ultimately, the Financial Services Industry needs to generate a culture in which decisions are taken on the basis of “I know I can do this, but should I do this?”. Developing this mindset creates that vital sense of ownership and engagement which the FCA is so focused on at the moment.
Clearly, there are other issues involved in making a “Compliance Culture” work within a firm, linked to remuneration, rewards and the culture of the business. However, ownership and engagement by every individual are vital.
What Does This Mean in Terms of Training?
In our experience, these insights from the world of Behavioral Psychology have proved particularly effective in stimulating vibrant classroom discussions and creating a new way of thinking about the challenges Compliance and Risk face in our markets.