The Board of the International Organisation of Securities Commissions (IOSCO) has published a report this Tuesday that outlines behavioral insights of retail investors, in an attempt to help its members improve regulation.
IOSCO members include the Financial Conduct Authority (FCA), the Australian Securities and Investments Commission (ASIC) as well as the Securities and Exchange Commission (SEC) of the United States, among others.
According to the report, The Application of Behavioural Insights to Retail Investor Protection, for the average person, the risks and information associated with investing are too complicated and too vast to accurately process and understand.
As a result, they take “shortcuts” to process this information, in much the same way that humans, in general, take short cuts to process all the information available to us. Because of this, many investors rely on biases to make their decisions, which could actually be working against them.
As set out in the report, some of these biases include overconfidence, over-extrapolation, and decision-making rules of thumb. Because of this, there are a number of ways in which investment information could be presented to make this process easier.
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Disclosures Need Improving, IOSCO Report Suggests
One of the ways which IOSCO outlines as an avenue for making the lives of retail investors easier is by adjusting the way in which financial firms disclose investment information and risks, stating the disclosure of all material information is necessary.
“However, such disclosure may not always be sufficient to meet this end. Individuals’ review of disclosed information may be colored by their internal heuristics and biases that may lead them to filter out or fail to notice relevant information and, as a result, make choices that run counter to their economic interests and financial goals,” the report states.
In order to improve the way in which financial information is disclosed, IOSCO suggests that important pieces of information should be placed where most investors are expected to focus their attention.
Secondly, “regulators may encourage or seek to ensure that disclosure providers simplify the language used in their disclosures where possible. Many regulators have issued guidance on the use of plain language.”
Another suggestion from the report is the use of graphical elements to help readers better understand the disclosed information, such as displaying investment fees as a rate or other metric which can be displayed graphically.