Behavioural Economics and Cognitive Dissonance

Since its inception, the FCA have shown a keen interest in Behavioural Economics. Their 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 their most recent publications on the topic (Occasional Papers 24 & 25), the FCA transfer 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.

Creating a culture of compliance

In works such as the “The Honest Truth about Dishonesty”, Ariely has discussed our ability to rationalise 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 rationalise a mild level of dishonesty.

The key point is that these rationalisations 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 rationalisations. 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. 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 focussed 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.

Dan Ariely’s ‘The Truth about Dishonesty’ is an excellent example of this.

What does this mean in terms of training?

In Eukleia’s experience these insights from the world of Behavioural 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.

If you would like to discuss ways in which we can help you bring these insights into your training programmes please contact us for further information.

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