2nd Workshop on Behavioural Financial
Regulation and Policy
Herbert Simon Society and Bank of Italy
Opening remarks by Salvatore Rossi
Senior Deputy Governor of the Bank of Italy
and President of the Institute for the Supervision of Insurance (IVASS)

Today we mark the second edition of the Workshop on Behavioural
Financial Regulation and Policy here at the Bank of Italy. Part of it will be
dedicated to the presentation and discussion of the BeFAIRLY report, which is
ambitiously titled "The Behavioural Finance Revolution: A New Approach to
Financial Policies and Regulations" (edited by Viale, Mousavi, Alemanni and
Filotto).
The remaining part of the workshop will be dedicated to issues that are
very dear to us regulators: financial education and risk literacy. Subjects that,
in the wider context of a consumer protection framework, have seen in recent
years some growing and fascinating research advancements, as well as an ever
increasing body of evidence coming from implemented policies around the
world.
In introducing the first edition of this workshop one year ago I suggested
that behavioral economics had irrevocably modified the way we frame
the real-world economic phenomena in our thinking. And that the debate
between those - like you - more eager to integrate or replace the "standard"
theory and those that are resisting it, has been beneficial to all its participants,
whichever the field of allegiance.
I stand by this view. The more an agreed-upon body of knowledge in
behavioral economic sciences consolidates1, the more defined and robust would
be the set of non-traditional regulatory tools. Especially when considering the
workings of the banking and insurance markets, any policy intervention should
be well understandable by the industry and the general public.
It is in this context that an open-ended discussion between regulators,
independent academics and the industry, such as the one we are going to
experience today, is so valuable. On the one hand the drive of the industry
towards value-creating innovations produces what in some instances could be
labelled "facts before the theory". On the other hand the findings of behavioral
theorists helps making sense of such data.
For example, recent research in behavioral corporate finance has greatly
expanded our understanding of managerial conducts. It has shown that even
top managers, a rather sophisticated group of individuals, are not immune to
biases and seemingly irrational decision making, and that their traits and life
experiences are priced by the markets2.
Even more relevant are behavioral traits in household finance decisions.
Actual investment and consumption decisions that are based on mental
accounting3, present bias4 and reference point consumption5, have been
recurrently mentioned as possible explanations for "non-traditional" agents'
behavior that is found in the data.
We at the Bank of Italy and IVASS (the Italian regulation and supervision
authority for insurance), in our consumer protection activity, consider now
attentively the insight of behavioral economics.
Years ago we were relying mainly on transparency requirements. But full
disclosure, while responding to information asymmetry, was not addressing
behavioral bias.
In the real world consumers have behavioral weakness and difficulty in
processing a vast amount of information. On top of that, households' financial
2
See for example Schoar, A. and L. Zuo, (2016), "Does the Market Value CEO Styles?", American
Economic Review, 106 (5), and Malmendier U., (2018), "Behavioral Corporate Finance", in Bernheim
D., S. DellaVigna and D. Laibson, Eds.
3
See Thaler, R.H., (1985), "Mental accounting and consumer choice", Marketing Science, 4 (3), and the
descending literature.
4
For example, Laibson, D., (1997), "Golden eggs and hyperbolic discounting", Quarterly Journal of
Economics, 112 (2).
5
See Koszegi, B. and M. Rabin, (2009), "Reference-dependent consumption plans", American Economic
Review, 99 (3).
decisions are taken so rarely that in fact seldom people learn from their direct
experience.
Therefore our policy approach has been re-oriented, in both regulation and
enforcement. Formal compliance has given way to a more substantial approach,
requesting producers to be fair in their relations to customers.
We have also promoted the creation of alternative dispute resolution
procedures, simple, rapid and effective. Arbitro Bancario e Finanziario has
been a success: last year over 30.000 complaints were received; the analogous
entity for insurance, Arbitro Assicurativo, will be established presumably in
the early 2020.
However, financial regulation and good supervision could be not enough
if consumers do not really understand their financial needs and cannot operate
properly their rights: effective financial education is a crucial life skill in order
to make financial decisions consistent with personal and family needs.
In today's digital age, financial markets offer everybody easy access to a
wide range of financial services and products. But digitalization is two-faced: it
can emphasize some behavioral biases, such as short-termism and impatience,
but could nudge people into specific virtuous action. The final balance will be
positive only if consumers are financially literate.
Building a sound financial education is complex, as it requires a long-life
approach on three challenging dimensions: knowledge, attitude, and behavior.
Financial education goes beyond than just providing information, it is meant
to change those three dimensions, in order for people to achieve their financial
well-being.
Best practices around the world show that experiential learning (such as
games, simulations and role plays) helps acquire, retain and put in practice
new information.
Since 2008 in our main program for students, "Educazione finanziaria a
scuola", we have progressively moved from information to capability, fostering
a value-driven approach to economic issues, stimulating the participants'
interest by suggesting "I need it because...". We have been using movies as
a trigger for debating financial issues and behavioral biases. We have also
introduced contests and prizes. Our competition "Let's design a banknote"
invites Italian primary and secondary school students to design an imaginary
banknote on a given theme; for the current edition, the theme is "money and
emotions". The prize-winning classes receive an amount of money for their
school. We will also contribute to the First edition of the Italian Economic and
Finance Olympiad.
Adults are more challenging: they tend to acquire just the knowledge
and skills they need for a specific purpose and their behavior tend to be
well-rooted. Furthermore, adults are an extremely heterogeneous population.
For example, some immigrants grew up where saving food meant wasting
it. Thus the concept of saving must be explained to them with a special care.
Let me also add that IVASS is now planning an exercise to measure
insurance literacy, a still underexplored dimension of financial capability; even
if it is a novel concept, it could become an international benchmark.
I would like to stress that, as international experience shows, single
institutions cannot fill all the gaps: a nationally-coordinated approach to
financial education is a key factor for success. Financial education needs an
interdisciplinary approach and strong cooperation among many stakeholders,
including academia, private sector and civil society, as well as the public sector,
so that all the points of view can be taken into account, from pedagogy to
neuro-economy.
Last October, some preliminary evidence of the Survey of financial
education initiatives in Italy in the years 2015-17 was released. The Survey
shows a very fragmented offer of financial education initiatives.
As authorities involved in the diffusion of financial literacy, over time we
advocated the implementation of a national strategy for financial education,
recognizing its crucial role in ensuring a more inclusive growth and gender
equality. We therefore strongly welcomed the establishment of the Committee
on financial education in August 2017.
Since its inception, the Committee has been very active, also thanks to the
energy of its Director Annamaria Lusardi, whom I want to thank on behalf
of all of us, and the forward-thinking choice to make the most of the existing
experience in financial literacy, in Italy and abroad. So far the Committee has
achieved many important results.
Among them, the Committee defined the Italian National Strategy
for Financial Education (NSFE), which defines vision, mission, goals and
guidelines. The strategy promotes a holistic approach to financial well-being,
also including insurance and social security perspectives. In the strategy, the
Committee has been able to take advantage from international experiences - as
Annamaria says quoting Isaac Newton "standing on the shoulders of giants" -
and building on all information available for our country, such as Bank of Italy
survey on adult financial literacy6.
We are confident that the Committee will play a constructive and pivotal
role in coordinating all efforts in the field of financial education. The Financial
Education Month, which took place last October, included over 350 initiatives
nationwide: it was a good starting point.
There is a further element to keep in mind: we need robust evaluations
to identify areas for improvement and to be sure that we make good use of
resources. Indeed, evaluation is a crucial aspect for making good financial
education.
In sum, we need to exploit all available theories, empirical evidence and
points of view. Much work still needs to be done, which requires a joint effort
by all the actors involved: this conference is an excellent opportunity to lay the
foundation of such a collaboration.
Designed and printed
by the Printing and Publishing Division of the Bank of Italy