Some features of financial products cause problems for consumers

Some features of financial products consistently cause consumers difficulty, according to a review of international behavioural literature published today by the ESRI. The review identifies specific problems for consumers in credit, investment and insurance markets.

The review, funded by the Central Bank of Ireland, examines evidence from more than 140 international studies in behavioural economics and behavioural finance, mostly conducted within the last five to ten years. It identifies multiple product features that are either poorly understood by many consumers or that generate systematic biases in their decisions.

Specific findings include:

• The amount consumers repay on credit cards is influenced by minimum amounts suggested by lenders, which act as “anchors” on decisions.
• Consumers can be influenced by changes to credit limits even when they borrow well below their limit.
• Many consumers underestimate how long it takes to repay debt and respond more to cash sums than to equivalent prices expressed as interest rates.
• Consumers struggle to understand how mortgage costs can vary, placing too much weight on immediate monthly repayments.
• Many retail investors pay too much attention to past performance and too little to fees charged by providers.
• Consumers do not evaluate so-called “structured” investment products accurately and are too optimistic about how well they will perform.
• Consumers are susceptible to purchasing poor value add-on insurance products.
• Some consumers fail to understand the trade-off between the premium and the excess on insurance products.

A common theme among the findings is that where financial products have multiple features, consumers struggle to take into account all the attributes that matter for their financial outcomes.

“There has been an increase in the volume of research in this area in recent years and it has become clear that many consumers find modern financial products difficult to deal with,” said Pete Lunn, head of the ESRI’s Behavioural Research Unit. “The evidence suggests a need to keep everyday financial products simple. Where more complex products are available, behavioural research provides methods for testing them to ensure that they can be properly evaluated and understood by the consumers they are designed to attract.”

The review concludes that consideration should be given to a requirement to pre-test some financial products and product features. Such pre-tests might help to ensure that innovative financial products offer genuine value to consumers.