IOSCO's behavioural insights report into retail investors

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IOSCO published their report on behavioural insights into investing behaviour, to better understand how to protect investors.

The International Organisation of Securities Commissions (IOSCO) report provides guidance for regulators on retail investor decision-making, reporting on behavioral biases and the impact on retail markets.

The report outlines behavioural biases, describing emotional and psychological experiences and how they may influence investment choices, including how ‘rule of thumb’ assumptions can lead to incorrect beliefs, and partial assessments of information may lead to different decisions.

The report explains how we make different decisions when we interact with an online interface compared with a human, or printed material.

Information overload

The report explains that we are inundated with information and choices every day, with none of us having the time or resources to fully analyse information, let alone take advantage of it. We filter information and take mental shortcuts to simplify decision-making, which may result in us making decisions that are not in line with our goals and preferences. Incorrect beliefs and emotions and experiences can lead to problematic decision-making.

The most common biases listed in the report are:

  • Present bias e.g. spending on a credit card for immediate gratification

  • Reference dependence and loss aversion e.g. believing that insurance added on to a base product is cheap because the base price is much higher

  • Regret and other emotions e.g. buying insurance for peace of mind

  • Overconfidence e.g. excessive belief in one’s ability to pick winning stocks

  • Over-extrapolation e.g. extrapolating from a narrow timeframe of investment returns into the future

  • Projection bias e.g. taking out a payday loan without considering how we’ll pay it back later

  • Framing, salience and limited attention e.g. overestimating the value of a packaged bank account because it looks nice on the brochure

  • Mental accounting and narrow framing e.g. investment decisions may be made asset-by-asset instead of considering the whole investment portfolio

  • Decision-making rules of thumb e.g. investment may be split equally across all funds in a pension scheme, rather than careful allocation

  • Persuasion and social influence e.g. following advice of a financial adviser because we like them

Download the The Application of Behavioural Insights to Retail Investor Protection