Using Behavioural Economics in Compliance

Posted by

Laura Evans

on 02 Mar 2023

Behavioural economics can help organisations achieve their compliance goals. We explore how to leverage behavioural economics in compliance.

How to Leverage Behavioural Economics

Behavioural economics may sound reserved for scientists and mathematicians, but harnessing its power is important for a firm’s success.

When compliance officers use behavioural economics, it helps them create more effective compliance programmes. They can better understand and address biases that influence employee decision-making and can lead to non-compliance.

Benefits of behavioural economics in compliance

According to the Living Library, behavioural economics’ “lexicon of ‘nudging’, ‘framing bias’, and ‘the endowment effect’ has become part of the vernacular of business, finance and policymaking”.

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What is behavioural economics?

Traditional economics assumes people are rational, have perfect knowledge, make decisions based on self-interest, and change their thoughts and beliefs according to new information.

Behavioural economics challenges those hypotheses, deeming them unrealistic. It examines how psychological, social and emotional factors influence the economic decisions of individuals and organisations. It’s a branch of economics that examines the following:

  • People make choices that aren’t always rational and
  • People deviate from the assumptions of traditional economic theory

Three main restrictions impact a person’s ability to make a well-informed decision:

  1. Limited time
  2. Complete information isn’t readily available
  3. Computational weakness: difficulty calculating the probability of something happening

The field seeks to explain why individuals often behave in seemingly irrational ways – for example, being overly risk-averse or succumbing to cognitive biases. It has numerous applications, from compliance and public policy to marketing and advertising.

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Can behavioural economics aid compliance leaders?

Compliance officers can use behavioural economics insights to design compliance programmes that are better tailored to the way people actually behave and make decisions, leading to an improvement in compliance.

Behavioural economics can also help compliance leaders identify and address the root causes of compliance failures. For instance, by understanding the psychological factors that influence employee behaviour, they can design controls that are more likely to prevent non-compliant conduct from occurring.

How can you optimise compliance?

Compliance officers can leverage behavioural economics to improve compliance programmes in the following ways:

  • Use nudges
    These are small, subtle changes to the environment or decision-making process that encourage employees to make better choices. For example, sending people an email reminding them they have outstanding compliance policies to review online can increase completion rates.
  • Show the potential risk of failing to act
    According to loss aversion theory, making employees aware of what they and their company stand to lose rather than gain through compliance will trigger a greater response. For instance, if certain metrics aren’t disclosed, the firm is subject to a fine of ‘X’ amount.
  • Simplify choices
    People are more prone to adhere to policies, rules and regulations when presented with straightforward, clear options. So, compliance officers should streamline the decision-making process. For example, invest in a centralised RegTech tools hub that increases efficiency and transforms staff compliance.
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  • Utilise social norms
    Employees are more inclined to comply with internal policies when they believe their peers are doing the same. Compliance officers can leverage social norms by highlighting the positive behaviour of others, whether that’s training accomplishments or ESG-related achievements etc.
  • Make the most of incentives
    When there are clear compliance benefits, staff are more likely to get on board with a compliance programme. With that in mind, consider rewarding people who follow the rules, or highlighting teams that demonstrate good compliance practices.
  • Provide feedback
    By offering regular commentary on compliance performance – celebrating successes and highlighting improvement areas – the chance of employees complying with policies and procedures increases. At the same time, seeking feedback from staff is also useful, making them feel valued and included.

Overall, by leveraging behavioural economics, compliance officers create a culture of compliance that’s successful and sustainable.

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Why is behavioural economics important?

By learning about behavioural economics, compliance officers understand the factors that influence decision-making; they’re aware that people are impacted by social norms, their environment and emotions.

If compliance officers disregard behavioural economics, they may end up creating a vague compliance programme with conflicting rules or constraints. Behavioural economics is therefore a valuable tool for compliance officers. It helps with:

  • understanding cognitive biases that can shape decision-making;
  • enhancing communication with employees about compliance policies;
  • encouraging good behaviour via incentives and nudges;
  • improving training, by understanding how people learn and retain information.

    As a result, compliance teams can create and apply effective compliance programmes, encouraging employees to make better choices that comply with regulations and ethical standards.

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Integrating compliance & behavioural economics

Behavioural economics spans a variety of human conduct, so it’s naturally insightful for compliance officers. They can use it to design and implement compliance programmes that are more effective, efficient and engaging for employees.

The field offers proven techniques such as nudges, loss aversion and simplifying choices that help compliance officers connect better with staff, giving their compliance programmes a higher chance of long-term success.

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