Executive Summary

In recent years, the financial landscape has become increasingly sophisticated with a wide array of products. However, product complexity and technological advancement also introduce new pitfalls for investors and potential avenues for fraud. Financial literacy is a crucial tool for investors to navigate this environment.

The official OECD definition of financial literacy encompasses “a combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial wellbeing.” While significant and concerted financial education efforts have been introduced, key challenges remain for financial education initiatives, including diverse demographic segmentation, difficulties in measuring and evaluating programme effectiveness, and a lack of supporting environmental initiatives. These existing challenges are only going to be exacerbated by the large-scale shifts that are already happening globally. An ageing demographic combined with rapid technological shifts mean that a new digital-savvy generation will become the main consumers and investors over the next decade.

Behavioural research provides insights into how some of these challenges can be tackled. Contrary to traditional notions of the rational investor, evidence suggests that most people act based on systematic biases and heuristics – which makes addressing financial behaviour even more important. In view of behavioural research and of the changing tides, we identified five key trends that may become increasingly relevant to the way we view financial literacy and investor behaviour moving forward, and the implications from behavioural insights for each case:

• Use of big data to support investor decision-making
• Increasingly active social media and online platforms
• Digitalisation of personal finance management
• Rise of digital investment intermediaries
• Increasing focus on support for long-term orientation

These shifts exacerbate the importance for all parties to take proactive steps in encouraging greater financial literacy. Reflecting on these developments in the context of behavioural insights, we identify some key ways in which a future agenda may be developed to strengthen financial literacy in the future:

For retail investors:

• To be aware of potential biases and to leverage on available tools that can help make better investment decisions
• To be empowered to take ownership of their own financial literacy learning and continue to increase their individual capacity-building

For financial intermediaries and private sector players:

• To harness behavioural insights and emerging technology to innovate new financial tools that can improve financial inclusion
• To leverage on behavioural methods to increase investor participation while concurrently encouraging users to make better-informed investment decisions
• To provide financial literacy programmes that leverage on behavioural insight to educate consumers on healthy financial habits
• Bigger financial intermediaries to harness their scale and customer base to partner with smaller startup fintech companies for financial innovation and capacity-building
• To develop and implement guidance that ensures prioritisation of customers’ needs

For policymakers:

• To understand that behaviour goes beyond mere financial education, but should be incorporated in all aspects of policy and regulation, from both the supply (behaviour of regulated intermediaries) and demand (investor behaviour) side
• Behavioural insights should be incorporated through every stage in the policy cycle, from policy development all the way to post-implementation, including embedding experimentation
• To design products and environments that encourage better choices, including simplifying financial decision-making, leveraging on mental accounting to build savings, and introducing commitment-saving tools
• To use behavioural insights as part of regulation for investor protection by overcoming limited attention spans and by framing information in a way that may be more salient to investors
• Traditional financial education initiatives could be bundled together with other programmes designed to change behaviour to increase the effectiveness of both
• Behavioural insights, in combination with available datasets, can be used as a measurement tool for regulators to understand investor segmentation and preferences, to evaluate policy effectiveness and to measure unintended consequences
• Behavioural insights should be embedded at an institutional level beyond specific programmes, with the necessary resources being channelled towards long-term capacity building

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