Irrational Decision-making

"...76% of decisions by both men and women are made by our irrational brains..."
Fi Bendall as quoted by Clare Stewart, 2016

An example of this is Australian Financial System.

The Wallis Financial System Inquiry (1997) suggested that disclosure was the foundation of an efficient financial system. Disclosure includes announcing any conflicts of interest by advisors and would help customers make informed choices in their best interest. This assumes that the customers were financially literate and rational.

Since the Royal Commission into Banking, etc (2019) the heavy reliance on disclosure has been challenged. It is regarded as unnecessary complex and is not helping customers make sensible, rational decisions.

Some examples of irrational decision-making

- payment notification

"...repayments rose by 28%......after 24,000 credit card holders received a text message reminding them their bill was due. E-mail reminders had no effect..."

Australian Government-Westpac study as quoted by John Kehoe 2019

- disclosure can cause clients to feel social pressure to follow that advice

"...Clients can become concerned that declining to follow the advice would signal distrust in their adviser, with whom they have often formed a personal bond..."

Sunita Sah as quoted by John Kehoe 2019

- in some cases, disclosure

a) has increased trust in the provider's expertise, especially when customers are distracted by competing information or

b) made customers sceptical and therefore prone to reject even high-quality advice

"...when conflicted advisers gave bad advice and the conflict was disclosed, 81% of people still followed the advice..."

ASIC-Dutch regulator report as quoted by John Kehoe 2019

More examples of people making irrational decisions

"...only two in five Australians given a key fact sheet for insurance objectively selected the best product, with 60% picking sub optimal insurance. Two thirds of people were not able to locate all relevant investment fund fees and less than half could find all superannuation fund fees. Around 86% of local consumers assessed the quality of financial advice to be good, in contrast to 39% of the same advice being independently rated as poor......superannuation dashboards - intended to provide a simple snapshot summary of a super product on a fund's website - were found to be vulnerable to manipulation. Consumer choice can be manipulated by relabelling......asset allocation information used in diagrams..."

ASIC-Dutch regulator report s quoted by John Kehoe 2019

NB The hope is

"...Eliminating as many conflicts of interest are possible and aligning incentives for financial advisers and customers will help improve advice quality and protect customers..."

Sunita Sah as quoted by John Kehoe 2019

Another example of irrational decision-making is what happened in the COVID-19 pandemic (starting 2020) reinforces the concept that we are not rational decision-makers. For example, there is a rare side-effect from one of the vaccines (AstraZeneca) of blood clotting in the brain. Based on statistics from Australia, the chance of dying from this side-effect is one in 1 million. On the other hand, if you catch COVID-19 there is a much higher risk of dying. Thus any rational person would get vaccinated. Yet initially was a very slow vaccination uptake rate in Australia as people were nervous owing to the negative publicity on the blood clotting and the lack of availability of the alternative, ie Pfizer.


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