Behaviourally informed retail financial regulation : turning bias into bliss?

Defence date: 11 September 2020 (Online)Examining Board: Professor Stefan Grundmann (EUI, Supervisor); Professor Mathias Siems (EUI); Professor Nicoletta Rangone (LUMSA University); Professor Danny Busch (Radbound University)The thesis examines whether the existing European retail investor protection legislation can be interpreted to be taking into account behavioural heuristics, biases, and norms that the average individual exhibits in their decision-making. In doing so, the thesis observes a clear general shift towards behaviourism in the interventions underpinning the retail investor legislation. The thesis aids this behavioural turn in investor protection legislation by compiling insights from studies on effective behavioural change interventions that can render behavioural investor protection more effective in influencing behaviour. The underlying argument is that the more effective the interventions the legislation incorporates for influencing behaviour, the more likely it is that such behaviourally-informed legislation can be effective in attracting more median retail consumer participation in the financial markets, helping in turn to mobilise retail investors’ cash savings into financial assets in Europe in light of the Capital Markets Union. The thesis concludes that this observed shift towards behaviourally-informed retail investor protection regulation is conducive to a functional, market-building, perspective in investor protection regulation. This is because market-building and market efficiency are not just pursued from the trust-conferring function of investor protection regulation, but also from a directly behavioural perspective, through nudging, biasing, and de-biasing. Thus, the thesis argues that in the behavioural turn of investor protection regulation the three main theoretical foundations for regulating for investor protection cited in the literature, namely: appeal to fairness; the pursuit of efficiency; and the acknowledgement of cognitive errors and limitations, are not only interlinked as the literature holds, but they also follow a hierarchical ordering with appeal to fairness and acknowledgement of cognitive limitations being functions of the pursuit of efficiency rather than self-standing foundations for regulating for investor protection. Such prioritization of market efficiency can potentially carry dangerous implications in the absence of a thoughtful moral examination