Consumers incapable of smart decisions, study finds
Published 29/02/2012 | 05:00
HOUSEHOLDERS are failing to get the best value for a host of products like insurance, bank accounts and utility bills because they are incapable of making intelligent financial decisions.
This has prompted a call for much tougher regulations on banks, other financial institutions and service providers.
Even people with good financial understanding are prone to taking on too much debt or paying too much in fees, a study by economic think-tank the Economic and Social Research Institute (ESRI) has found.
Consumers made bad financial decisions during the boom that contributed to the economic crisis. They continue to be bad at seeking out the best deals.
Very low levels of switching by consumers is presented in the study as evidence for the poor decision-making.
The paper, by Pete Lunn, quotes figures from the National Consumer Agency for last year showing that just 4pc of householders had switched television provider, only 5pc had switched health insurer and only 8pc had changed fixed telephone provider in the previous 12 months.
Dr Lunn said this inertia meant there was no incentive for firms to offer better value. He said it was wrong to assume consumers will make calculated decisions to select the best deals.
"Most consumers lack the knowledge needed to choose the better deals from among the many mortgages, credit cards and other financial products on offer.
"The international research shows that even those consumers with better financial understanding are prone to reasoning that can lead them to take on too much debt or to pay too much in fees to banks and other providers of financial services," he said.
The research paper found that consumers routinely make bad financial decisions because:
• They are excessively swayed by advertising and marketing of financial products.
• They are drawn to products with immediate benefits even if the long-term benefits are greater.
• They make bad decisions when they are presented with too large a choice, or because of the influence of friends.
• A high degree of competition among providers often does not lead to better value offers.
• Householders were not aware of what interest rates they were paying on mortgages and credit cards.
Dr Lunn said: "The evidence shows that we need tougher regulation of the financial sector -- to have rules that force companies to act more in the consumers' interest."
This could include tougher inspections, bigger punishments and the publicising of violations.