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A new era of consumer protection?

If the goal of product disclosure statement (PDS) is to help consumers make the most appropriate choices, we have to start with the consumer, rather than the document.

So, when we think about consumers, decision-making, and even consumer protection, we need to understand how people decide, and the processes they use to understand information.

And it just might be time to start again with how we protect consumers, and how we approach what we currently call the product disclosure statement.

In a sense, I would like to think of this as a new product development opportunity.

We know that people will use shortcuts when they are making a decision.

We know that people are impatient, intelligent beings.

We know that people are busy.

We know that people take risks.

We know that taking risks is not always a bad thing.

We know that most people don’t read product disclosure statements.

We know that most people don’t read the terms and conditions.

We know that most people don’t read the fine print.

And if we are going to talk about what other countries or jurisdictions are doing, or planning to do, let’s talk about their substance, and why they might work, rather than simply borrowing or copying their ideas.

In my experience, the best way to think about the potential product is to start with benefit in mind.

In marketing we talk about creating products based on the benefits that they provide to consumers.

So, let’s talk openly about what benefits we want for consumers. What do we actually want people to do?

What I am arguing is that we need to put the consumer back into consumer protection. We have to more thoroughly understand consumer behaviour, in all its complexity, before we design programs to get them to behave the way that we believe is the most appropriate way for them to behave.

So, if we are truly serious about helping consumers to make better decisions – rather than protecting our asses – then let’s approach this in a more sophisticated way.

Let’s borrow ideas from other disciplines, industries, and sectors.

Let’s think of all possible permutations and ideas, limited only by imagination and (maybe) budget that could lead to the desired behaviour.

But, this is definitely not a revisiting or re-engineering of the Product Disclosure Statement. That would be a bit like adding a computer to a fridge, which seemed like a good idea at the time, but in the end, no one was actually using it.

I hesitate to say it, but what we might be looking at is a complete re-engineering of how we approach consumer protection, knowing what we currently know about decision-making.

So how would this look?

Firstly, I want to say that there are always going to be mistakes, and there are always going to be people who make mistakes.

We don’t want to completely remove the opportunities for people to make mistakes or take risks. If people don’t take risks, there won’t be innovation.

Somehow we have to find a happy medium.

I’ll give you a few starters to think about, but these are just my initial ideas. The underlying constant is that we need to remind ourselves that we are dealing with people, not legal documents, and not something akin to a computing system.

It might be about anticipating problems.

We need people outside of the law contributing to regulation. We need alternative perspectives that somehow take into consideration the reality of human behaviour.

I would like to see this happen as legislation, policy or regulation is being drafted.

I would also like to see this as financial products are developed. What this might mean is that a regulator has to be more proactive, rather than reactive.

Perhaps regulation should go through a due diligence or stress-testing process with consumer behaviour specialists, so that we know that it is going to achieve what the lawyers are hoping it will achieve. And perhaps we need to make sure that before people sign a PDS (or whatever we end up with), they undertake a knowledge test; not asking them what they think they learned, but actually seeing what they did learn from the PDS.

And on the supply side, maybe products should also go through a due-diligence process or a product piloting. In the same way that a marketer would go through a piloting process to see if people would buy their product, maybe some products should go through a piloting process to see if they might cause harm.

And not just through a legal process – through a process that analyses potential consumer behaviour.  In the same way that we seek legal advice about consumer policy, we should also seek consumer behaviour advice. Maybe not all products, but perhaps products that have more potential for harm.

Not to necessarily rule-out risk, but simply to understand the risks. 


We know that time can reduce the effects of a range of these biases.  When I say time, I am not simply referring to cooling-off periods, though.

Research I conducted into the psychology of in-home sales confirmed that the way time works to influence these biases is more complex than it seems.

My research, and other research, has found that cooling-off periods, certainly the way that most of them operate, don’t overcome many of the biases of human behaviour. The problem with the current cooling-off periods, or at least the ones I am aware of, is that they operate after we have purchased something, or signed an agreement. By then it’s too late.

The endowment effect, the status quo bias, endowed progress effect and ego protection theory all tell us that once a person “owns” something, they value it more, and are less likely to give it up – at least in the short term – particularly if they have put mental, physical or social effort into their decision.

We also know that it takes a significant amount of cognitive resources to admit we made a mistake – again, this is not a conscious use of resources, but happens regardless of how rational we think we are. The role of our ego is to protect us, so out of our conscious reach, our ego creates defences, including apathy, that restricts us from changing our mind after we have become endowed with something.

Perhaps we need to go back to the original intent and construction of cooling-off periods, which came into force before you made a final decision… or killed your neighbour.

So, if we are to have a cooling-off period clause in contracts and agreements, they have to come before the contract is signed. One way to do this is something that I call a Double-Opt In Clause. In my research into In-Home Sales, I found that once consumers had actually signed a large financial contract for a pretty poor educational software package, their likelihood of cancelling that contract within ten days (which until recently was the cooling-off period in Victoria) was remote.

But if we required cooling-off periods to start once an intention to buy was made, a consumer would have more time and resources to think about the consequences. If they had to say once, or even sign something to say that they want the product, but are not committed to it, and then sign a second document at least 48 hours after the initial intention to purchase, then we remove the pressure and the psychological biases associated with the endowment effect, ego depletion and prospect theory.

Time has that effect.


There has been a lot of research on how we frame information. Some refer to it as choice architecture. I don’t want to get too carried away looking at the different ways that framing effect decision-making, but I do want to mention a couple of aspects of framing.


If we already know that we are unlikely to read the terms and conditions, how do we use language to get people to, at least, engage with some of the material provided to them.

Here’s some of the things that we know about language. We know that polite and formal language signifies and creates psychological and personal distance. In other words, the use of normative, polite language – the language used in business and law  – rather than colloquial, less polite language, leads participants to believe that the target of the communication (them) was spatially and temporarily distant. In research by Stephan et al, published in 2010, when participants read or heard a formal statement such as “My brother is taking our family car, so the rest of us will stay at home” they believed that that the person who was being addressed was not them, in a more remote location, and the conversation referred to something that might happen in the future. A better way to put the same statement would be,  “My brother is taking our family car, so the rest of us will be stuck at home”. 

We also know that hypothetical language, such as “this may happen to you” affects the perception of distance, and concreteness, in that people don’t expect hypothetical events to occur, at least to them, and in the near future.

So, if we want people to take notice, language should be direct, immediate, and personal.

In the same vein, the layout and format of information should be more about comprehension, and less about formality. The most important information should be upfront, rather than following a more formal, logical structure. The things that you want people to read should be early and in bold. These are simple ideas, but it always surprises me how illogical, logic actually is. 

And one other thing that marketing can bring to the table.


If we are going to take decision-making seriously, one of the answers has to be related to segmentation. In marketing, when we talk about segmentation, what we mean is that we design the entire marketing program, not just the promotional or communication activities, around the different consumers we wish to persuade. So, in a practical sense, we have to avoid the tendency to go for the one size fits all approach when designing products, and also when designing consumer protection.

The challenge is that this would require a deeper understanding of consumer behaviour, and of how groups behave, and will undoubtedly need more targeted resources depending on vulnerability. It would also require a more sophisticated view of vulnerability –  beyond simplistic demographic profiling.

Segmentation is not demographics. It is about understanding what factors contribute to understanding, to attitudes and behaviours, and then designing programs that suit that particular understanding, attitude and behaviour. And we belong to different groups for different products, stimuli and activities.

All of this requires a new way of thinking.

And, without oversimplifying the issue, we have to stop being so logical, and become more strategic. 

In order to achieve this, Rational Choice Theory – the Homo economicus concept – must be abandoned in favour of a more realistic view of the individual, as an agent endowed with imperfect knowledge of the factors and risks involved in a decision, and subjected to a myriad of potentially influential stimuli entering his or her decision making process.


This is an excerpt from a speech that I gave at the ASIC Summer School in 2011. It relates to comments I made to Patrick Durkin of the Australian Financial Review

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