Executive summary
Australians spend over $450 billion on goods and services every year with $29 billion being spent on financial and insurance services alone.1
But despite the amount of money that is spent, we know very little about the decision-making processes that occur when Australian consumers spend or invest their money. How many decisions are based on good advice, sound knowledge and the right attitude and how many decisions are based on bad advice, guess work and the wrong way of thinking?
We know that Australian consumers have lost a substantial amount of money to investment scams over the last three years.2 We know that more Australians are facing debt issues at a younger age than ever before.
At the same time, we know that many Australians are becoming more prosperous through involvement with the share market and property investment. We also know that many Australians are extremely savvy in the way they make their purchases and are increasingly prepared to negotiate hard for the best deal.
So, the modern Australian consumer tends to be a mixture. For most of us, we are good at some decisions and bad at others. We also tend to adopt different behaviours in different circumstances.
While this may not be a surprise to many, it is only recently that economists have sought to understand the complexity of our decision-making. In doing so, they have drawn on other disciplines such as psychology to better understand the factors that lead to different consumer behaviour.
In 2002, Daniel Kahneman won the Nobel Prize for his work on bounded rationality; the concept that there are limitations on the rationality of consumers in the decisions that they make. Economists and service providers can sometimes inappropriately assume that consumers use information in deductive ways to make logical decisions to suit their needs. In his studies, Kahneman found that most decision-making was based on intuition rather than reasoned analysis.3
As more and more work is being done on the consumer or ‘demand side’ of economics, there is a growing acceptance that the modern consumer can no longer be assumed to be someone who makes fully rational decisions based on objective assessments of the information presented to them.
Just as we all have different personal characteristics, we also have different socio-economic and cultural backgrounds which affect the way we approach decision-making. For example, a person from an Arabic community who adheres to the strictures of the Koran is not likely to choose a credit provider as the Koran forbids ‘riba’ — the practice of charging interest on lending money.
It should also be recognised that consumers go through different phases in their lives. The attitudes and behaviour we have in our teens can be completely different to the attitudes and behaviour we have when we approach retirement. So, understanding of consumer behaviour also needs to be rooted in an understanding of what stage we are at in life.
This is also true for the economic factors that influence our behaviour. For example, changes in interest rates can affect behaviour in different ways. People who have lived through periods of high interest rates may be more cautious in allowing for fluctuations while those who have not experienced high interest rates may take more risk in structuring their loans with no margin for increase. Similarly, legislation and regulation can often affect the complexity of products and thus consumers’ ability to properly understand them.
Finally, we all have different skill levels. Some consumers struggle with basic literacy and numeracy while others are extremely knowledgeable about money management and their consumer rights. Skill levels are very important in ensuring Australians are equipped to manage the thousands of purchasing and investment decisions they are faced with in their lives.
Skills also need to be taught at a young age, which is why the Taskforce has looked at the issues associated with teaching consumer and financial literacy within the Australian school system.
However, skill levels alone do not explain why we have well educated and knowledgeable people still making bad financial decisions. It is only by understanding the different elements of personal characteristics, social background and life events that we can begin to piece together the whole picture.
It is with this in mind, that as a first step, the Taskforce is proposing a Consumer Behaviour Model for better understanding the factors that contribute to consumer decision-making. This is in order to encourage information providers and policy makers to better understand the needs, backgrounds and motivations of today’s consumer when delivering solutions in the marketplace.
The Taskforce views this as an important first step in improving the provision of information to consumers. It is important because it provides a proper framework for taking action that ensures effectiveness, efficiency and consistency across sectors.
With this framework, the Taskforce hopes businesses will strive to provide more independent and useful information to consumers while at the same time, simplifying the complexity of the products and services they offer.
While not actually breaching any laws, it is an unfortunate fact that many business operators in Australia continue to act in unethical or unhelpful ways to consumers. A good example of this is the way in which some credit services are marketed towards vulnerable consumers.
This is why the Taskforce proposes a pincer approach — improving consumer and financial literacy while at the same time, improving business practices. Smarter consumers drive better choices in the market while responsible businesses drive longer term profits by building trust with consumers. This is clearly a good outcome for both businesses and consumers.
Governments also have a role to play in providing proper regulatory frameworks that improve information flow and protect against consumer detriment. An unintended consequence of this can sometimes be complexity and bureaucracy which leads to confusion and frustration amongst consumers and high compliance costs for business which are, in turn, passed on to consumers.
It is therefore important that there be ongoing information flows between consumers, business and government to ensure that things are working properly.
There also needs to be a consistency in the approach to consumer and financial literacy. In Australia today, a large number of government, commercial and consumer organisations are investing considerable resources to address issues of consumer and financial education. While there is commonality in their aims, a wide range of approaches and methods are evident.
In some instances, effective partnerships are engaged but in many instances they are not. In some instances, providers know how to effectively target audiences with information but in many instances they do not. In some instances, effectiveness is evaluated but in many instances it is not.
The number of different information providers, programs and sometimes conflicting information can result in consumers feeling bewildered and mistrustful. In these situations, consumers tend to resort to easier and more trusted sources of information such as the media, friends and relatives.
The Taskforce conducted a preliminary stocktake of consumer information initiatives (with a focus on financial education) and found over 700 initiatives being produced by public, private and community sector bodies. It is the Taskforce’s view that there is no shortage of good consumer information available to assist Australians. However, a good proportion of that material is either not known, not properly targeted or not used by Australian consumers.
The Taskforce also found that there were no formal networks for communication amongst information providers and thus a general ignorance of what others were doing. This has led to much overlap and duplication in the work done by organisations. It has also led to a lack of corporate knowledge over time where failures can be repeated and best practice is often not followed.
In looking at solutions to these problems, the Taskforce has also drawn on international research and expertise to determine what has worked well in other countries. Many countries have come a long way in developing solutions to these problems and the Taskforce was fortunate to be able to draw on this work as well as recent work on financial literacy in schools by the Australian Securities and Investments Commission.
With the Consumer Behaviour Model as a first step, the Taskforce proposes that a second step should be the establishment of a coordinating body that better connects information providers with consumers and that is able to take a more strategic view of consumer information issues.
This paper outlines the possible functions and services of such a body and how it can make a difference to the lives of Australians over time.
In approaching these issues, the Taskforce initially considered taking a more prescriptive approach, recommending specific consumer education initiatives be put in place. However, it soon came to the view that a longer term, systematic approach would deliver far greater and lasting benefits to Australian consumers.
Indeed, it was felt that short term thinking was responsible for the situation the Taskforce had been asked to improve. The history of consumer information provision in Australia is characterised by well-intentioned initiatives that begin with a big bang and peter out over time.
For these reasons, the Taskforce is keen to take a longer term view and to facilitate a greater engagement between stakeholder organisations and the general public in developing a framework for improvement which would better withstand changes in the market and within government.
The Taskforce believes that consumer and financial literacy needs to be embedded in the Australian culture in the same way that Australians know how to ‘Slip, Slop, Slap’ when going in the sun or wear a seatbelt while driving. However, these cultural shifts take time and require concerted effort from information providers in pushing strong and consistent messages.
It is with this strategy and vision that the Taskforce is seeking public views. Have we got it right? Is a coordinating body the best way to go? Do we have it in ourselves to change our behaviours in more positive ways? The Taskforce encourages you to respond to these questions by making a submission to this paper or by attending the consultation meetings that will be held across Australia.
This is an important issue that will shape the future capacity of all Australians. The Taskforce looks forward to your involvement and views.
1 2002-03 ABS Catalogue 5204.0 Australian System of National Accounts, Household Final Consumption Expenditure, pp. 74-75.
2 Australian Securities and Investments Commission, Financial Literacy in Schools, Discussion Paper, June 2003.
3 Kahneman, D. (2002), Maps of Bounded Rationality: A perspective on intuitive judgement and choice, Nobel Prize Lecture, December, Princeton University.
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