Abstract:Policy makers have bemoaned the irrational behaviour of households as they stock up on gold and real estate and ignore financial assets. But are households to blame? Households don’t trust the financial markets for good reason – they have lost money from the regulated part of the market not because of volatility but due to poor regulation that has allowed firms to cheat. Households respond to the kind of the market in place and stay largely away. I make the proposition that we need supply side reform in the financial sector and we must stop blaming households.
What kind of reform do we need? The current market rests on the twin legs of disclosure and financial literacy to bridge the asymmetrical information gap. But disclosures are fuzzy and literacy does not work. Examples of fuzzy disclosures include those in life insurance, medical insurance and annuity plans. A paper I co-wrote that has been published in the Journal of http://bit.ly/2uBtw5Y) shows that disclosure regulations are badly thought through and largely ignored on the ground. Supply side reform needs reform on product structures, incentive placement and effective punishment. But even this reform is not enough. If the neo-classical econ insights lead to a buyer beware market, insights from behavioural econ should lead to a seller beware market.