Bringing Behavioural Science To Compliance

Why am I here?

I sometimes wonder how I ended up working in a Compliance function.  Like so many people who work in the area, it’s not something the younger me would ever have dreamt of becoming.

That’s not entirely surprising. As a piece of branding, it’s not exactly aspirational. Who in their right mind would dream of working in a role whose very title evokes bureaucracy and slavish adherence to rules reminiscent of an overly zealous parking attendant?  Self-evidently the answer is: me!

With the huge benefit of hindsight, one reason might be that I’ve always been fascinated by what makes people “tick”; whether that’s understanding my own behaviour or that of others.

It’s a large part of what Compliance is all about.  When we consider whether or not a Firm is compliant, what we’re really talking about is influencing the (in)actions of employees and arguably nowadays customers.  Companies can’t, in of themselves be compliant or non-compliant; that’s down to the actions or inactions of those that work within them.

Behaviour is also a key driver of the other part of my job title: Operational Risk. When things go wrong in organisations, there is usually a human component.  Whether a direct cause or in some form of contributory negligence. How often do we read about “Human Error” being a factor in something going wrong?

In my other blogs on Human Risk (“the risk of people doing things they shouldn’t or not doing things they should”), I’ve explored the science of how we aren’t the logical, rational beings we’d like to think we are.

In fact, we’re often precisely the opposite, with a Human Operating System designed for a bygone era.

As Harvard Professor Dan Gilbert explains in his TED Talk on Why we make bad decisions:

Our brains evolved for a very different world than the one in which we are living…for a world in which people lived in very small groups, rarely met anybody who was terribly different from themselves, had rather short lives in which there were few choices and the highest priority was to eat and mate today

In that era, all of the emphasis is on the speed of decision-making.  Note that really important last word: “today”.   This desire for quicking thinking makes sense when you consider the homogeneity of their existence and the fact that immediate concerns were around subsistence and survival.  A far cry from the world that you and I are fortunate to inhabit in the 21st century.

Shopping Risk

Take something like shopping.  On the face of it, a simple modern equivalent of hunter-gatherer activity; only with a barter system that exchanges money for goods.  Of course, it’s not that simple.  Before we make the decision of what to buy, we’re bombarded with choice and tempted by seductive advertising that exploits our emotions.

Unsurprisingly, most of us will have bought items we later regret; things, for example, that we don’t really need or that aren’t really worth what we’ve paid for them.

I’m a particular sucker when it comes to buying and regularly upgrading Apple products.  I do it repeatedly and often, even when I know that the additional features of whatever new iProduct I’m tempted by, probably aren’t the huge game changers the marketing and price point would suggest.  But I do it anyway because it’s largely an emotional rather than rational decision.

My propensity to buy is increased whenever there’s an Apple Store nearby.  It’s a 21st Century Garden Of Eden replete with technological temptations; ironically the latest incarnations even have trees in them.

Photo: Bruno Dalimonte/macplus.net

Sadly for my bank balance, there’s a high correlation between the locations I visit on business trips and late-opening Apple Stores.  A jet-lagged brain, egged on by prices in a foreign currency that I can mentally convert at a preferential rate, is no match for the persuasive powers of a super brand.

I’m not alone in this.  We all make choices that are influenced by a whole host of factors beyond simple value for money when it comes to shopping.  That’s because we are highly susceptible to being influenced by emotion over facts. It’s why the advertising industry focuses far more on persuading us to buy things because of how they’ll make us feel than on giving us facts about the product or service in question.

Of course, I’m being intentionally hard on myself.  My decision making in buying from Apple isn’t entirely stupid; after all their products fulfil the practical purpose I require them for, are easy to use and aesthetically pleasing.  There are perfectly good, if not better and cheaper alternatives available, but in buying Apple, I’m going down a tried and tested route where I know I’ll be broadly happy with my decision.  I can also justify my decision, in the knowledge that I’m in good company; millions of other people make the same decision on a daily basis.   Hold that thought on copying what others do, it’s a key factor in all of our decision-making.   Apple is a safe option; albeit not the most economically rational one.

Shopping isn’t the only area of our lives where we deploy a much broader range of factors in our decision making, than are considered by the traditional economist’s model of Homo Economicus (HE); who go about their daily business being consistently rational and efficiently following optimal, utility-maximising courses of action.

HE doesn’t exist.   We all do things that can’t simply be explained by cold hard economic logic; whether (in my case, at least) it’s not getting enough exercise, the way I drive, not eating as healthily as I should or in how I cast my vote at the ballot box.

All of which is bad news from a Compliance perspective.   Because if we want to influence behaviour, then we can’t just rely on people rationally doing “the right thing”.  We need to get to work on the subconscious decision-making processes that influence us.

It’s all about the money

For those of us working in Financial Services, the situation is a whole lot harder. That’s because, just like shopping, money introduces a whole new level of complexity.

In their book Dollars and Sense (“Small Change” in some countries), Prof Dan Ariely and Jeff Kreisler illustrate some of the ways it impacts decision making:

The simple act of thinking about money actually changes us in deep and troublesome ways. Money is the top reason for divorce and the number one cause of stress in Americans. People are demonstrably worse at all kinds of problem-solving when they have money problems on their mind.

If you work in banking, this is worrying on both a personal and professional level, given money is simultaneously the commodity our business deals with and at the heart of the industry’s incentive program.

This suggests that Homo Economicus Argentarius, a banking derivative of HE, is even less likely to exist than the non-banking counterpart. This is supported by this research  which concluded that:

employees of a large, international bank behave, on average, honestly in a control condition. However, when their professional identity as bank employees is rendered salient, a significant proportion of them become dishonest.

This effect is specific to bank employees because control experiments with employees from other industries and with students show that they do not become more dishonest when their professional identity or bank-related items are rendered salient.

Whilst there are questions about the size of the sample used and the methods deployed in undertaking the research, the results don’t sound entirely implausible.  After all, this is an industry that has demonstrated, on a number of occasions, that decision making hasn’t always been of the highest ethical order.

Rules don’t rule

The principle way in which my industry has sought to manage Human Risk and ensure Compliance is through the use of rules.  Lots and lots of them.  Even in times of “light touch” regulation (remember those?), there were extensive rulebooks, governing what was and was not permitted.  Nowadays the number and size of those books are even larger.  Which has then been replicated within Firms in the way of policies and procedures that individuals are expected to know, understand and follow.

This is theoretically a good idea because writing down what is and is not acceptable means that no one can be in any doubt.  People can refer to the rules and providing they comply with them all will be fine.  It works extremely well in environments where following a strict set of protocols is an absolute necessity and where the situations people have to deal with are relatively predictable; such as in a nuclear plant or during a medical procedure.

It works less well in an environment where people are hired for a role which requires them to think creatively and where nuance exists.  As technology takes over the more routine tasks, the activities which human beings will increasingly be undertaking in our industry will become more judgement based.  That’s harder to write concrete rules for.

People need parameters, but they also need room to think.  Make the world excessively rules-based and we discourage decision-taking and encourage “unthinking compliance” where behaviour is driven by fear of punishment and people base their behaviours on the rules rather than thinking about what they are doing.   Meanwhile, intelligent people who want to find ways around the rules will do so.

If we want to incentivise people to “do the right thing” then we need to go beyond simply ordering people to follow policies and punishing them if they don’t.    Tali Sharot, Associate Professor of Cognitive Neuroscience at the University of London, explains in her recent book The Influential Mind that

Our instinct when trying to influence other’s actions is to give orders.  This approach often fails, because when people feel their independence has been limited, they get anxious and demotivated and are likely to retaliate. In contrast, expanding people’s sense of agency makes them happier, healthier more productive, and more compliant.

In other words, people don’t like being told what to do.   Even when you are paying them.    This applies in “normal” times, but particularly when people are under pressure and therefore more likely to make mistakes.   That’s precisely when the default reaction of those trying to control behaviour is to double-down on traditional methods; more enforcement of rules and greater intolerance for breaches. 

 Do what I say…or else…

All too often the behavioural incentives which are deployed in the name of Compliance are extrinsic (do things because I tell you to) rather than intrinsic (do things because you want to).

Which brings me back to the decision-making involved in shopping.  As we saw earlier, we’re not autonomous decision makers, but heavily influenceable.

At their most effective what advertisers use to persuade us to buy things are techniques that push our intrinsic rather than extrinsic buttons.  Even when it looks like we’re being told what to buy, such as when a celebrity endorses products, it’s actually less about them telling us to buy something, but rather us aspiring to be like them.

To better influence our decision-making, advertisers have become experts at knowing how we think.  In his book, The Choice Factory,  Richard Shotton, Manning Gottlieb OMD’s deputy head of evidence (now there’s a job title!) explains this:

BeSci, the study of decision-making, is an important topic…as it provides a robust explanation about why people buy particular products.  It recognises that people are overwhelmed by the sheer volume of decisions they need to make each day. While these short-cuts enable quicker decision-making, they are prone to biases…If advertisers are aware of these biases…then they can use them to their advantage.   They can work with the grain of human nature rather than unproductively challenging it.

If it’s good enough for advertisers then why shouldn’t we think about deploying some of the same techniques in the furtherance of our objectives? Both are seeking to influence decision-making.

The obvious counter-argument is that our regulators won’t let us.   An objection that is beginning to be challenged.  The UK’s Financial Conduct Authority, normally ahead of the pack on these matters, has recently published  Discussion Paper 18/2 that includes no less than 20 references to the term “behavioural science”.   Like this one:

Many decades of behavioural science research have shown that prescriptive rule-bound environments don’t build towards positive cultures and can lead to unintended and unwanted consequences (eg following rules without any sense of individual accountability or understanding of outcomes, or even ‘gaming’ the system)

So let’s bring a little more (behavioural) science into Compliance.   Unlike that humanoid robot pictured at the top of this page, we function better if we’re incentivised, rather than told what to do.   If we really want to manage Human Risk, then we need to make it easy and natural for people to do the right thing.

In my next blog, I’ll explore some ideas about how that might work in practice.

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