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Five actions to implement behavioral economics in financial services

Behavioral economics (BE) has a place in many industries, especially financial services, where employing BE has great potential.

In brief

  • Many financial services companies have already established disciplines around behavioral economics.
  • The use of BE has been on the rise in recent years in the financial services sector because it’s effective and has a wide reach.
  • There are many applications for BE in companies including commercial strategy, digital strategy, product research or even employee retention.

Behavioral economics is the study of judgment and choice — in other words, it looks at how we make decisions. It was created as an alternative approach to the economic models that tried to explain the behavior of consumers, but which presented certain deficiencies as anomalies — because they didn’t take into account the human factor.

The effectiveness of BE has been proven both in market experiments and in real environments. In fact, many financial institutions have already established disciplines around this science.

Marketing and commercial teams use it to design better ways to reach customers. It informs talent teams creating training programs for employees — to increase their well-being and motivation. Even governments use it to launch effective civil policies.

BE has been on the rise for primarily for two reasons: its effectiveness and its reach. Some of the activities that EY-Parthenon team members have significantly influenced through the application of behavioral economics include increasing employee satisfaction, optimizing employee communication, refining career plans and defining retention programs.

Applying behavioral economics does not only mean understanding the behavioral mechanisms but also adopting a way of employing them effectively. Each identification and validation of a mechanism starts from a hypothesis of human behavior that takes place right before a decision. It is followed by the setup of a study in the form of market surveys or other types of controlled tests. Numerous iterations are carried out until the results are statistically significant.

Finally, once the behavioral hypotheses are validated, they can be incorporated into product design or the definition of a customer strategy.

The role of behavioral economics has increased its relevance in large financial institutions, insurance companies, Fintech and Insurtech.

How to get started with behavioral economics

One of the main questions that large organizations face is where to start, which basically translates into where shall the financial institution allocate such a discipline or knowledge center. We have seen that the applications of behavioral economics range from pure commercial strategy to digitalization, product development or employee motivation.

The easiest way to answer this question is by understanding the company’s goals. Several institutions are appointing a Chief Behavioral Officer to be responsible for the well-being of the employees, which is obviously a very ambitious goal.

Other companies, however, may see the use of these techniques more as a completely customer-related topic and may want to start testing the approach and results in more agile ways, for example, setting up a specific team or scrum, to optimize the commercial impact of a specific product. This could generate quick wins that can be used to create momentum.

We’ve found that five key factors make a difference when initially incorporating and expanding behavioral economics within an organization.

Five key factors when incorporating or expanding BE

1. Involve the top management team

It is crucial to have awareness at the top management level of the importance of behavioral economics, as well as sufficient support for its implementation.

  • First of all, it is necessary that the top management team commits itself to focusing regularly on the importance of developing high-impact projects, training programs or even isolated initiatives in different areas.
  • Secondly, they must set the direction and clearly define the positioning and goals of the initiative, such as how many employees need to be trained, what results are expected from its application or how many projects should be implementing the methodology in depth.
2. Start gradually

A bank does not transform itself overnight, and the projects that are carried out by behavioral economics at the beginning do not necessarily have to be conducted with that aspiration. The ideal is to find an adequate balance between generating significant impact and not consuming too many resources. It is an initial stage in which it is essential to gain credibility internally. In EY-Parthenon’s experience, high-income impacts can be obtained with projects lasting between two and three months.

3. Understand that not everyone has to be an expert

While it is important for the entire organization to have notions of behavioral economics, not everyone needs to be an expert; its day-to-day application varies greatly from one business area to another — from accounting to risk, for example. For this reason, training courses of different levels can be designed, some of them can be for more than one day, others could be online. Also, depending on the area, not all teams will be equally involved in the projects, something we will discuss in the fifth point.

4. Create a defined structure

After the agile restructuring of many banks, it is easier to expand behavioral economics to the different teams. Here, the key is to have a knowledge center and expert staff running the different projects within the multidisciplinary teams. Banks will need to identify how these experts engage with, for example, other scrum members such as the product owner or the user experience (UX) specialist.

5. Involve key teams as much as possible

As we indicated earlier, not all the employees have to be experts, but those who carry out relevant projects do. Identifying the key people in the business, such as the Digital Transformation or Marketing Director, is fundamental. The same goes for the human resources area, where the training coordinator could be a major player in the rollout.

The potential of behavioral economics

The world of financial services has immense potential when it comes to incorporating behavioral economics into their business models. Unlike other industries, financial products are unattractive, complex and sometimes difficult to purchase. In short, they are boring and therefore clients take shortcuts to make their decisions and reduce their cognitive effort.

Behavioral economics is the tool that can help financial institutions understand how clients behave and how they make decisions. Digitalization, boosting savings, facilitating credit access or eliminating cash — whatever the challenge banks have ahead, behavioral economics is more relevant than ever.

There is no doubt about the importance of behavioral economics. Several Nobel Prize winners endorse the theories and numerous empirical tests verify its results.

In the financial sector, the applications of behavioral economics are extensive, both for internal customers (employees) and external customers (clients). Applications range from creating more attractive career paths to improving business effectiveness across all channels.

Financial products are needed but not necessarily desired, as they are mostly unattractive and complex. There are numerous cognitive barriers that slow down customers’ decision-making. In most cases, eliminating these barriers is more important than generating incentives to buy. Dan Ariely, one of the leading behavioral economists, uses the metaphor of a rocket. A rocket needs enough fuel to fly (incentives) but also not too much friction (barriers).

BE knowledge and methodologies allow companies to rapidly investigate the cause of those barriers or frictions, and design effective triggers or incentives.

This will create a virtual circle in which customers are positively influenced to make better financial decisions, which has a consequent impact on their satisfaction, loyalty and, finally, to the organization’s bottom line.

Pedro Donoso Armada, EY-Parthenon Senior Manager, contributed to this report.


The application of behavioral economics is especially relevant in financial services, a sector that tends to offer complex and sometimes challenging products to its customers. BE theory can assist financial institutions with gaining unique insights into their clients’ decision-making process. This information can help companies respond to specific challenges to help achieve business goals.

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