## wp18178

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### I. BEHAVIORAL ELEMENTS — A. Introduction
- Post‑GFC rule‑based policy responses cited:
  - Basel III capital and liquidity rules.
  - Solvency II Directive for insurance companies.
  - IFRS 9 making asset and liability valuation more forward looking.
- Observations:
  - Behavioral factors received limited attention in mainstream economic and financial policymaking despite initiatives (FSB work on risk culture; occasional EC reports; World Bank’s World Development Report 2015).
  - Some authors describe a post‑GFC “spike” in applying behavioral research to economic policy for “alternative low‑cost approaches to financial services regulation,” but behavioral aspects remain marginal beyond corporate governance measures (executive compensation rules, fit and proper requirements).
  - The paper challenges the homo economicus assumption by linking financial‑sector decision‑making to emotional and subconscious processes.
- Structure overview:
  - Section I: behavioral elements (norms, behavior of others, biases).
  - Section II: application to financial sector.
  - Section III: concluding thoughts and suggestions.

### I. BEHAVIORAL ELEMENTS — Norms (overview)
- Three relevant norm categories:
  - Social norms: values, morals, ethics, community expectations.
  - Legal norms: positive law—written laws, jurisprudence, case law.
  - Market norms: economic supply and demand interactions in markets.
- Key points:
  - Determining which norm predominates in a decision is difficult; fast mental processes and subconscious factors obscure conscious choice of norms.
  - Neurobiology and social‑psychological models (Haidt’s Social Intuitionist Model; Kahneman’s “System 1”) support predominance of automatic, emotional, and subconscious influences.
  - Norms can overlap and be formalized; incentives influence compliance decisions but not necessarily perceived applicability of a norm.

### I. BEHAVIORAL ELEMENTS — Social Norms (detailed)
- Definition and characteristics:
  - Internalized through social interaction; felt by people; context‑dependent; exist without formal agreements.
  - Include etiquette and religious norms (religion treated as a subset of social norms in the paper).
- Example:
  - Dutch banking oath (as of 2015): required of all 80,000 bankers and banking staff in the Netherlands; consists of eight integrity vows (example text: “I swear that I will endeavor to maintain and promote confidence in the financial sector,” includes “So help me God”); breaking the oath can lead to fines, suspension, or blacklisting.
- Behavioral dynamics:
  - Compliance can stem from “it feels right” rather than legal obligation; observed behavior of others influences adherence; social norms may be formalized into legal norms without losing social character.

### I. BEHAVIORAL ELEMENTS — Legal Norms (detailed)
- Functions of legal norms:
  - Prevent undesirable behavior; encourage desirable behavior; clarify boundaries; attach penalties; strengthen/ weaken social/market norms.
- Sanctions:
  - Backed by criminal, administrative, or private sanctions as prudential reasons to comply.
- Administrative burdens:
  - Some legal norms lack clear grounding and can become outdated (example: fixed two‑week government response times vs. modern communication speeds).
- Regulatory practice trends:
  - Rise of Regulatory Impact Assessments (RIA): defined as “a systemic approach to critically assessing the positive and negative effects of proposed and existing regulations and non‑regulatory alternatives.” (OECD reference).
  - EC practice: combining RIAs with behavioral insights; EC (2013) recommends reflecting individual behavior as a driver in Impact Assessment problem trees.
  - US example: President Trump Executive Order 13772 (February 3, 2017) outlines principles including “make regulation efficient, effective, and appropriately tailored.” US Treasury commentary referenced (2017).
- Risks of formalization:
  - More complex rules and litigation may favor bureaucratic or corporate actors; proliferation of rules can enlarge discretion for regulators and enable “creative compliance.”
- Illegal versus harmful distinction:
  - Sparrow (2009) conceptualizes areas illegal but not harmful, and harmful but not illegal, creating supervisory dilemmas.
- Empirical note:
  - Acemoglu and Jackson (2015) suggest stricter rules reduce behavior among law‑abiding individuals but may induce more law‑breaking among law‑breakers.

### I. BEHAVIORAL ELEMENTS — Rules versus Principles
- Definitions:
  - Rules: prescriptive, detailed, reduce interpretation scope.
  - Principles: broader, outcome‑focused, allow flexibility and tailored solutions; require judgment and skills from regulated entities and supervisors.
- Trade‑offs and evidence:
  - Principle‑based regimes require strong judgment capabilities; power asymmetries may benefit larger firms.
  - English FSA (pre‑GFC 2007) favored principles‑based regulation to enable rapid response and support innovation; critics argue a mix persists and post‑crisis sentiment sometimes blames principles‑based approaches for failures.
  - Nursing home sector study (Australia) found excessive specific rules can create “endemic unreliability” and expand regulator discretion (the “paradox of discretion”).
- Conclusion: effective frameworks often combine rules and principles.

### I. BEHAVIORAL ELEMENTS — Market Norms
- Market norms: facilitate transactions and maximize individual utility; rooted in homo economicus assumptions.
- Classic reference:
  - Adam Smith quotation from Wealth of Nations about self‑interest and the “invisible hand.”
- Interaction with other norms:
  - Market norms may conflict or coincide with social norms; rationale differs even when behavior aligns.

### Box 1. Sen on Utility Maximization — core points
- Sen’s critique (direct quotation from Sen (1977)):
  - “The reduction of man to a self‑seeking animal depends in this approach on careful definition. If you are observed to choose x rejecting y, you are declared to have ‘revealed’ a preference for x over y. ... But if you are consistent, then no matter whether you are a single‑minded egoist or a raving altruist or a class conscious militant, you will appear to be maximizing your own utility in this enchanted world of definitions. ... The complex psychological issues underlying choice have recently been forcefully brought out by a number of penetrating studies dealing with consumer decisions and production activities. It is very much an open question as to whether these behavioral characteristics can be at all captured within the formal limits of consistent choice on which the welfare‑maximization approach depends.”
- Context:
  - Homo economicus underpins much contemporary financial regulation; references include Smith’s line and Alan Greenspan’s admission of “shocked disbelief” after the crisis.
  - Agency theory (Jensen and Meckling): shareholder–manager interest divergence and information asymmetries.
  - Stewardship theory: managers can act as stewards; adding money can crowd out social norms.
- Norm activation requirements:
  1) Awareness of consequences.
  2) Felt responsibility.
- Empirical mechanisms:
  - Ariely (2010): reminders of morality at temptation increase honesty.
  - Codes of ethics and banking oaths act as norm activation devices.

### Behavior of others: internalization, identification, conformity
- Internalization: norm “feels as if it is my own”; internal honesty monitor active mainly for big transgressions.
- Identification: adopting witnessed behavior to establish self‑defining relationships; Bicchieri’s “empirical expectation”; Akerlof’s “insiders” vs “outsiders.”
- Conformity: avoid differing from group; Shavell’s “compliance externality”; Bicchieri’s “normative expectation.”
- Summary: behavior of others exerts powerful influences via these channels interacting with social, legal, and market norms.

### Biases and heuristic principles affecting decision‑making
- Heuristics as “mental models”: categories, identities, prototypes, causal narratives, worldviews.
- Neurological constraints: Swaab.
- Salient biases listed in source:
  - Representativeness bias.
  - Confirmation bias.
  - Anchoring (Tversky and Kahneman).
  - Availability bias.
  - Recency bias.
  - Salience.
  - Imaginability.
  - Action bias.
  - Insensitivity to sample size.
- Additional biases: loss aversion, overconfidence, norms of reciprocity and fairness.
- Consequences:
  - Heuristics can create an illusion of validity; heavy reliance on experts can inhibit critique; calls to “de‑expertise” to democratize expertise.

### Bounded ethicality, strong reciprocity, and Prospect Theory
- Bounded ethicality (Tenbrunsel and Bazerman): people settle for satisfactory ethical choices; explains “good people do bad things without knowing that they are doing so.”
- Strong reciprocity (Ostrom/Gintis): individuals may be rational egoists or strong reciprocators motivated by material and intrinsic preferences.
- Prospect Theory (Kahneman and Tversky, 1979): decisions evaluated relative to reference point; losses weigh more heavily than gains (loss aversion).
- Implication: norms, behavior of others, and biases must be incorporated into financial regulation, supervision, and risk assessment.

### Examples and case evidence
- BP Deepwater Horizon (2010): regulator failures in worst‑case analysis and aggregation of low‑probability risks attributed partly to biases in risk assessment.
- Experimental/empirical evidence:
  - Codes of ethics with certification increase moral reasoning.
  - Reminders of morality reduce dishonesty at temptation moments.
  - Monetary incentives can “crowd out” intrinsic motivation and social norms.

### II. Practical take‑out for financial supervisors, regulators, and central banks
- Role of behavioral elements:
  - Limited but important role; integrating norm contexts, peer behavior, and biases can address individual decision‑making risks.
- Two country examples:
  - Netherlands: De Nederlandsche Bank (DNB) early adopter of integrating behavioral elements into regulation and supervision.
  - United Kingdom: Behavioural Insights Team (BIT) early policy team focused on behavioral insights.

### Framework for integration of behavioral elements into supervision and regulation
- Three main areas to incorporate behavioral knowledge:
  - 1) Research: academic and experiment‑based behavioral economics/finance research.
  - 2) Supervision: practicing behavioral supervision in addition to regular supervision.
  - 3) Policy/regulation: applying behavioral knowledge to rule design and policy development.

### Research and monetary policy notes
- Research as foundation; central banks/supervisors should create environments conducive to behavioral research.
- Noted biases affecting central banks (Haldane (2014)): (1) preference bias, (2) myopia bias, (3) hubris, (4) groupthink.
- Monetary policy experiment examples:
  - Lombardelli, Proudman, and Talbot (2002): groups make better decisions than individuals; information‑sharing improves decision quality.
  - Brazier et al. (2006): heuristic inflation forecasting model stabilizes economy better than some rules.

### Supervision — Case example: De Nederlandsche Bank (DNB)
- Preconditions for behavioral supervision:
  - Top executives and senior management must understand need for behavioral elements.
  - Hiring staff with behavioral expertise (psychologists, sociologists).
- DNB practices:
  - 2009: DNB published “The Seven Elements of an Ethical Culture.”
  - DNB’s Expertise Center on Governance, Conduct, and Culture supports supervisors with behavioral expertise (behavioral surveys; observers in company board meetings; behavioral interviews).
  - The Expertise Center conducts thematic examinations across supervised entities (~one year), draws final conclusions and suggestions; it does not itself issue supervisory interventions (warnings remain supervisory team responsibility).
  - Early recognition of behavioral risks can change prioritization and may identify governance root causes; in some banks this could lead to a capital add‑on under Basel’s Pillar 2.
  - April 2013: DNB published “Leading by Example—Conduct in the Board Rooms of Financial Institutions,” reporting findings from thematic examinations of about 30 financial institutions and defining behavioral supervision’s goal as pinpointing problems at an early stage.
- DNB’s four key areas expected of financial institutions (from 2013 report):
  - 1) Specific action to enhance attention to behavior and group dynamics (example: “Patterns of group dynamics were regularly and openly discussed both in day‑to‑day operational meetings and during regular off‑site sessions”).
  - 2) Sound judgment (“This means that their members must actively ask questions, engage in constructive discussion and challenge one another in the context of forming a judgment”).
  - 3) Organizing critical dialogue (“This helps ensure adequate discussion of all relevant risks and prevents decision‑making from becoming overly dependent on interpersonal dynamics”).
  - 4) Flexible leadership style for chairpersons (“Chairpersons should be capable of flexibly applying several leadership styles, depending on the situation”).
- Best practices: coaching and strategy sessions for boards; breaking complex decisions into smaller processes.
- Sectoral culture influence: events called “rationale for change” hosted by DNB executive management to promote behavioral attention.

### Regulation and behavioral policy development
- Long‑term objective: draft regulations that incorporate behavioral aspects from the outset.
- International recognition:
  - World Development Report (WDR) 2015: “paying attention to how humans think ... can improve the design and implementation of development policies and interventions that target human choice and action (behavior).”
  - European Commission (2013): policymaking could benefit from “a better understanding of people’s behavior.”
- Regulatory domains where behavioral insights matter:
  - Anti‑corruption and conflicts‑of‑interest rules may unintentionally lower barriers to misconduct (example: “four eyes principle” may be less effective because dyads can increase propensity to wrongdoing; Weisel and Shalvi, 2015).
  - Remuneration policy: current bonus capping rules do not consider that “nonmonetary rewards are harder to resist, especially by good people ... Regulators need to worry about nonmonetary rewards at least as much as they do about monetary ones.”
  - Shared identity or ideological ties between regulators and regulated parties affect behavior beyond monetary incentives.
- Intrinsic motivation and crowding effects (Frey and Jegen framework):
  - 1) External interventions crowd out intrinsic motivation if perceived as controlling.
  - 2) External interventions crowd in intrinsic motivation if perceived as supportive.
- Corporate governance linkage:
  - Governance covers relationships between management, board, shareholders, and stakeholders; structure for objectives and monitoring; incentives; role in providing market confidence.
  - Behavioral policy/regulation links to qualitative standards: remuneration, suitability/fit and proper, structuring senior management, nonfinancial risk management, internal audit, internal supervision and independence.
- Work environment effects:
  - Roles influence norm application (e.g., ethics officer vs trader); separation in space/time between decision‑makers and those affected reduces social norms.

### Applicability of behavioral‑informed rules (ex post) — framing and intent
- Goal: convey standards to financial institutions to best achieve compliance results; governance rule must make behavioral aspects visible.
- Contemporary governance references: ECB’s Guide to Banking Supervision; EBA’s Guidelines on Internal Governance; European Capital Requirements Directive IV (article 98, sub 7 on “corporate culture and values” in SREP).
- Policymakers/regulators must reflect on their own biases; economists systematically make optimistic forecasts requiring correction for optimism bias.

### MINDSPACE (UK BIT) and practical behavioral elements
- MINDSPACE nine elements (as presented in Table 1):
  1. Messenger — “The messenger determines our reaction to information.”
  2. Incentives — “Losing a sum of money has a bigger impact than winning the same amount; bonuses prompt us to take bigger risks than we should.”
  3. Norms — conformity and meeting expectations (example: providing information on average energy consumption of neighbors causes reduction in own consumption).
  4. Defaults — people choose the standard option (organ donation defaults; hotel towel reuse notices).
  5. Salience — new, simple, accessible, rapid information attracts attention; “anchor point.”
  6. Priming — actions driven by hints (words, images, smells).
  7. Affect — emotion, mood, feeling determine behavior.
  8. Commitments — people keep promises to avoid reputational damage.
  9. Ego — desire for a positive self‑image; attributing success to self, mistakes to others.
- EAST framework: simplified “Easy, Attractive, Social, Timely” for pragmatic policy application.
- Institutional recommendations:
  - Draft internal guidance translating MINDSPACE for rule drafters.
  - Set up Behavioral Insights Teams (BITs) within central banks/supervisors.
  - Allow experiment‑based research and Behavioral Impact Assessments of new rules.

### Behavioral units and experimental approaches (examples cited)
- Behavioural Insights Team (BIT), UK.
- White House Social and Behavioral Sciences Team (led by Maya Shankar).
- Australian Behavioural Insights Unit (New South Wales Government).
- Singapore Ministry of Manpower (cooperation with UK BIT).

### Effective behavioral influence in application and enforcement
- Influence strategies: normative (persuading/directing), educational (supporting/inspiring), coercive (punishing/rewarding).
- Use MINDSPACE to select messenger and medium (supervisor, central bank, ministry; directive, regulation, formal letter, seminar).
- Shefrin’s qualitative model links governance elements with biases to assess risk management failure likelihood (bias examples: Overconfidence, Confirmation Bias, Loss Aversion).
- Ethical considerations: Sunstein finds Americans show aversion to manipulative nudges and favor health/safety nudges; transparency recommended.

### Enforcement toolkit and behavioral integration
- Supervisory interventions range from softer, frequent measures to tougher, less frequent measures (graduated sanctions).
- Formal penalties examples (as listed in source):
  - DOJ fine of $780 million for UBS hiding accounts of American customers (2009).
  - US CFTC penalty of $325 million for RBS in the Libor case, with an additional $150 million fine from the DOJ.
  - US SEC fine of $500 million for ABN AMRO Bank / RBS for violations of the International Emergency Economic Powers Act Trading with the Enemy Act and Bank Secrecy Act.
- Preventive interventions (formal letters, consultations, investigations, document requests) are suited for applying behavioral knowledge; tone and format influence acceptance versus creative compliance.

### Systemic risk assessment and behavioral factors
- Systemic risk assessments focus on quantifiable aspects but behavioral aspects manifest in operational risks (compliance, reputational).
- Group of Thirty (2015): poor cultural foundations and cultural failures were major drivers of the recent financial crisis.
- Proposal: include boardroom dynamics and corporate culture in stress tests and systemic supervision tools.
- Proportionality: behavioral elements’ role grows with systemic importance or elevated systemic stress (consistent with IMF Financial Sector Assessment Handbook).

### Role of central banks: decision‑making, monetary policy, and communication
- Behavioral biases affect monetary policy decision‑making (loss aversion, reciprocity norms, overconfidence).
- Masciandaro: loss aversion can explain monetary policy inertia; described effects include moderation, hysteresis, and smoothing effects on policy stances.
- Governance features reducing behavioral risks in central banking (Haldane/BoE):
  1) goal dependence;
  2) instrument independence;
  3) committee‑based decision‑making;
  4) transparency and accountability.
- Central bank communication (forward guidance) can use behavioral insights to anchor expectations through messenger and medium selection.

### Recommendations (summary — Five main areas where behavioral elements should be used)
- 1. Research: allow experiment‑based research (example: BoE’s “One Bank Research Agenda”).
- 2. Rule‑making/regulation: set up behavioral policy development (MINDSPACE/EAST); conduct Behavioral Impact Assessments; strengthen governance arrangements; set up a BIT.
- 3. Financial supervision & enforcement: implement behavioral supervision; support on‑ and offsite supervisors with behavioral interventions.
- 4. Financial stability/systemic risk: include behavioral elements in governance and assessments for systemically important institutions.
- 5. Monetary policy: apply behavioral tools to committee decision‑making and central bank communication.

### Operational recommendations for supervisors, regulators, and central banks
- HR/staffing and expertise:
  - Ensure staff with diverse backgrounds including psychology, sociology, communication, HR, governance.
- Governance and transparency:
  - Strengthen board selection criteria and regular assessments, internal oversight, proper disclosure of policies and actions.
- Risk management and assurance:
  - Strengthen internal risk management (especially nonfinancial risk management) and assurance.
- International cooperation:
  - Share information with other supervisors/regulators/central banks via international organizations.
- Measurement and accountability:
  - Develop means to measure effectiveness of behaviorally inspired measures (examples: effects on tax returns, compliance with administrative fines, insurance levels).

### Conclusion and further research priorities
- Behavioral elements are relevant across three domains:
  1) behavioral effects of norms (social, legal, market);
  2) behavior of others (internalization, identification, conformity);
  3) psychological biases.
- Institutions have not realized the full potential or risks of behavioral elements; approaches must include social‑science insights on individual and group behavior.
- Practical starting points:
  - Experiment with behavioral supervision.
  - Draft guidance for regulators and supervisors.
  - Set up Behavioural Insight Teams in a low‑key, low‑cost manner.
  - For board members: increase awareness of behavior inside and outside the boardroom.
- Further research priorities:
  1) Incorporating behavioral expertise into selection and application of supervisory interventions.
  2) Examining the behavioral impact of supervision itself.
  3) Links between behavioral elements and systemic risk.

*Source: wp18178 - IMF Working Paper content provided in the supplied PDF chapter.*

### References .............................................................................................................

### References

### Tables
- 1. MINDSPACE: Behavioral Elements and Examples ...........................................................39
- 2. Shefrin's Model for Culture and Governance ......................................................................41
- 3. A Behavioral Approach for Financial Supervision, Regulation, and Central Banking .......50

### Figures
- 1. Trend in RIA Adoption Across OECD Jurisdictions ...........................................................12
- 2. Legal Norms—Illegal versus Harmful .................................................................................14
- 3. Schematic Overview of Agency Theory ..............................................................................17
- 4. Overview of Biases ...............................................................................................................26
- 5. Framework for Integration of Behavioral Elements into Financial Supervision and 
Regulation ................................................................................................................................30
- 6. DNB's House of Cultural Elements .....................................................................................32
- 7. Categories and Examples of Supervisory Interventions ......................................................44

### Boxes
- 1. Sen on Utility-Maximization ...............................................................................................16

*Source: wp18178 - References (wp18178 - References .............................................................................................................), https://www.imf.org/-/media/files/publications/wp/2018/wp18178.pdf*

### 2. Governance—A Matter of Definition ..................................................................................3

### 2. Governance—A Matter of Definition

### I. BEHAVIORAL ELEMENTS — A. Introduction
- Post-GFC policy responses focused on quantifiable changes to systems, procedures, and rules: examples include Basel III capital and liquidity rules, Solvency II Directive for insurance companies, and IFRS 9 making asset and liability valuation more forward looking.
- These rule-based responses were supplemented by extensive reporting requirements and disclosure rules.
- Behavioral factors received limited attention in mainstream economic and financial policymaking despite isolated initiatives: FSB work on risk culture, occasional EC reports, and the World Bank’s World Development Report 2015.
- Some authors describe a post-GFC “spike” in applying behavioral research to economic policy for “alternative low-cost approaches to financial services regulation,” but behavioral aspects remain marginal beyond corporate governance measures (e.g., executive compensation rules, fit and proper requirements).
- The paper links financial-sector decision-making to emotional and subconscious processes, challenging the homo economicus assumption of purely conscious, material-incentive-driven choice.
- Structure: Section I examines behavioral elements (norms, behavior of others, biases); Section II applies these to the financial sector; Section III offers concluding thoughts and suggestions.

### I. BEHAVIORAL ELEMENTS — B. Norms (overview)
- Three relevant norm categories:
  - Social norms: values, morals, ethics, community expectations.
  - Legal norms: positive law—written laws, jurisprudence, case law.
  - Market norms: economic supply and demand interactions in markets.
- Key observations:
  - Determining which norm predominates in a decision is difficult; fast mental processes and subconscious factors obscure conscious choice of norms.
  - Neurobiology and social-psychological models (e.g., Haidt’s Social Intuitionist Model; Kahneman’s “System 1”) support the predominance of automatic, emotional, and subconscious influences.
  - Norms can overlap: social norms often formalize into legal norms; market and social norms can coincide but rest on different rationales.
  - Incentives influence the decision to comply, but not necessarily the perceived applicability of a norm.

### I. BEHAVIORAL ELEMENTS — Social Norms (detailed)
- Definition: norms that govern societal and individual behavior, internalized through social interaction.
- Characteristics:
  - Felt by people, context-dependent, exist without formal agreements.
  - Include etiquette and religious norms (religion treated as a subset of social norms for this paper).
  - Social norms can be intrinsic (sense of moral obligation) and linked to community membership.
- Examples and empirical notes:
  - World Bank calls this “thinking socially”: behavior influenced by social expectations, recognition, cooperation, care of in-group members, and social norms; “Social norms are not similar world-wide.”
  - Dutch banking oath (as of 2015): required of all 80,000 bankers and banking staff in the Netherlands; consists of eight integrity vows (e.g., “I swear that I will endeavor to maintain and promote confidence in the financial sector,” includes “So help me God”); breaking the oath can lead to fines, suspension, or blacklisting. Christine Lagarde cited the oath as appealing to individuals’ moral compasses.
- Behavioral dynamics:
  - Compliance can stem from “it feels right” rather than explicit legal obligation; observed behavior of others influences adherence.
  - Social norms may be formalized into legal norms without losing their social-rooted character.

### I. BEHAVIORAL ELEMENTS — Legal Norms (detailed)
- Legal norms typically embody state-imposed social or market norms.
- Primary functions:
  - Preventing undesirable behavior and encouraging desirable behavior.
  - Clarifying boundaries, attaching penalties, and strengthening or weakening social/market norms.
- Sanctions:
  - Legal norms are typically backed by criminal, administrative, or private sanctions; sanctions act as prudential reasons to comply.
- Administrative burdens and red tape:
  - Some legal norms lack clear grounding and can become outdated (example: fixed two-week government response times vs. modern communication speeds).
- Regulatory practice trends:
  - Rise of Regulatory Impact Assessments (RIA): defined as “a systemic approach to critically assessing the positive and negative effects of proposed and existing regulations and non-regulatory alternatives.” (OECD reference).
  - OECD trend figure referenced (Figure 1) indicates number of countries requiring RIAs across OECD jurisdictions (source: OECD (2012)).
  - EC practice: combining RIAs with behavioral insights; EC (2013) recommends reflecting individual behavior as a driver in Impact Assessment problem trees.
  - US example: President Trump Executive Order 13772 (February 3, 2017) outlines principles including “make regulation efficient, effective, and appropriately tailored.” US Treasury commentary referenced (2017).
- Risks of formalization:
  - More complex rules and litigation may favor bureaucratic or corporate actors.
  - Proliferation of rules can enlarge discretion for regulators and enable “creative compliance” (seeking loopholes), reducing individual responsibility.
- Illegal versus harmful distinction:
  - Sparrow (2009) conceptualizes areas that are illegal but not harmful, and harmful but not illegal, creating supervisory dilemmas (Figure 2).
- Empirical finding:
  - Some research (Acemoglu and Jackson (2015)) suggests stricter rules reduce behavior among law-abiding individuals but may induce more law-breaking among law-breakers.

### I. BEHAVIORAL ELEMENTS — Rules versus Principles
- Definitions and trade-offs:
  - Rules: prescriptive, detailed, reduce interpretation scope.
  - Principles: broader, outcome-focused, allow flexibility and tailored solutions; require judgment and skills from both regulated entities and supervisors.
- Enforcement challenges:
  - Principle-based regimes require regulators to have strong judgment capabilities and enforcement entities to assess diverse applications fairly.
  - Power asymmetries may lead to unfair outcomes where larger firms influence enforcement more effectively than small firms.
- Evidence and debates:
  - English FSA (pre-GFC 2007) favored principles-based regulation to enable rapid response to market change and support innovation.
  - Critics note a mix of rules and principles persists; post-crisis sentiment sometimes blames principles-based approaches for regulatory failures.
  - Cross-sector evidence: nursing home sector study in Australia found that an excessive number of specific rules can create “endemic unreliability” and expand regulator discretion (the “paradox of discretion”).
- Noted conclusion: choice between rules and principles is not binary; an effective framework often combines both.

### I. BEHAVIORAL ELEMENTS — Market Norms
- Market norms: centered on facilitating transactions and maximizing individual utility; rooted in homo economicus assumptions.
- Classical foundation:
  - Adam Smith quotation from Wealth of Nations highlighting self-interest leading to public benefits via the “invisible hand.”
- Interaction with other norms:
  - Market norms may conflict or coincide with social norms; the underlying rationale differs even when behavior aligns (e.g., giving money to a friend may be social or market-driven).

### Key takeaways and implications for financial governance (synthesized from above)
- Behavioral aspects (social, legal, market norms; subconscious decision-making; religious and moral influences) materially affect decisions in the financial sector but remain under-emphasized in policy design.
- Formal legal responses post-GFC improved measurable safeguards (capital, liquidity, accounting), but may have overlooked the behavioral drivers that produce risky decisions.
- Policy tools that incorporate behavioral insights (e.g., RIAs with behavioral analysis; norm-activation devices like oaths) show promise but require careful design to avoid unintended effects (e.g., creative compliance, increased regulator discretion).
- Regulatory design choices must balance rules and principles: overly prescriptive rules can increase loopholes and discretion; principles demand stronger supervisory capabilities and can create power asymmetries if not paired with capacity-building.
- Supervisors and regulated entities need skills beyond technical rules: interview techniques, negotiation, intercultural awareness, and perspective-taking to apply principle-based regimes fairly.

*Source: wp18178 - 2. Governance—A Matter of Definition*

### Box 1. Sen on Utility Maximization

### Box 1. Sen on Utility Maximization

### Sen’s critique of revealed preference and utility maximization
- Direct quotation from Sen (1977):
  - “The reduction of man to a self-seeking animal depends in this approach on careful definition. If you are observed to choose x rejecting y, you are declared to have ‘revealed’ a preference for x over y. Your personal utility is then defined as simply a numerical representation of this ‘preference,’ assigning a higher utility to a ‘preferred’ alternative. With this set of definitions you can hardly escape maximizing your own utility, except through inconsistency. Of course, if you choose x and reject y on one occasion and then promptly proceed to do the exact opposite, you can prevent the revealed preference theorist from assigning a preference ordering to you, thereby restraining him from stamping a utility function on you which you must be seen to be maximizing. He will then have to conclude that either you are inconsistent or your preferences are changing. You can frustrate the revealed-preference theorist through more sophisticated inconsistencies as well. But if you are consistent, then no matter whether you are a single-minded egoist or a raving altruist or a class conscious militant, you will appear to be maximizing your own utility in this enchanted world of definitions. Borrowing from the terminology used in connection with taxation, if the Arrow-Hahn justification of the assumption of egoism amounts to an avoidance of the issue, the revealed preference approach looks more like a robust piece of evasion....

  The complex psychological issues underlying choice have recently been forcefully brought out by a number of penetrating studies dealing with consumer decisions and production activities. It is very much an open question as to whether these behavioral characteristics can be at all captured within the formal limits of consistent choice on which the welfare-maximization approach depends.”
- Citation: Sen, A., 1977, “Rational Fools: A Critique of the Behavioral Foundations of Economic Theory,” in Philosophy and Public Affairs, Vol. 6, No. 4, pp. 323–24.

### Context within financial regulation and governance theory
- The concept of the homo economicus underpins much contemporary financial regulation and supervision; historical reference to Smith’s line from 250 years ago and to Alan Greenspan’s testimony regarding the financial crisis: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity (myself especially) are in a state of shocked disbelief.”
- Agency theory (Jensen and Meckling) highlights:
  - Shareholders’ interests can differ from managers’ interests.
  - Information asymmetries can disadvantage shareholders.
  - Performance structures and incentives should align manager actions with shareholder interests.
- Stewardship theory argues:
  - Managers can act as stewards serving company and stakeholder interests without privileging self-interest.
  - Social/market norms guide managerial decision-making; adding money shifts decisions toward market norms and can crowd out social norms.

### Norm activation and implications for policy design
- Norm activation requires two conditions:
  1) Awareness of consequences: the individual must realize his/her actions affect society.
  2) Felt responsibility: the individual must feel responsible to take action.
- Empirical examples and mechanisms:
  - Ariely (2010): reminders of morality at the moment of temptation increase honesty.
  - Codes of ethics improve manager behavior and investor confidence when including certification choices, by increasing moral reasoning.
  - Banking oaths, codes of conduct, and corporate core values act as means of activating intrinsic norms.
- Policy implication:
  - Policymakers can design interventions to trigger social norms or market norms depending on desired outcomes (norm activation).

### Positive Model of Integrity and norm interactions
- Key concept: integrity as wholeness (keeping one’s word “whole and complete”) leads to “workability” (the state or condition determining available opportunity for performance).
- Distinctions:
  - Morality (social virtue): generally accepted societal standards of right and wrong.
  - Ethics (group virtue): agreed-on standards within a group, including disciplinary bases.
  - Legality (governmental virtue): laws enforceable by the state through penalties and judicial process.
- Interaction with market norms:
  - A cost-benefit/market-norms analysis of integrity indicates untrustworthiness; integrity cannot be a calculated price.
  - Applying market norms to decisions of integrity moves the relationship into a market context and can undermine social norms and workability.

### Behavior of others: internalization, identification, conformity
- Internalization:
  - A norm is internalized when it “feels as if it is my own”; content matters more than source.
  - Internal honesty monitor (superego) is active mainly for big transgressions; small transgressions are often rationalized away.
- Identification:
  - Consciously adopting witnessed behavior to establish or maintain a satisfying self-defining relationship to others.
  - Bicchieri’s “empirical expectation”: expecting a majority to follow a norm.
  - Akerlof’s “insiders” vs “outsiders”: norms become part of worker identity; workers suffer utility losses if others disobey and may retaliate.
- Conformity:
  - Acceptance of norms to avoid differing from group and to limit perceived risk of detection (peer pressure, herding).
  - Shavell’s “compliance externality”: people act according to social norms for fear of social sanctions.
  - Bicchieri’s “normative expectation”: belief that others expect conformity.
- Summary implication:
  - Behavior of others exerts powerful influences on individual behavior through these three channels, and they interact with social, legal, and market norms.

### Biases and heuristic principles affecting decision-making
- Heuristics function as rules of thumb and “mental models” (World Bank): concepts, categories, identities, prototypes, stereotypes, causal narratives, worldviews drawn from communities.
- Neurological and developmental influences constrain moral choices and decision-making (Swaab).
- Salient biases relevant to the financial sector (as listed in source):
  - Representativeness bias: rating probabilities based on resemblance; similarity may mislead; statistical methods (e.g., Bayes’ theorem) can counteract.
  - Confirmation bias: tendency to search for/interpret/remember information confirming preconceptions.
  - Anchoring (Tversky and Kahneman): overdependence on first-offered information; common in listing and bargaining.
  - Availability bias: basing decisions on examples that come to mind immediately.
  - Recency bias: recent events have stronger impact than older events.
  - Salience: real-life experiences create more readily recalled facts.
  - Imaginability: difficulty imagining all possible outcomes in complex situations.
  - Action bias: preferring action (even counterproductive) over inaction.
  - Insensitivity to sample size: seeing patterns in small samples despite regression to the mean.
- Additional biases: loss aversion, overconfidence, norms of reciprocity and fairness.
- Consequences:
  - Heuristics can produce an illusion of validity—successful predictions bolster unwarranted confidence.
  - Heavy reliance on experts can inhibit opposition or critique; calls exist for “de-expertising” to democratize expertise.

### Bounded ethicality, strong reciprocity, and Prospect Theory
- Bounded ethicality (Tenbrunsel and Bazerman):
  - Parallel to bounded rationality (Herbert Simon): people settle for satisfactory rather than optimal ethical choices due to information limits, mental limitations, and time constraints.
  - Ethical decisions are influenced by biases and forms of behavior of others (identification and conformity).
  - Explains how “good people do bad things without knowing that they are doing so.”
- Strong reciprocity (Ostrom/Gintis):
  - Individuals may be either:
    - Rational egoists (neoclassical utility maximizers), or
    - Strong reciprocators (motivated by material payoffs and intrinsic preferences).
- Prospect Theory (Kahneman and Tversky, 1979):
  - Individuals evaluate decisions based on gains and losses relative to a reference point, not final outcomes.
  - Losses weigh more heavily than gains (loss aversion).
- Implication for financial sector:
  - Behavioral elements—norms, behavior of others, biases—must be better understood and incorporated into financial regulation, supervision, and risk assessment.

### Examples and case evidence
- BP Deepwater Horizon (2010): regulator failures in worst-case analysis, aggregation of low-probability risks, and considering reasonably foreseeable significant adverse impacts; attributed partly to biases in risk assessment.
- Experimental and empirical findings:
  - Codes of ethics with certification can increase moral reasoning.
  - Reminders of morality reduce dishonesty in moments of temptation.
  - Monetary incentives can “crowd out” intrinsic motivation and social norms, lowering performance in some contexts.

*Source: Box 1. Sen on Utility Maximization, wp18178*

### Section II builds on this by applying the insights of Section I to financial supervision,

### Section II builds on this by applying the insights of Section I to financial supervision,

### Practical take-out for financial supervisors, regulators, and central banks
- Behavioral elements play a limited but important role in financial regulation and supervision; integrating norm contexts, peer behavior, and behavioral biases can help address individual decision-making risks to the financial sector.
- Two country examples illustrate practical approaches:
  - Netherlands: De Nederlandsche Bank (DNB) as an early adopter of combining behavioral elements from social norm contexts into regulation and day-to-day supervision.
  - United Kingdom: Behavioral Insights Team (BIT) as an early policy team focused specifically on behavioral insights.

### Framework for integration of behavioral elements into financial supervision and regulation
- Three main areas for incorporation of behavioral knowledge and expertise:
  - 1) Research: conducting academic research into behavioral economics and finance.
  - 2) Supervision: practicing behavioral supervision in addition to regular supervision.
  - 3) Policy/regulation: applying behavioral knowledge to financial regulation and policy development.

### Research (general and monetary policy)
- Research is foundational for understanding theoretical behavioral concepts before practical implementation; central banks, supervisors, and regulators should create environments conducive to behavioral research.
- Behavioral biases affect central bank decision-making; Haldane (2014) highlights four biases that may pose particular policy-making challenges: (1) preference bias, (2) myopia bias, (3) hubris, and (4) groupthink.
- Monetary policy research examples:
  - Lombardelli, Proudman, and Talbot (2002): experiments on monetary policy decision-making under uncertainty find that groups (e.g., a monetary policy committee) make better decisions than individuals; information-sharing and observing other committee members’ choices improve decision-making quality.
  - Brazier, Harrison, King, and Yates (2006): an inflation forecasting model using heuristics (lagged inflation and announced inflation targets) stabilizes the economy better than some monetary policy rules.
- Additional research topics noted: regulatory capture (Veltrop and De Haan, 2014), inattention in financial markets (Ehrmann and Jansen, 2012), and the BoE’s “One Bank Research Agenda” (2015) highlighting further areas for study, including biases in judgment-based supervision and collecting firsthand data from surveys or experiments.

### Supervision — Case example of De Nederlandsche Bank (DNB)
- Preconditions for behavioral supervision:
  - Top executives and senior management must understand the need to incorporate behavioral elements.
  - Hiring knowledgeable staff and developing staff expertise (including psychologists and sociologists) is imperative for central banks, supervisors, and regulators.
- DNB practices:
  - 2009: DNB published a policy paper titled, “The Seven Elements of an Ethical Culture.”
  - DNB’s Expertise Center on Governance, Conduct, and Culture supports regular supervisors with behavioral expertise (behavioral surveys within supervised entities; observers in company board meetings; behavioral interviews with board members).
  - The Expertise Center conducts thematic examinations on specific behavioral themes (for example, leadership or decision-making) across numerous supervised entities over roughly one year; it draws up final conclusions and suggestions but does not itself issue supervisory interventions (warnings remain the responsibility of the supervisory team).
  - Early recognition of behavioral risks enables different prioritization and may identify root causes in governance; in some banks this could lead to a capital add-on under Basel’s Pillar 2.
  - April 2013: DNB published “Leading by Example—Conduct in the Board Rooms of Financial Institutions,” reporting findings from thematic examinations of about 30 financial institutions in the Netherlands and defining behavioral supervision’s goal as pinpointing problems at an early stage, before they result in poor [financial] performance.
- DNB’s four key areas expected of financial institutions (as listed in the 2013 report):
  - 1) Specific action to enhance attention to behavior and group dynamics (example: “Patterns of group dynamics were regularly and openly discussed both in day-to-day operational meetings and during regular off-site sessions”).
  - 2) Sound judgment (“This means that their members must actively ask questions, engage in constructive discussion and challenge one another in the context of forming a judgment”).
  - 3) Organizing critical dialogue (“This helps ensure adequate discussion of all relevant risks and prevents decision-making from becoming overly dependent on interpersonal dynamics”).
  - 4) Flexible leadership style for chairpersons (“Chairpersons should be capable of flexibly applying several leadership styles, depending on the situation”).
- Best practices highlighted: company boards organizing coaching and strategy sessions; breaking down complex decision-making into smaller, less complex processes.
- DNB’s sectoral culture influence efforts: events called “rationale for change” (round tables, seminars, discussion settings); events hosted by DNB executive management and attended by key financial-sector players to promote behavioral attention.

### Regulation and behavioral policy development
- Long-term objective: draft regulations that incorporate behavioral aspects from the outset.
- International and supranational recognition:
  - WDR (2015): “paying attention to how humans think ... can improve the design and implementation of development policies and interventions that target human choice and action (behavior).”
  - European Commission (2013): policymaking could benefit from “a better understanding of people’s behavior.”
- Specific regulatory domains where behavioral insights matter:
  - Anti-corruption and conflicts-of-interest rules may unintentionally lower barriers to misconduct (example: the “four eyes principle” may be less effective because dyads can increase propensity to engage in wrongdoing; reference to Weisel and Shalvi, 2015).
  - Remuneration policy: current regulations on capping bonuses do not consider that “nonmonetary rewards are harder to resist, especially by good people ... Regulators need to worry about nonmonetary rewards at least as much as they do about monetary ones.”
  - Shared identity or ideological ties between regulators and regulated parties can influence behavior in ways not captured by monetary incentives alone.
- Intrinsic motivation and crowding effects (Frey and Jegen framework, as discussed by Ostrom and Gintis):
  - 1) External interventions crowd out intrinsic motivation if perceived as controlling; self-determination and self-esteem suffer and intrinsic motivation is reduced.
  - 2) External interventions crowd in intrinsic motivation if perceived as supportive; self-esteem and perceived freedom increase, enlarging self-determination.
- Corporate governance as a practical integration point:
  - Corporate governance definitions (OECD-based): relationships between management, board, shareholders, and stakeholders; structure for setting objectives and monitoring performance; incentives for board and management; and role in providing confidence for market functioning.
  - Behavioral policy development and regulation are readily linked to corporate governance, covering qualitative standards: remuneration policies, suitability/fit and proper, structuring of (senior) management, nonfinancial risk management, internal audit, internal supervision and independence requirements.
- Work environment effects:
  - Roles within firms influence which norms individuals apply (e.g., ethics officer vs. trader).
  - Separation of roles and distance in space/time between decision-makers and those affected can reduce prevalence of social norms in favor of legal/market norms.

### Practical recommendations for supervisors and regulators (governance focus)
- Incorporate behavioral aspects into governance approaches by:
  - 1. Making behavioral aspects of governance rules visible, ex ante:
    - Take into account (a) norms; (b) behavior of others; and (c) biases when drafting or adjusting governance rules.
    - Apply a behavioral policy framework (for example, the UK’s approach described elsewhere in the source).

*Source: IMF Working Paper (wp18178) — Section II content provided in the supplied PDF chapter.*

### 2. The next step concerns the applicability of this new kind of rule, ex post. This is a matter

### wp18178 - 2. The next step concerns the applicability of this new kind of rule, ex post. This is a matter

### Applicability of behavioral-informed rules (ex post) — framing and intent
- Goal: convey standards to financial institutions in a manner that contributes most to achieving the desired (compliance) result.
- The governance rule must be made more robust by making behavioral aspects visible.
- Contemporary references cited for governance guidance: European Central Bank’s (Single Supervisory Mechanism) Guide to Banking Supervision; European Banking Authority’s Guidelines on Internal Governance; European Capital Requirements Directive IV (notably article 98, sub 7 on examining “corporate culture and values” in SREP).
- Policymakers and regulators must reflect on their own behavioral biases; quantitative forecasting requires correction for optimism bias (example: economists systematically make optimistic forecasts, giving more weight to recent growth performance than is justifiable by historical experience).

### Incorporating behavior into rules: MINDSPACE (UK BIT) and approach
- MINDSPACE: a methodology developed by the UK’s British Behavioral Insights Team (BIT) listing nine behavioral elements for policymakers.
  - The nine elements (as presented in Table 1) and examples:
    1. Messenger — "The messenger determines our reaction to information." Example: experts may have more influence than a belittling government.
    2. Incentives — "Losing a sum of money has a bigger impact than winning the same amount; bonuses prompt us to take bigger risks than we should."
    3. Norms — conformity and meeting expectations. Example: providing information on the average energy consumption of neighbors causes reduction in own consumption.
    4. Defaults — people choose the standard option. Example: organ donation defaults; hotel towel reuse notices.
    5. Salience — new, simple, accessible, rapid information attracts attention; "anchor point."
    6. Priming — actions driven by hints (words, images, smells). Example: picture of smiling face increases cafeteria helpings.
    7. Affect — emotion, mood, feeling determine behavior. Example: sporting contest results influence share prices.
    8. Commitments — people keep promises to avoid reputational damage. Example: losing weight together is more effective.
    9. Ego — desire for a positive self-image; attributing success to self, mistakes to others.
- EAST: a simplified version ("Easy, Attractive, Social, Timely") published by BIT for pragmatic policy application.
- MINDSPACE examples span domains beyond finance (health care, hospitality, advertising), indicating applicability across policy, legislation, standardization, and supervision.

### Behavioral units and experimental approaches
- Examples of behavioral units:
  - British Behavioral Insights Team (BIT).
  - White House Social and Behavioral Sciences Team (led by Maya Shankar).
  - Australian Behavioral Insights Unit (New South Wales Government).
  - Singapore’s Ministry of Manpower (cooperation with UK BIT).
- Recommended institutional approach:
  - Draft internal guidance translating MINDSPACE into practical guidance for rule drafters (BCBS working groups, ECB SSM, EBA, etc.).
  - Set up Behavioral Insights Teams (BITs) within central banks/supervisors to integrate behavioral expertise across Communication, HR, and Supervisory Policy.
  - Allow for experiment-based research and Behavioral Impact Assessments of new rules.

### Effective behavioral influence in application and enforcement
- Application of rules requires considering how people react to legal form and communication method.
  - Influencing strategies to choose consciously: normative (persuading/directing), educational (supporting/inspiring), coercive (punishing/rewarding).
  - Use MINDSPACE to decide messenger and medium (e.g., supervisor, central bank, ministry of finance; directive, regulation, formal letter, seminar).
- Shefrin’s qualitative model: links governance elements with biases to assess risk management failure likelihood. Example biases listed: Overconfidence, Confirmation Bias, Loss Aversion.
- Responsible use of "nudging":
  - Sunstein’s findings: Americans show aversion to certain default-based or clearly manipulative nudges; generally favor health and safety nudges.
  - Ethical concerns and need for transparency when using behavioral interventions.

### Enforcement toolkit and behavioral integration
- Supervisory interventions range from softer, frequent measures to tougher, less frequent measures (graduated sanctions).
- Examples of formal penalties in recent years:
  - DOJ fine of $780 million for UBS hiding accounts of American customers (2009).
  - US Commodity Futures and Trading Commission penalty of $325 million for RBS in the Libor case, with an additional $150 million fine from the DOJ.
  - US SEC fine of $500 million for ABN AMRO Bank / RBS for violations of International Emergency Economic Powers Act Trading with the Enemy Act and Bank Secrecy Act.
- Preventive interventions (formal letters, consultations, investigations, document requests) are well suited for applying behavioral knowledge; the tone and format of communications can influence acceptance versus creative compliance or defiance.
- Recommendation: integrate behavioral insights into the design and delivery of supervisory communications and interventions.

### Systemic risk assessment and behavioral factors
- Systemic risk assessments often focus on quantifiable aspects (liquidity, equity devaluations, credit risk), but behavioral aspects manifest in operational risks (compliance risk, reputational risk).
- Group of Thirty (2015) argued poor cultural foundations and cultural failures were major drivers of the recent financial crisis.
- Proposal: include boardroom dynamics and corporate culture in stress tests and systemic supervision tools.
- Proportionality: behavioral elements’ role grows with systemic importance of an institution or elevated systemic stress (consistent with IMF Financial Sector Assessment Handbook approaches).

### Role of central banks: decision-making, monetary policy, and communication
- Behavioral biases affect monetary policy decision-making (examples: loss aversion, reciprocity norms, overconfidence).
  - Masciandaro: loss aversion can explain monetary policy inertia; three effects described: (1) moderation effect (increasing number of monetary “pigeons”); (2) hysteresis effect (“doves” and “hawks” smooth attitudes); (3) smoothing effect (number of “pigeons” stabilizes).
- Governance features to reduce behavioral risks in central banking (Haldane/BoE): (1) goal dependence; (2) instrument independence; (3) committee-based decision-making; (4) transparency and accountability.
- Central bank communication is a key instrument (forward guidance); behavioral insights can improve clarity, selection of messenger, and medium to anchor expectations effectively.
- Research and committee design should explicitly consider bounded rationality and heuristics to align central bank decisions with societal interests.

### Recommendations (summary and Table 3 overview)
- Five main areas where behavioral elements should be consciously used:
  1. Research: allow experiment-based research; example: BoE’s “One Bank Research Agenda.”
  2. Rule-making/regulation: set up behavioral policy development (MINDSPACE/EAST); conduct Behavioral Impact Assessments; strengthen governance arrangements; set up a BIT.
  3. Financial supervision & enforcement: implement behavioral supervision; assist on- and offsite supervisors with behavioral interventions.
  4. Financial stability/systemic risk: include behavioral elements in financial system governance and assessments for systemically important institutions.
  5. Monetary policy: apply behavioral tools to committee decision-making and central bank communication.
- Operational recommendations for supervisors, regulators, and central banks:
  - HR/staffing and expertise: ensure staff with diverse backgrounds including psychology, sociology, communication, HR, governance.
  - Governance and transparency: strengthen board selection criteria and regular assessments, internal oversight, proper disclosure of policies and actions.
  - Risk management and assurance: strengthen internal risk management (especially nonfinancial risk management) and assurance.
  - International cooperation (FSB, IFIs): share information with other supervisors/regulators/central banks via international organizations active in this area.
- Measurement and accountability: develop means to measure effectiveness of behaviorally inspired regulatory and supervisory measures; examples include measurable effects on tax returns, compliance with administrative fines, and insurance levels.

### Conclusion and further research priorities
- Behavioral elements are relevant for financial supervision, regulation, and central banking across three domains: (1) behavioral effects of norms (social, legal, market); (2) behavior of others (internalization, identification, compliance); and (3) psychological biases.
- Institutions have not realized the full potential or risks of behavioral elements; approaches must include individual and group behavior insights from social sciences.
- Practical starting points: experiment with behavioral supervision, draft guidance for regulators and supervisors, set up Behavior Insight Teams in a low-key, low-cost manner.
- For board members: increase awareness of behavior inside and outside the boardroom.
- Further research should focus especially on:
  1. Incorporating behavioral expertise into selection and application of supervisory interventions.
  2. Examining the behavioral impact of supervision itself.
  3. Links between behavioral elements and systemic risk.

*Source: wp18178 (PDF chapter content provided).*

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- Ali, P., I. Ramsay, and C. Read, 2014, “Behavioural Law and Economics: Regulatory Reform of Consumer Credit and Consumer Financial Services,” SSRN.com.
- Braithwaite, J., 1984, Corporate Crime in the pharmaceutical industry.
- Braithwaite, J., V. Braithwaite, 1995, “The Politics of Legalism: Rules Versus Standards in Nursing-Home Regulation,” Social & Legal Studies 4: 307+.
- Kelman, H.C., 1958, “Compliance, identification, and internalization—three processes of attitude change,” The Journal of Conflict Resolution, Volume II, No. 1, pp. 51–60.
- La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny, 2009, “The quality of government,” Journal of Law, Economics and Organization, 15 (1999), pp. 222–79.
- Raz, J., 1983, The Authority of Law.
- Shavell, S., 2010, “When is it socially desirable for an individual to comply with the law?” Discussion Paper No. 682, Harvard Law School.
- Smith, A., 1776, The Wealth of Nations.
- Smits, J.M., 2003, Monografieën Nieuw BW: Bronnen van verbintenissen, A2.

### Reports, talks, and other sources
- Clark, A., and J. Treanor, “Greenspan:  I was wrong about the economy. Sort of,” The Guardian, October 24, 2008.
- Guiso, L., P. Sapienza, and L. Zingales, 2003, “People's opium? Religion and economic attitudes.” Journal of Monetary Economics, 50 (2003), pp. 225–82.
- Hilary, G., and K.W. Hui, 2009, “Does Religion Matter in Corporate Decision Making in America,” Journal of Financial Economics, Vol. 93, No. 3, pp. 455–73.
- Jansen, R., 2011, Wellink aan het woord.
- McBarnet, D., 2006, “After Enron: Will ‘whiter than white collar crime’ still wash?” The British Journal of Criminology, Vol. 46, No. 6, November 1, 2006, pp. 1091–109.
- Nesterak, E., 2014, “Head of White House ‘Nudge Unit’ Maya Shankar Speaks about Newly Formed Social and Behavioral Sciences Team,” www.thepsychreport.com, July 13, 2014.
- Raz, J., 1983, The Authority of Law.
- Schwartz, S.H., 1977, “Normative influences on altruism,” Advances in experimental social psychology, No. 10, pp. 221–79.
- Smith, A., 1776, The Wealth of Nations.
- Sunstein, C.R., 2014, “The Ethics of Nudging,” Very Preliminary Draft 11/20/14, SSRN.com.
- Sunstein, C.R., 2015, “Which Nudges Do People Like? A National Survey,” Preliminary Draft 6/22/15, SSRN.com
- Taylor, T., 2014, “Economics and Morality,” Finance and Development, Vol. 51, No. 2, pp. 34–38.
- Veltrop, D.B., and J. de Haan, 2014, “Regulatory Capture of Financial Supervisors: A Social Identity Perspective,” DNB Working Paper (forthcoming).
- World Bank, 2015, Mind, Society, and Behavior, World Development Report Washington: The World Bank

*Source: wp18178 - REFERENCES (wp18178 - REFERENCES).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp18178.pdf_