From advert to action: behavioural insights into the advertising of financial products

The Financial Conduct Authority (FCA) published Occasional Paper No. 26 on April 12th 2017: From advert to action: behavioural insights into the advertising of financial products. It was written by Paul Adams and Laura Smart.

Laura Smart also wrote an Insight (FCA’s term for a blogpost I suppose): Economical with the truth: three ways behavioural science can help to spot a misleading advert. Add there is an infographic.

And on June 29th, they have a nice event for regulated firms. Experts Rory Sutherland and Joe Gladstone will present, as will Laura Smart and the FCA Financial Promotions team.

Summary

How are we affected by financial advertising? What do we pay attention to and when might we be misled? We explore the science of advertising to answer these questions. Building on earlier FCA work into behavioural biases, we summarise a large body of academic literature to explore the mechanisms behind consumer attention, understanding, and behaviour. We build this into a framework for understanding how consumers process information in the form of advertisements, divided into three stages: See, Interpret and Act. We then apply our findings in a novel setting: explaining what the science says about when an advert may be unclear, unfair or misleading.

In See, we find that attention may be predicted by the relative salience of information and is also affected by consumers’ motivation and intentions; for example, those searching for a house are more likely to notice mortgage deals.

In Interpret, we find that certain ways of presenting information, particularly those which make use of behavioural biases or which involve percentages may impede understanding and have the potential to mislead consumers in certain circumstances.

In Act, we see that consumers may be influenced into action through techniques which encourage reliance on heuristics or emotion, rather than reason, and that this may cause problems.

 

What is advertising for? (p6)

  • Marketing professionals point to the role of advertising in changing customers’ preferences or improving their brand recognition
  • Psychologists and behavioural scientists argue that advertising aims to prime potential customers to buy products when opportunity presents itself.
  • Economic approach
    • persuasive; that it altered consumers’ tastes and created (potentially spurious) product differentiation and brand loyalty.
    • informative; advertising helped to solve the problem that it is costly for consumers to search for products by providing information directly and efficiently.
    • complementary to the advertised product; that it does not change views or provide information, but simply enhances the existing features of a product.
  • Traditional approach: AIDA model attention, interest, desire and action. “require a high level of cognitive involvement, which does not necessarily concur with the behaviour we see
  • Behavioural approach (used by this FCA paper): how advertising draws on inbuilt psychological mechanisms, invokes our emotions, changes our preferences and invites automatic responses, as well as tells us a story.

 

How do we process adverts?

  1. See: getting our attention
    • Salience (“bottom-up attention”); size, colour, incongruities, pictures, music , language (e.g. personalised, or containing signal words such as “danger” or “warning” [Wogalter et al (2002) Research-based guidelines for warning design and evaluation])
    • Motivation (“top down attention”); people are also affected by their current circumstances; what they are thinking and feeling at the time in which they come across an advert. This highlights the importance of considering context and possible effects of priming in assessing consumer responses.
  2. Interpret: reaching an understanding
    • Numbers: “People are highly likely to make systematic errors when processing numbers”, especially with percentages. Or availability bias. “When it comes to communicating risk, comprehension may be reduced still further”. I fully endorse the FCA’s recommendation of David Spiegelhalter (@d_spiegel) and Gerd Gigerenzer’s work (see this book review for summary Simple Heuristics That Make Us Smart).
    • Framing: such as playing to loss aversion, tinkering with the choice-set (e.g. decoy effect), defaults (save lives), anchoring, and drip pricing:

      “Another way to present costs in a way that makes them seem less unattractive is to present the first cost and then add additional or optional costs later (such as adding sales fees, platform fees and termination fees for investments after presenting the initial cost; OFT, 2010, Advertising of Prices). Because the customer is already psychologically invested in the purchase by this point, they are less likely to back out when the further costs appear.”

    • Words and truth. I had never heard of Gricean Maxims, named after Paul Grice, who described conversational implicature in a piece called Logic and Conversation (1975).

      Omissions and caveats which lead to false impressions are often called “pragmatic implications” (see Gricean Maxims box). Common examples include:
      * two juxtaposed phrases which imply a causalrelationship: “You want only the best. Buy brand X”,
      * hedge words such as “may”,
      * comparative adjectives: “Gives you more rewards”, and
      * piecemeal survey results: “Better than Competitor A on price, better than Competitor B on coverage”.
      (…)
      It may be helpful to consider pragmatic implications in understanding what consumers take away from advertisements and to pay attention not only to what is said, but also how it is said. Even if the words are literally true, the message that the customer takes away could be incorrect.

      Adams en Smart conclude on #2 Interpret: “Techniques such as framing and pragmatic implications affect what consumers take away from an advertisement, which may be a different impression from what the words literally say.” (p26)

  3. Act: being influenced
    Consumers may be influenced to purchase products through appeals to emotion or the use of principles of influence, such as reciprocity or scarcity.

    • Emotion (“affect”). Possible counters:
      • “cooling on” periods, customers need to actively do something to complete the decision and activate the product. This provides a pressure-free period in which the customer can stop and think
      • pop-up warnings during purchase processes, (…) To test comprehension directly, it would even be possible to ask mandatory questions to check that a customer has understood what they are buying.
    • Influence. The Cialdini 6: Liking, Authority, Scarcity, Social Proof, Consistency, Reciprocity.

 

On Targeting & Timing

Targeting: now easier than ever to target adverts to consumers based on data about them. Two important considerations:

  1. As choices become more tailored to the individual’s current preferences, the individual is less likely to discover new preferences . They may even develop a distorted knowledge of what products are actually available.
  2. Data about consumers may be used to target those in particular circumstances, for example, those in debt or those who enjoy gambling, which could be detrimental to customers who are less able to ignore poor value or risky offers (Ronson, 2005 Who killed Richard Cullen?).

On Timing (p15): I tweeted the Ellering 2016 reference. He also quotes Dan Zarella who, in my experience, also has good, data-backed advice on how to get retweets or mail opens. Blog is not updated much though.

 

FCA regulation of Financial Promotions

The overarching principle [of the FCA] is that financial promotions must be clear, fair and not misleading.” (p4)

The FCA already requires that all relevant product information, including risk warnings and key exclusions, is sufficiently prominent” (p15)

The FCA published guidance on social media and customer communications in 2015 which explained that shorter adverts, including tweets, should still be standalone compliant (clear, fair and not misleading) without the need for users to click on a link to see balancing information or caveats (Financial Conduct Authority, FG15/4, 2014). However, as part of the Smarter Consumer Communications initiative, the FCA is undertaking further work to explore alternative approaches to firms’ communications through social media (Financial Conduct Authority, 2016). (p24)

 

Where to draw a line? What is acceptable advertising?
When is a sell too hard? When does selling become misselling? (In Dutch: the difference between “verleiding” & “misleiding”).

“What is the difference between unethical and ethical advertising? Unethical advertising uses falsehoods to deceive the public; ethical advertising uses truth to deceive the public.”

Vilhjalmur Stefansson, explorer and ethnologist (p16)

It is difficult to find a suitable way to measure when techniques might be unfair. Is it better to measure consumer understanding of their products, the decision making process of the consumer or the literal interpretation of the rules? In practice, it might be appropriate to take all of these factors into account. (p33)

For example, the UK Advertising Standards Authority recently adjudicated a case in which a company sent out marketing material in white windowed envelopes and found that the envelope breached the CAP code by making it insufficiently clear that the direct mailing was a marketing communication before opening it (Advertising Standards Authority, 2017). (p13)

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