Spanish regulation for labeling of financial products: a behavioral-experimental analysis

Spanish regulation for labeling of financial products: a behavioral-experimental analysis – Y Gómez, V Martínez-Molés, J Vila – Economia Politica, 2016 [Pdf].


This paper assesses the impact of the Spanish Ministry of Economy and
Competitiveness’ (Board of Executives (BOE) Order ECC/2316/2015. Economy
and Competitiveness Ministry, Spain, 2015) new regulation for financial product labeling.

We design and conduct an economic experiment where subjects make risky investment decisions under three different treatments: a control group where subjects have only objective information about the key features of the products they must select and two treatment groups introducing visual labels resembling the labels required under the new Spanish regulation. The results of the experiment are analyzed within the framework of rank-dependent utility theory.

While visual labels do not change the utility function of the subjects, they do significantly affect the subjects’ weighting functions. The introduction of numerical and color-coded labels significantly increases the concavity of the weighting functions and increases pessimism and risk-aversion in cases where the probability of obtaining the best outcome is high.

Labels widen the difference between real subjects’ behavior and that of the perfectly rational agents described by expected utility theory. Consequently, our empirical findings raise doubts as to whether the new regulation actually achieves its objectives.

The regulation seeks to empower retail investors by enhancing their understanding of financial products. Introducing the visual labels, however, seemingly increases the differences between actual risk levels and the decision weights applied by subjects when making decisions.

Moreover, labels increase investors’ pessimism and risk-aversion when the best outcome is likely and fail to alter investors’ risk-aversion when the worst outcome is likely.


Method was at times too complicated for me (utility & weighting functions), but interesting outcomes nonetheless:

  • Consequently, our empirical findings raise doubts as to whether the new regulation actually achieves its objectives.
  • In summary, visual labels affect subjects’ understanding of risk levels. Visual labels cause subjects’ understanding to diverge from that of perfectly rational agents. Furthermore, labels make subjects more risk averse in cases where the probability of the best output is high.
  • The behavioral experiment presented in this paper shows that the labels proposed under the new regulation are seemingly a long way from achieving their goal. Taking decisions made by the rational agents described in rational choice theory as a benchmark, our experiment shows that both graphical and numerical labels actually worsen subjects’ decision-making. Introducing labels makes retail investors’ decisions less rational.
  • The practitioners claimed that introducing labels has increased the perception of risk associated with the safest products (for instance, bank deposits), mainly among investors with low financial literacy.

Disclosure and warnings are often employed as the solution for everything (market failures). Important and good that such interventions are also measured and assessed on merit. The proof of the pudding is in the eating.


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