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

Abstract

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.