Appalled by the FSA’s belief that key features illustrations and the requirements set out in its consultation paper CP12/05 (chapter 5 -pension scheme disclosure proposals) will actually help consumers make good decisions, I produced this real-world, personal example of how consumers really make decisions and what actually helps. I could have quoted the work of people such as Richard Thaler and Cass Sunstein but I thought this was more fun. It’s the story of how I went about buying a brand new car in 2010.
My first observation, in reflecting on this, is that I did not consciously set out any specific criteria against which to make my decision or have a “scientific” process for making my choice. Looking back, just over 2 years later, I still have the car and remain highly satisfied with my choice.
Despite the lack of “science”, algorithms, documented process or governance, my decision-making was not random. With varying degrees of consciousness at the time, my criteria included the size of car, appearance, enjoyment in driving, reliability, budget and running cost, more or less in that order (most important first).
Size was simple: big enough for 4 people and luggage but I did not want any gratuitous additional bulk. That established basic suitability and the sorts of car I would look at.
Appearance and enjoyment in driving were obviously subjective. They were also the easiest things for me to decide: I instinctively knew what I liked.
I could have judged reliability through various industry surveys or ratings. However, the general level of reliability is very high these days with few outliers. In the end, since the car I wanted to choose was Japanese, that to me was proof enough: Japanese manufacturers have ranked highly in such surveys for years, which is also consistent with my personal experience that “Made in Japan” is synonymous with quality and reliability in all things.
My budget was never an actual figure: it was a broad range with blurred limits. I was willing to spend more for something I liked yet also happy to spend less if I could get away with it. My eventual choice was neither the most expensive nor cheapest that I looked at. Value for money was judged on “gut feel”, not an Excel spreadsheet, and was not a big concern as the car market is very competitive.
Undoubtedly the least important criteria for me was running cost. I have given it far more thought in preparing my comments for this consultation paper than I did at the time of purchase. In fact, at the time of purchase, I do not believe I gave it any conscious thought at all.
The car I chose was quite a low insurance group and the cost of insuring it has proven low. Servicing costs have matched closely those of previous cars I have had, not that I considered it at the time. However, the most significant running cost was always likely to be fuel.
The actual fuel economy someone will get from a car is affected by a great many variables. What is more, many are difficult to determine and may change. So most consumers rely on the figures produced by manufacturers in standardised tests. These produce figures for “urban” and “extra urban” driving but most consumers rely on an “average” figure which is a combination of the two. Despite the flaws in the tests, the average mpg figures have had enduring popularity with consumers due to their simplicity and ease of use. The various issues are discussed well in this article on MSN.
Since making my choice of new car, the type of driving and mileage I do has undergone two significant changes already. Clearly, I do not know how many more there might be in future. However, this has not been an issue for me as, in my judgement, the car has been economical in all scenarios – much more so than my previous car. Had I tried to work out the most economical car to buy, it would have been too difficult a calculation for me. Furthermore, I would have undergone two anxiety-inducing shocks in two years as the bases of my calculations were completely undermined and I found that my car was now sub-optimal.
My decision to buy a brand new car was made close to the end of the scrappage scheme. Choosing was surprisingly easy because my decision-making was fast and frugal instead of complex and fraught. Even setting aside the subsidy from the scrappage scheme, the purchase has been a significant benefit over doing nothing. My old car needed repairs running into a four figure sum and it was incredibly uneconomical.
I hope the parallels to SIPPs are as obvious to you as they are to me and that you can in some way relate to my personal example. Although I did not consider it at the time, it is microcosm of what behavioural finance teaches us. I offer these thoughts for helping to shape pension scheme disclosure proposals specifically designed with the needs of consumers in mind:
- Setting out the regulator’s key concerns and the reasons for them in brief and simple language would help consumers and guide those wanting to help consumers
- Keep it simple: complexity grows exponentially
- The private sector has proven imaginative and innovative in providing information and help
- This has been amplified by technology such as forums and social media
- Consumers are used to and like measures such as ratings (e.g. energy efficiency), kite-marks (British Standards) and simple comparative measures (miles per gallon)
- Such measures effectively guide consumers in the right direction in other walks of life
- Do not set consumers impossible tasks (e.g. finding the cheapest)
- A good decision is usually better than endless procrastination
I do not believe that lengthy and complex calculations, the obscure concept of effect of charges, detailed disclosure of the individual amounts of commissions or the extensive information in key features illustrations in general are in any way consistent with helping consumers to make better decisions. If they had applied to cars and the cost of ownership, they would have made my decision much harder, so much so that I believe they would have prevented me from making any decision at all – to my detriment.
You can read my full response to the consultation here: Response to CP12_05 Chapter 5