6. Behavioral Science: From Theory to Practice

The pioneering work of economists Tversky and Kahneman are introduced in the development of behavioral economics. How their work was taken further by Richard Thaler and Cass Sunstein, and how such thinking is applied within financial services is examined. The Dutch National Bank and its use of behavioral science in the supervision process is highlighted. A case study of the Royal Bank of Scotland’s behavioral risk team provides a blueprint for how behavioral science can be used within a large financial firm to supplement existing compliance, audit and human resource functions. The author uses the RBS example to propose that such behavioral risk teams could also identify behaviors that work well within a firm, providing for “choice architecture” development.