CO2 #3 U.K. regulator turns to behavioral economics to detect fraud (via Futures)

Stefan Hunt spent much of his academic career trying to understand why people make lousy financial decisions.

Now the former Harvard and Yale economist is helping U.K. market regulators protect consumers from those who might profit from exploiting the biases, instincts and fears that prompt those poor choices.

“It’s not like we are completely irrational,” said Hunt, who leads a 25-strong research team at the Financial Services Authority. “We make some systematic and predictable mistakes.”

Regulators are attempting to use behavioral economics to better understand the mindset behind the improprieties plaguing Britain’s financial hub: from rogue trader Kweku Adoboli, who hid trades that cost UBS AG $2.3 billion, to improper sales of loan insurance, for which U.K. banks have set aside more than 10 billion pounds ($16 billion) to compensate consumers.

The 37-year-old said he hopes awareness of behavioral science will make for better rules and fairer markets as the FSA prepares to split its role and create a new consumer-protection agency next year.

Behaviorists challenge the notion in traditional economics that people weigh their options and pick the best outcome for themselves. Instead, they look at the psychology of choices.

Read here this interesting article about a new application of BE: BEFraud