Protecting Financial Consumers in the Era of BD•ML Innovations: What Behavioral Patterns to be Tamed? And How?

Abstract

The main objective of this study is two-fold: first, deriving specific behavioral patterns to be tamed, in both demand-side and supply-side of the financing markets, in the viewpoint of protecting financial consumers in the era of BD∙ML innovations; and, second, elaborating a set of policy remedies to nudge the consumers as well as the intermediaries to improve each behavioral pattern identified. To that end, two particular optimization frameworks are specified - (1) a two-period (working age vs. retirement) intertemporal utility maximization framework for financial consumers, and (2) a profit (or NOI per-period) maximization framework for financial intermediaries, out of which eight specific behavioral patterns are identified as those that should be targeted in designing and instituting a welfare-enhancing regime of consumer protection policies. Those behavioral patterns are further linked to real world cases of abusive and fraudulent intermediation practices as well as to policy remedies to deal each behavioral pattern included. In so doing, the study aims to offer a template with which one can formulate future research agenda and policy instruments to be collaborated in the global research community as to how to protect financial consumers in the current environment of rapidly advancing technologies.