Martin Wheatley, chief executive of the Financial Conduct Authority, believes behavioural economics will play a part in the FCA's new style of regulation.
Speaking at the London School of Economics last night, Mr Wheatley said behavioural economics colauuld help the FCA understand how people make financial decisions.
Mr Wheatley said: "One of the most significant challenges for modern financial regulators and financial services alike is to recognise that we operate within a very human environment. A fallible world- not just of ratios and complex models but also response, sometimes flawed, that behavioural economics helps us understand."
It would also be used to look at consumer behaviour and how the FCA can help customers make decisions.
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He said: "We want the regulatory system to use behavioural economics to ascertain whether people are being put off switching products through inertia, inattention or even the simple fear of regret of making a wrong decision."
But, he admitted, the move would require the FCA to change its mindset regarding risks and problem-solving.
"We should not pretend this is a straightforward discipline. There is no mechanical routine to follow when we apply behavioural economics to regulation. It will require us to change the way we identify risk, diagnose problems and troubleshoot."
The speech followed two papers published by the FCA , one covering behavioural economics and a field study on encouraging consumers to claim redress.

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