Business simulation experiments by QUT behavioural economists commissioned by ASIC indicate simple interventions could increase compliance by company directors whose companies are undergoing liquidation.
These insights could be used by other organisations which need to encourage compliance with legal obligations, says Professor Uwe Dulleck from QUT's Queensland Behavioural Economics Group (QuBE).
The QuBE report for ASIC (Australian Securities and Investment Commission), Improving communication with directors of firms in liquidation, made recommendations for simple "nudge" techniques to increase compliance based on the experimental results.
QuBE's Professor Uwe Dulleck said the experiments simulated real business environments in which participants played for real money.
The aim was to test the effectiveness of subtle changes in communication to encourage company directors to comply with their legal obligations to report information to their liquidators.
"'Nudge' techniques are increasingly being used by regulatory bodies overseas such as tax offices and the Behavioural Insights Team in the UK," Professor Dulleck said.
"In Australia almost 10,000 companies became insolvent in 2012-2013 and there are quite a lot of processes for directors to go through to comply with their nominated liquidator's requirements.
"We already know that people are not able to process complex information quickly and effortlessly. This problem is compounded when faced with the stressful and emotionally draining situation of a compulsory liquidation.
"Our experiment confirmed that non-compliant directors fall into two categories: directors who struggle to comply because they are overwhelmed with requirements and who may lack financial skills, and those who intentionally go into liquidation to withhold assets for private use.
"This indicates that letter design should take into consideration the psychology of the recipient."
Professor Dulleck said the QuBE team made five recommendations for letter design changes based on experiments with participants who were told they were "running a company" and given various parameters for that company, which "eventually delivered a loss".
"Participants were then given some information about what they had to supply to the liquidator and some options for how they could do so.
"We found that 20 per cent of participants chose to receive legal or accounting help. This group was 30 per cent more likely to provide accurate information during the compliance process than those who did not choose to receive legal or accounting help.
"We also found that just reversing the order of the letter currently sent to unintentionally non-compliant directors, who would most likely be overwhelmed by 'cognitive overload', got more of their limited attention by stating the actions requested by ASIC first, followed by the rules and penalties."
Professor Dulleck said other effective techniques that ASIC could trial to nudge compliance included informing directors that compliance rates were usually high, thus appealing to their need to conform to social norms.
"For intentionally non-compliant directors the most effective treatment may be to leave the potential for punishment ambiguous, which is likely to be perceived as more threatening," he said.
"These findings confirm the use of laboratory experiments as a first step for designing compliance communication because they can control for the large variety of environmental factors that affect behaviour which are difficult to untangle to in real-world settings."
The Queensland Behavioural Economics group at the QUT Business School is a platform to bring together researchers from Economics, Finance and Behavioural Sciences to push the frontiers in theoretical and applied Behavioural Economics research. The group strives to evaluate, inform and design decisions and institutions in business, politics and society.
Currently the group collaborates in research projects with the Departments of Education in Queensland and Victoria, Suncorp and the NRL-based non-profit organisation Former Origin Greats and engaged in workshops about this topic with Queensland Police, the ATO and AMP besides the work done with ASIC. It is one of, if not the, most active group in Australia to bring state of the art insights and methods of Behavioural Economics to real-world applications.
Media contact: Niki Widdowson, 07 3138 2999 or n.widdowson@qut.edu.au
