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Neuroscience and the law focus: what's the point of regulating advertising?
I have no doubt after reading the article entitled “The advertising effect – how do we get the balance of advertising right?” published today by Compass by Zoe Gannon and Neal Lawson that the major thesis of the authors that unregulated advertising is likely to be dangerous for society, and could have a massively detrimental effect.
I really liked this article, as I think that it is one of the few articles which seemed to have an understanding of the modern neuroscience involved in tackling a problem of huge cultural significance, maybe using legal measures. As someone who tends to read the introduction and conclusion of article, I found it most helpful that Gannon and Lawson summarized the gist of their argument successfully in the conclusion,
“If you go to an advertising company to sell a product or service their planners will strip the issue down to bare essentials before building a campaign around it. It is the essence of the message they are after, the essence of the advertising industry is that new technologies, new science and new psychology have put the industry increasingly out of social and political control. Advertising regulations now need to catch up with the reality of the advertising effect on us and our planet.”
On the other hand, I found Jackie Ashley’s response lacked any depth to an analysis of the problem from either a neuroscience or legal perspective (1). However, arguably, one of the most interesting enticing paragraphs begins with the sentence,
“Meanwhile neurologists are working out what images will trigger the buy button in our brains.”
Gannon and Lawson provide that “machines are being used to shed light on brain mechanisms that play a central role in consumer behaviour: circuits that underlie reward, decision making, motivation, emotions and the senses of self.” This would indeed seem to make sense, as the subjective experience of being the target of advertising probably has the same underlying neural basis as our euphoria on sex or drugs of abuse. Indeed, one of the many successes of neurological research in the last century has been to identy a neurobiological mechanism mediating behavior motivated by events commonly associated with pleasure in humans. These events are termed “rewards” and are viewed as primary factors governing normal behavior. The subjective impact of rewards (e.g., pleasure) can be considered essential (e.g., Young, 1959) or irrelevant (e.g., Skinner, 1953) to their effect on behaviour, but the motivational effect of rewards on behavior is now universally acknowledged by experimental psychologists.
In addition, the authors give due credit to one of the most important papers on the subject of “neuromarketing”, a relatively new field. A cognitive neuroscientist (Read Montague) postulated that, if people preferred the taste of Pepsi, the drink should have dominated the market. It didn’t. So in the summer of 2003, Montague gave himself a ‘Pepsi Challenge’ of a different sort: to figure out why people would buy a product they didn’t particularly like. Neuromarketing is effectively the study of the brain’s responses to ads, brands, and the rest of the messages littering the cultural landscape.
Montague had his subjects take the “Pepsi Challenge” while he watched their neural activity with a functional MRI machine, which tracks blood flow to different regions of the brain. Without knowing what they were drinking, about half of them said they preferred Pepsi. But once Montague told them which samples were Coke, three-fourths said that drink tasted better, and their brain activity changed too.
Coke “lit up” the medial prefrontal cortex (a part of the brain very much involved in higher cognitive processes). Montague’s hypothesis was that the brain was recalling images and ideas from commercials, and the brand was overriding the actual quality of the product. For years, in the face of failed brands and laughably bad ad campaigns, marketers had argued that they could influence consumers’ choices. The paper was a substantial contribution to the literature. Montague published his findings in the October 2004 issue of Neuron, and a new field of the neurosciences was born: neuromarketing. (1)
However, there are still some problematic unanswered questions from a neuroethics perspective.
(1) What effect did the Coke label have on the brain that the Pepsi label did not?
(2) What other evidence suggests that taste alone does not determine your favorite cola? Obesity is epidemic in America, and sugared soft drinks are one of the primary culprits.
(3) How might this research help doctors fight obesity?
(4) Suppose both the Coke and the Pepsi labels triggered the same reaction in the brain. What conclusion would you draw?
For a long time, marketing experts have relied on behavioral studies for guidance. In the USA, some companies are taking the practice several steps further, commissioning their own fMRI studies consistent with the research above. For example, in a study of men’s reactions to cars, Daimler-Chrysler has found that sportier models activate the brain’s reward centres as well as activating the area in the brain that recognizes faces, which may explain people’s tendency to anthropomorphize their cars. Steven Quartz, a scientist at Stanford University, is currently conducting similar research on movie trailers. And in the age of poll-taking and smear campaigns, political advertising is also getting in on the game. Researchers at the University of California, Los Angeles have found that Republicans and Democrats react differently to campaign ads showing images of the Sept. 11th terrorist attacks. Those ads cause the part of the brain associated with fear to light up more vividly in Democrats than in Republicans.
Gannon and Lawson in their scholarly article appear to develop their case that, if unregulated, this is dangerous:
“Excessive advertising turns a never ending series of new needs into new wants, and crowds out the space for other visions of the good society, where time and relationships matter more than what we buy. Advertising encourages us to run ever faster on the treadmill of modern consumer life; in so doing it contributes to growing consumer debt, a number of social problems which this report discusses, and to the very real prospect of climate change beyond our ability to manage. So the report calls for a tax on all advertising that encourages greater consumption to limit its scope and slow the pace of growth for the good of society and the future of the planet.”
There are in fact seven ways which Gannon and Lawson perceive as perhaps being capable of solving the problem: e.g. banning advertising in public spaces, controling advertising on the Internet, tax advertising, and probably, most contentiously, introduce statutory regulation of the advertising industry. This would be yet another example of where cognitive neuroscience meets the law in some way – exciting times indeed. If advertising is so rampant, should we spend money researching it like cancer?
References
(1) Jackie Ashley. Let’s take on the ads that fuel such waste, debt and misery. The Guardian, Sunday 24th February 2009.
(2) McGlure SM, Li, J, Tomlin, D, Cypert KS, Montague LM, Montague PR. Neural correlates of behavioral preference for culturally familiar drinks. Neuron 2004 Oct 14;44(2):379-87.
The final report of the Independent Commission on Banking from Sir John Vickers
Ahead of schedule, the final Report has just been published. This Final Report sets out the Commission’s recommendations on reforms to improve stability and competition in UK banking. The context of this Final Report is striking, as set out in the conclusion of the Executive Summary. “The fact that the economy is currently weak is no reason to be distracted from this goal. It is strongly in the national economic interest to have much sounder banks than before. Postponement of reform would be a mistake, as would failure to provide certainty about its path.”
The Final Report commences thus:
The recommendations in this report aim to create a more stable and competitive basis for UK banking in the longer term. That means much more than greater resilience against future financial crises and removing risks from banks to the public finances. It also means a banking system that is effective and efficient at providing the basic banking services of safeguarding retail deposits, operating secure payments systems, efficiently channelling savings to productive investments, and managing financial risk. To those ends there should be vigorous competition among banks to deliver the services required by well-informed customers.
The international reform agenda – notably the Basel process and European Union (EU) initiatives – is running concurrently, but needs to be supported and enhanced by national measures, according to the Committee. Sir John Vickers and colleagues believe that mcro-prudential regulation by the new Financial Policy Committee should help curb aggregate financial volatility in the UK.
They comment specifically that improved supervision by the new Prudential Regulation Authority should avoid some shortcomings of regulation exposed by the recent crisis. The Commission’s view is that the right policy approach for UK banking stability requires both (i) greater capital and other loss-absorbing capacity; and (ii) structural reform.
The Committee notes that governments in the UK and elsewhere prevented banks from failing in 2008 because the alternative of allowing them to go bankrupt was regarded as intolerable. Under Basel III, banks will be required to have equity capital of at least 7% of risk-weighted assets by 2019, while risk weights have also been tightened.
The Committee believes that structural separation should make it easier and less costly to resolve banks that get into trouble. They feel that one of the key benefits of separation is that it would make it easier for the authorities to require creditors of failing retail banks, failing wholesale/investment banks, or both, if necessary, to bear losses, instead of the taxpayer. Secondly they believe that structural separation should help insulate retail banking from external financial shocks, including by diminishing problems arising from globalisation in the banking sector. The Commission’s analysis of the costs and benefits of alternative structural reform options has concluded that the best policy approach is to require retail ring-fencing of UK banks, not total separation. They strikingly comment that:
The objective of such a ring-fence would be to isolate those banking activities where continuous provision of service is vital to the economy and to a bank’s customers. This would be in order to ensure, first, that such provision could not be threatened by activities that are incidental to it and, second, that such provision could be maintained in the event of the bank’s failure without government solvency support. This would require banks’ UK retail activities to be carried out in separate subsidiaries. The UK retail subsidiaries would be legally, economically and operationally separate from the rest of the banking groups to which they belonged. They would have distinct governance arrangements, and should have different cultures. The Commission believes that ring-fencing would achieve the principal stability benefits of full separation but at lower cost to the economy.
Governance
Since the development of the Combined Code in the City here in London, a huge amount of attention has been paid to effective corporate governance mechanisms such that the financial services industry and the general public can have complete faith in the banking sector. Effective ring-fencing also requires measures for independent governance to enforce the arm’s length relationship. The Commission’s view is that the board of the UK retail subsidiary should normally have a majority of independent directors, one of whom is the chair. For the sake of transparency, the Committee argues that subsidiary should make disclosures and reports as if it were an independently listed company.
The Final Report interestingly considers the effect of this structural reorganisation on corporate culture.
Though corporate culture cannot directly be regulated, the structural and governance arrangements proposed here should consolidate the foundations for long-term customer-oriented UK retail banking.
This tackles one fundamental issue in organisational change in management – that whilst you can radically alter the structure of a corporation, you may not be able to alter it fundamental make-up culturally, and its values and modus operandi continue as before. The combined effect of the Commission’s recommended reforms on structure and loss- absorbency can be explained in relation to the ‘too big to fail’ problem, i.e. that government is compelled to save big banks for fear of the consequences of not doing so.
UK competitiveness
The effect on the City as one of the leading global markets is discussed in great detail, unsurprisingly.
Vickers and colleagues do not wish to throw the baby out with the bathwater. They believe that these reforms, arguably the most substantial reforms in the banking industry in a lifetime, will ensure “the City’s international reputation as a place to do business.” UK competitiveness also features extremely prominently in the Commission’s remit, unsurprisingly. The Committee argue that recommendations in this Final Report will be positive for UK competitiveness overall by strengthening financial stability. The proportion of wholesale and investment banking activity in the City that would be directly affected by the proposed reforms would be relatively small, and the ability of UK banks to compete against foreign banks should be maintained by allowing, subject to important provisos, international regulatory standards to apply to their wholesale/investment banking activities. The proposed capital standards for ring-fenced banks, which have been calibrated partly with an eye to regulatory arbitrage possibilities, should not threaten competitiveness in retail banking either.
The consultation on the Interim Report has apparently indicated that a greatly improved switching system for personal and business current accounts could be introduced without undue cost. The Commission therefore recommends an early introduction of a redirection service for personal and SME current accounts which, among other things, transfers accounts within seven working days, provides seamless redirection for more than a year, and is free of risk and cost to customers. The threat of substitutes and barriers to entry have long been recognised by Prof Michael Porter from the Harvard Business School as being pivotal in analysing the competitive advantage of any entity in industry (although Porter’s original analysis emanated from American-based manufacturing industry.)
The relationship between competition and regulation
One of the reasons for long-standing problems of competition and consumer choice in banking and financial services more generally has been that competition has not been central to financial regulation. Sir John Vickers and his Committee for the first time considers this specific issue.
The current reform of the financial regulatory authorities, especially the creation of the FCA, presents an opportunity to change this, which in the Commission’s view should be seized. The issues of switching and transparency mentioned above are examples of where the FCA, with strong pro-competitive powers and duties, could make markets work much better for consumers. It could also do so by tackling barriers to the entry and growth of smaller banks.
The Interim Report also considered whether there was a case for the relevant authorities to refer any banking markets to the Competition Commission for independent investigation and possible use of its powers to implement remedies under competition law.
The final report instead conclude that such a reference is not recommended “before important current policy questions are resolved, but could well be called for depending how events turn out in the next few years.”
Conclusion
The final conclusion to the Executive Summary is extremely sobering: “Banks are at the heart of the financial system and hence of the market economy. The opportunity must be seized to establish a much more secure foundation for the UK banking system of the future.”
Quotations are provided from the Executive Summary of the Final Report of the Independent Commission on Banking published at 0615 on 12 September 2011.
The reform of the banking industry. Are firewalls and ringfencing the answer?
Tomorrow the Independent Banking Commission headed by Sir John Vickers will publish its interim report. The Commission of five economists and bankers, chaired by former Bank of England chief economist John Vickers, was tasked with considering a full-scale break-up of banks – something Liberal Democrats had called for in their election manifesto. Regulation holds the key to successful functioning of the financial services or banking industry. The main argument made until now for completely breaking up the banks is that it is unfair that ordinary retail customers should be put at risk by the investment banking arms. That is likely to be true, in that when a consumer bank – Northern Rock – adopted an investment bank style of financing in the shape of aggressive securitisation it failed horribly. This report due to be published tomorrow will not support the total break-up of Britain’s biggest banks, according to the BBC. Instead it will favour ring-fencing their risky investment banking operations, so they do not jeopardise the savings of ordinary depositors.
Most of the big “Wall Street banks” have long come off the critical list, repaid the US government every cent invested or borrowed, and are happily paying dividends. Conversely, in the UK, Northern Rock, Royal Bank of Scotland and Lloyds Banking Group soldier on, largely on the back of the UK government. The new ‘firewall’ arrangement is intended to eliminate the possibility of losses at the investment banks being borne by the public purse. Customers’ deposits, business lending and the transmission of money would be ring-fenced within the universal banks as new subsidiaries, endowed with increased capital resources to protect against losses.
Markets are likely to see the ring-fenced investment banks as riskier credits, making it more expensive for them to borrow and undercutting their profits. Rating agencies will be looking carefully at the report to understand how it affects the chance of banks being rescued by the government in future financial crises. One of the most famous agencies, Moody’s, said on Thursday that it will review ratings for 19 UK banks this year in light of the tougher regulatory environment, with many likely to face large downgrades. What happens to banking regulation will have worldwide implications for our relative competitive advantage, say, for example, compared to New York or Shanghai.
The ring-fencing may mean that rating agencies give investment banks separate – and lower – credit ratings than their parent banks. The buzzword is banking circles now is “subsidiarization”— the idea that banks can address regulators’ concerns by creating legal firewalls between their different businesses that stop short of full separation. Santander already operates a subsidiary structure along these lines: all its major units are separate legal entities, independently regulated and with responsibility for their own capital and funding. HSBC also largely follows this pattern. Since these have been two of the most successful banks in the world through the crisis, this models are understandably attracting increasing attention as a possible solution.
However, subsidiarization is not the complete answer to the regulators’ dilemma. For example, a subsidiary structure would have enabled U.K. regulators to stop Lehman Brothers transferring large quantities of cash to the U.S. the night before it went into administration. Similarly, U.K. regulators would have been able to ring-fence the operations of Icelandic banks active in the U.K. before the crisis by forcing them to hold their own capital and liquidity. Instead, they collapsed with their parents, with disastrous consequences for the U.K. economy. Not surprisingly, regulators are keen on subidiarization as part of their efforts to force banks to maintain so-called living wills to help ensure an orderly wind-up. Any regulation has to be correctly thought through this time around.
For example, the Wall Street Journal has previously remarked (link to the article here),
“[It is considered not atogether clear] subsidiarization provides the kind of firewall between different parts of a bank needed to protect taxpayers in the parent country. After all, HSBC operates a subsidiary structure, but that did not stop it funneling billions of dollars into its troubled U.S. unit, Household, rather than allowing it to go bust. At the time, HSBC argued persuasively that allowing Household’s bondholders to bear the losses from the unit’s disastrous subprime lending would have calamitous consequences for its own credit rating. Santander argues that its decision to write down the value of its Argentinian unit to zero during that country’s devaluation crisis early in the decade shows it was willing to cut a troubled subsidiary adrift. But ultimately, it never took this step—no bank could easily survive such a breach of trust. But because banks would retain the ability to deploy their capital across the range of their activities according to the returns they perceive to be available at any particular moment, the increase in their costs of doing business would not be – in their view – prohibitive.”
The regulation of the BBC's website is clearly up-the-spout
http://www.bbc.co.uk/news/entertainment-arts-10754220
The BBC should be independent, we agree. But this shouldn’t be a licence for backdoor BBC promotion in the corporate sector, or backdoor defamation on its news website which is prone to be riddled with journalistic errors on a regular basis (see for example its consistent misspelling of Huntingdon’s disease as Huntington’s disease.)
