Behavioral Economics 101: Applying Behavioral Strategies to Improve Asset-Building Outcomes
This session is sponsored by the Financial Inclusion sponsor, Citi.
Speakers: Katy Davis, ideas42 Anita Drever, CFED Ethan Geiling, CFED Josh Wright, ideas42 Moderator: Brandee McHale, Citi Foundation
Network ID: ALC2012 Password: ideasintoaction Join the Conversation: #alc2012
Behavioral Economics and Asset Building
Brandee Mchale Chief Operating Officer
Why Citi Foundation is Interested in Behavioral Economics?
The current financial profile of American consumers suggests the need for more and better resources aimed at improving financial capability
49% have difficulty covering monthly expenses 56% do not use a budget to guide spending 33% have no non-retirement savings 66% did not comparison shop when obtaining a credit card (51% for auto loans) 44% gave themselves a grade of C,D, or F on their financial knowledge
Sources: FINRA 2010 Financial Capability Study, NFCC 2011 Consumer Financial Literacy Survey
Yet there are more sources of information regarding financial planning and guidance than ever before
Does improved financial knowledge actually lead to improved financial capability and behaviors?
What is financial capability? A set of consumer behaviors that leads to tangible improvements in a consumers financial health.
Relationship Management and Program
Being able to cover monthly expenses with income Tracking spending Planning ahead and saving for the future Effective selection & use of financial products Exercising financial knowledge
Financial Literacy: What you know
Financial Capability: What you do
Citi and our partners are focused on testing new ways to build low-income consumer financial capability via behavioral economics
Self Help Books
Applying Behavioral Economics to Grantmaking
Not a panacea or silver bullet, but small program design tweaks can drive radical shifts in outcomes
Does not necessarily determine if end-user will actually be better off on a long term basis
Capacity/experience gaps at the practitioner and grantmaker level
INTRO TO BEHAVIORAL ECONOMICS AND
THE BETA PROJECT
Assets Learning Conference September 20, 2012
I. What is ideas42? II. Intro to Behavioral Economics III. Our Secret Sauce IV. Designing Interventions
IDEAS42 WAS FOUNDED BY VISIONARY ACADEMICS
Sendhil Mullainathan, Harvard University
Antoinette Schoar, MIT Sloan
With an ambitious goal: To help millions of people by applying the theories of Behavioral Economics and Behavioral Psychology to solve the worlds toughest problems.
Eldar Shafir, Princeton University
Educate Conduct Executive Education Use technology to make BE insights more widely accessible
Assist Improve existing products and programs
Invent Create new products, policies Produce new applicable research
IDEAS42 APPLIES BEHAVIORAL ECONOMICS FOR SOCIAL GOOD
II. Intro to Behavioral Economics
FIRST, A QUESTION
THE QUESTIONS WERE NOT EXACTLY IDENTICAL
Please list as many white things as you can
Please list as many white things as you can (For Example:) Milk Snow
Milk is on your mind
Mind is Blank
Think of things that are white
HOW IS THIS AN ISSUE IN REAL LIFE WITH REAL PROBLEMS
What is the second leading cause of firefighter deaths on the job? (heart attacks are #1)
Vehicle accidents (20-25% of firefighter deaths) 79% were not wearing seatbelts
Goal: Getting to fire quickly, prepared to fight the fire. Do this really well, but tunnel on this goal, and neglect other things
HOW IS THIS AN ISSUE IN REAL LIFE WITH REAL PROBLEMS WE MIGHT BE TRYING TO SOLVE
Give us a different perspective on the use of short term high interest rate credit by low-income people.
Scarcity creates goal inhibition and tunneling on immediate goal.
Dont you get it? I have to pay my rent now.
NEXT, A LITTLE PUZZLE
REPRESENTATION LEADS TO SOLUTION 20
REPRESENTATION WE HAVE OF PEOPLE LEADS TO SOLUTIONS
STORY OF THE B-17
Excellent airmen commit no errors.
REPRESENTATION WE HAVE OF PEOPLE INSTEAD OF SITUATIONS ALSO LEADS TO SOLUTIONS
We decide yes if benefits > costs
Action naturally follows from decision
Decision Actions Outcome
Failed to choose, didnt consider at all
Process changes decision
Yes No ???
Yes No ???
THERE ARE MANY INFLUENCES ON DECISION MAKING AND ACTIONS
Attention: Focus & Neglect Passivity Focusing illusion Mindless behavior, automaticity, habits,
limited attention Prescriptive / descriptive norms Implementation intentions
Time Inconsistency Discounting Self-control problems, procrastination Planning fallacy Conflicting identities
Barriers (& Routes) to Action Hassle factors Forgetting / inattention (& reminders) Darley/Batson person vs. situation Social proof and social norms Channel factors Scarcity principle
Revaluation Self-perception, self-fulfilling prophesy
Construal: Whats in the Choice Set Acceptance (of whats presented..) Frames, sets, order/contrast effects What people know, remember, perceive, think
Situation: Influences of Context Proliferation of options & choice conflict Joint vs. separate evaluation, opportunity cost
ignorance, weighting Prospect theory: reference points, loss aversion,
endowment Local focus Mental accounting Social norms Visual cues
Person Misunderstanding compounding, unit confusion Overconfidence, probability perception Affect Identity Memory, remembering self makes the choice Goals
LETS EXAMINE A FEW THAT ARE OFTEN LINKED TO SAVINGS BEHAVIOR
INSIGHT #1: PEOPLE HAVE LIMITED ATTENTION
INSIGHT #2: PEOPLE ARE OVER-CONFIDENT ABOUT THEIR FUTURE SELVES
Pay-per-use contract: $10/visit
Attend 4.4 times per month on average =
Dellavigna & Malemendier, 2006 29
INSIGHT #3: SELF-CONTROL IS HARD
INSIGHT #4: COGNITIVE CAPACITY IS SCARCE
Executive functions Problem-solving Reasoning Planning Sustaining attention Exerting self-control
MONEY PROBLEMS IMPOSE A REAL COST
III. Our Secret Sauce
Often overlooked design features matter
A lot An unreasonable amount for their size
BEHAVIORAL APPROACHES MATTER IN BIG AND SMALL WAYS
So how do we find these opportunities?
DEFINE DIAGNOSE DESIGN TEST
OUR PROCESS INVOLVES FOUR STAGES
DEFINE DIAGNOSE DESIGN TEST
FIND ANOTHER BOTTLENECK
CAPACITY AND SCALABILITY
IDENTIFY SIDE EFFECTS
Ask the right questions.
ideas42 partner sequential iterative as necessary
OUR PROCESS IS ITERATIVE
IV. Designing Interventions
___ Enroll in 401(k) ____ Deduction
___ Not to Enroll in 401(k) ____ Change Deduction
CAUTION: DIAGNOSIS DRIVES DESIGN
Defaults work in increasing 401(k) savings Can we apply to savings in general?
Field experiment tested with low-income population receiving EITC.
Defaulted to placing 10% into savings bonds.
Opt In Opt Out40
Out of every 100 surveyed employees
68 self-report saving too little 24 plan to
raise savings rate in next 2 months
3 actually follow through over the next four months
Did not trust thegovernment
Did not feelcomfortable
Did not likebonds becausewanted more
Did not have abaseline tocompare to
Had specific planfor how theywere going tospend refund