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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 Stay Connected!

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  • 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

    Stay Connected!

  • 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

    Progress

    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

    Traditional Methods

    Seminars/Workshops

    Self Help Books

    Education Classes

    In-Person Counseling

    Financial Planners

    New Methods

    Text/Email Messaging

    Educational Gaming

    Social Media

    Automation

    Defaults

    Social Commitments

  • 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

  • AGENDA

    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

    10

  • 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

    11

  • II. Intro to Behavioral Economics

  • FIRST, A QUESTION

    13

  • 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

    14

  • INHIBITION

    Milk is on your mind

    Mind is Blank

    Think of things that are white

    15

  • GOAL INHIBITION

    16

  • 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

    17

  • 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.

    18

  • NEXT, A LITTLE PUZZLE

    19

  • REPRESENTATION LEADS TO SOLUTION 20

  • odd choice.

    REPRESENTATION WE HAVE OF PEOPLE LEADS TO SOLUTIONS

    21

  • STORY OF THE B-17

    22

    Excellent airmen commit no errors.

  • REPRESENTATION WE HAVE OF PEOPLE INSTEAD OF SITUATIONS ALSO LEADS TO SOLUTIONS

    23

  • BEHAVIORAL MODEL

    A

    B

    Decision Actions

    Yes

    No

    Outcome

    Yes

    No

    24

    We decide yes if benefits > costs

    Action naturally follows from decision

  • BEHAVIORAL MODEL

    25

    A

    B

    Decision Actions Outcome

    Failed to choose, didnt consider at all

    ???

    Yes

    No

    Process changes decision

    Yes No ???

    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

    about

    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

    26

  • LETS EXAMINE A FEW THAT ARE OFTEN LINKED TO SAVINGS BEHAVIOR

    27

  • INSIGHT #1: PEOPLE HAVE LIMITED ATTENTION

    28

  • INSIGHT #2: PEOPLE ARE OVER-CONFIDENT ABOUT THEIR FUTURE SELVES

    Monthly contract:

    $80/month vs.

    Pay-per-use contract: $10/visit

    Attend 4.4 times per month on average =

    $17/visit!

    Dellavigna & Malemendier, 2006 29

  • INSIGHT #3: SELF-CONTROL IS HARD

    30

  • 31

  • INSIGHT #4: COGNITIVE CAPACITY IS SCARCE

    Executive functions Problem-solving Reasoning Planning Sustaining attention Exerting self-control

    32

  • 33

    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?

    35

  • DEFINE DIAGNOSE DESIGN TEST

    OUR PROCESS INVOLVES FOUR STAGES

    36

  • DEFINE DIAGNOSE DESIGN TEST

    REDEFINE PROBLEM

    FIND ANOTHER BOTTLENECK

    STATED PROBLEM

    DISENTANGLE PRESUMPTIONS

    CAPACITY AND SCALABILITY

    INTERVENTION CONCEPT

    CONTEXT RECONNAISSANCE

    BEHAVIORAL MAP

    HYPOTHESIZED BOTTLENECKS

    POLISH INTERVENTION

    DETERMINE FEASIBILITY

    CLARIFY OUTCOMES

    IDENTIFY SIDE EFFECTS

    ROBUST EXPERIMENT

    Ask the right questions.

    ideas42 partner sequential iterative as necessary

    ACTIONABLE BOTTLENECKS

    SCALABLE INTERVENTION

    DEFINED PROBLEM

    consumer

    OUR PROCESS IS ITERATIVE

    37

  • IV. Designing Interventions

  • ___ Enroll in 401(k) ____ Deduction

    ___ Not to Enroll in 401(k) ____ Change Deduction

    39

  • 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.

    0%

    20%

    40%

    60%

    80%

    100%

    Opt In Opt Out40

  • 401(K) PSYCHOLOGY

    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

    41

  • EITC PSYCHOLOGY

    0%

    25%

    50%

    75%

    100%

    Did not trust thegovernment

    Did not feelcomfortable

    buying bonds

    Did not likebonds becausewanted more

    liquidity

    Did not have abaseline tocompare to

    bonds interestrate

    Had specific planfor how theywere going tospend refund

    42

  • INTERVENTION #1: REMINDERS

    Karlan, McConnell, Mullainathan, and Zinman, 2010 43

  • INTERVENTION #2: PRESENTATION

    Make a $600 contribution and receive a 33% ($200) rebate

    Make a $400 contribution and receive a 50% ($200) match

    `

    33% Credit vs. 50% Match

    Match doubled contribution amount

  • Bettinger, Long, Oreopoulos & Sanbonmatsu, 2009

    27% 22%

    35%

    27%

    0%5%

    10%15%20%25%30%35%40%

    Submit FAFSA Matriculate

    FAFSA form details were pre-filled using an individuals tax return data to decrease user effort

    INTERVENTION #3: MAKE IT EASY

    45

  • 46

    INTERVENTION #4: COMMITMENT A bank offered a commitment savings account which could only be withdrawn after: A certain date A savings goal was reached

    28% of those who were offered it opened an account Average balances among those offered increased 81%

  • NEXT STEPS: THE BEHAVIORAL ECONOMICS TECHNICAL ASSISTANCE (BETA) PROJECT

    Josh Wright, Managing Director [email protected]

    Katy Davis, Senior Associate [email protected]

    Matthew Darling, Senior Associate [email protected]

    mailto:[email protected]:[email protected]:[email protected]

  • Anita Drever, Director of Applied Research, CFED Ethan Geiling, Senior Policy & Research Associate, CFED

    The Behavioral Economics Technical Assistance (BETA)Project

  • What is the BETA project?

    Opportunity for your organization to participate in behavioral economics applied research with CFED and ideas42

    RFP released on September 4

  • What would participation in BETA involve?

    Steps For example

    Articulate a problem with future potential for scale

    Provide input and feedback on behavioral intervention design

    Pilot the behavioral intervention, collect data, and share results with learning community

    Low deposits levels into emergency savings accounts that are specifically targeted at LMI individuals

    Text message reminders that frame not depositing as a lost opportunity, coupled with deposit coupon book with same frame

    Test text messages and framing over six months by giving new approach to half of the participants

    1

    Participate in Behavioral Diagnosis process

    Map process of account enrollment and deposits and identify behavioral issues 2

    3

    4

  • Examples of program/projects ripe for an intervention

    A direct deposit program where employees are not enrolling

    Financial counseling where clients are not following through on budget plans

    A Volunteer Income Tax Assistance program where clients are not bringing necessary documents despite reminders

  • Example from the audience

  • Consider applying to BETA if:

    Your program could be more successful if clients/potential clients exhibited different behaviors in certain situations

    Your program serves or has the potential to reach large numbers in a 6 month window

  • How will your program benefit?

    Technical assistance from nationally-renowned Behavioral Economics experts

    Improved program outcomes National exposure and opportunity to have your

    programs work shared broadly

    $15,000 grant to support staff time over the grant period (Nov. 2012 Nov. 2013)

  • What would BETA require of your program?

    Leadership buy-in: Senior leadership support and commitment, including interest and enthusiasm from program staff

    Staff capacity: ~.3 FTE of staff time, which includes time for a BETA coordinator leading your programs effort

    Data capacity: Willingness and ability to collect and share data

    Willingness to randomly assign an intervention to some individuals and not others

  • Application Timeline

    October 4 Q&A Webinar About application process

    October 19 Proposals Due Download RFP and application form at www.cfed.org

    November 9 Final Selections Announced Three to five organizations will be selected

  • Questions?

    Talk to the BETA Project Team

    Anita Drever, Director of Applied Research, CFED [email protected]

    Ida Rademacher, Chief Programs Officer, CFED [email protected]

    Ethan Geiling, Senior Policy & Research Associate, CFED [email protected]

    Josh Wright, Managing Director, ideas42 [email protected]

    Katy Davis, Senior Associate, ideas42 [email protected]

    Matt Darling, Senior Associate, ideas42 [email protected]

    Leigh Tivol, Director of Savings & Financial Security, CFED [email protected]

    mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

  • BETA Project Coffee Hour Main Ballroom Friday, 7:30am

  • Questions & Answers

    Behavioral Economics 101: Applying Behavioral Strategies to Improve Asset-Building OutcomesBehavioral Economics and Asset BuildingWhy Citi Foundation is Interested in Behavioral Economics?Yet there are more sources of information regarding financial planning and guidance than ever beforeWhat is financial capability? A set of consumer behaviors that leads to tangible improvements in a consumers financial health. Citi and our partners are focused on testing new ways to build low-income consumer financial capability via behavioral economics Applying Behavioral Economics to GrantmakingSlide Number 8Slide Number 9ideas42 was founded by visionary academicsSlide Number 11Slide Number 12Slide Number 13The Questions were not exactly identicalInhibitionGoal InhibitionHow is this an issue in Real Life with real problemsHow is this an issue in Real Life with real problems we might be trying to solveNext, A little PuzzleRepresentation leads to solutionRepresentation WE have of people leads to solutionsStory of the B-17Representation WE have of people instead of situations also leads to solutionsBehavioral modelBehavioral modelThere are many influences on decision making and ActionsSlide Number 27Slide Number 28Slide Number 29Slide Number 30Slide Number 31Slide Number 32money problems Impose a real costSlide Number 34Slide Number 35Our process involves four stagesOur Process Is IterativeSlide Number 38Slide Number 39Caution: diagnosis drives design401(k) PsychologyEitc psychologySlide Number 43Slide Number 44Slide Number 45Slide Number 46Slide Number 47The Behavioral Economics Technical Assistance (BETA)ProjectWhat is the BETA project?What would participation in BETA involve?Examples of program/projects ripe for an interventionExample from the audienceConsider applying to BETA if:How will your program benefit?What would BETA require of your program?Application TimelineQuestions?Slide Number 58Questions & Answers