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R&D FOR FINANCIAL WELLNESSPART 1
September 2011
JONATHAN ZINMANProfessor, Dartmouth College
Director, U.S. Household Finance Initiative, IPAMember, Research Advisory Board, HelloWallet
My Approach Today
September 2011R&D for Financial Wellness: Part 1
Outline problems and opportunities Symptoms of financial illness Causes (Behavioral Economics 101)
Outline disciplined approach to address these problems using behaviorally-driven R&D [Steve and HelloWallet: detailed example of approach] Identify other concrete examples of how this approach can deliver better solutions Put forth actionable ideas for R&D we could do together
Financial stress Reduced productivity
Financial I l lness: Symptoms
September 2011R&D for Financial Wellness: Part 1
Many employees suffer low financial resiliency
29% no savings, most with little savings (EBRI)
High debt reliance: expensive High “money on the table”
Poor shopping, mediocre mgmt
Low financial sophistication
Financial I l lness: Causes(Behavioral Economics 101a)
September 2011R&D for Financial Wellness: Part 1
Cognitive biases that stack deck toward spending/borrowing, away from saving/accumulating
In preferences: costly self-control, loss-aversion In expectations: “things will get better” (or at
least not worse) In price perceptions
Underestimation of compound interest Underestimation of borrowing costs
(Limited attention)
# 1
Financial I l lness: Causes(Behavioral Economics 101b)
September 2011R&D for Financial Wellness: Part 1
Mistakes borne of misguided heuristics, other cognitive limitations
Information/choice overload Anchoring Low (financial) literacy, numeracy
# 2
Financial I l lness: Causes(Behavioral Economics 101c)
September 2011R&D for Financial Wellness: Part 1
Limited opportunities for learning … on high-stakes decisions
Mortgage/house Job Marriage Car (and financing it)
Even high-frequency decisions can have uncertain long-run implications
Credit card use (what’s right debt load for me/my family)?
Changing life circumstances creates moving targets
# 3
Financial I l lness: Causes(Behavioral Economics 101d)
September 2011R&D for Financial Wellness: Part 1
Markets sometimes exacerbate consumers’ cognitive “bugs”
Advice markets are a mess and limited in scope
Who covers the household balance sheet?
For the mass market? Price competition in product markets helps,
but only partly
# 4
Reduce stress Increase productivity
Opportunity and Approach
September 2011R&D for Financial Wellness: Part 1
Use insights from behavioral social sciences to:
Improve benefit features, delivery and utilization at low cost Improve workforce financial resiliency
3-Pronged Approach to R&D
September 2011R&D for Financial Wellness: Part 1
Behavioral Research on what makes consumers and markets tick
Lots of suggestive evidence from theory, lab, surveys (much of it competing)
Little actionable evidence from real-world settings of interest
Very logic of behavioral research suggests that setting can matter a lot: importance of “context”, “frames”, “cues”, etc.
# 1
3-Pronged Approach to R&D
September 2011R&D for Financial Wellness: Part 1
“D” based on “R” Work with companies to apply behavioral research through innovations in:
Product development Pricing Marketing Customer communication (messaging)
# 2
3-Pronged Approach to R&D
September 2011R&D for Financial Wellness: Part 1
Testing keeps the “R” and “D” honestWork with companies to evaluate innovations:
Develop success/failure metrics Implement gold-standard methodologies that deliver
sharp, actionable results E.g., Randomized-Control Trials Adapted per operational realities, other constraints
Reveal mechanisms underlying success or failure
# 3
Experimentati on & the Learning Organizati on
September 2011R&D for Financial Wellness: Part 1
A Virtuous Cycle:R
DTest
Examples
September 2011R&D for Financial Wellness: Part 1
1. HelloWallet2. More from JZ
R&D FOR FINANCIAL WELLNESSPART II:
BUILDING ON SUCCESS STORIES
September 2011
JONATHAN ZINMANProfessor, Dartmouth College
Director, U.S. Household Finance Initiative, IPAMember, Research Advisory Board, HelloWallet
Product Development Example
September 2011R&D for Financial Wellness Part II: Building on Success Stories
Performance bonds for goal attainment Financial Reputational/social
Pilot: Successful for increasing savings Second application: smoking cessation with Green Bank in the Philippines Now extending all over world
Banks Other financial service providers
Credit counseling agencies HelloWallet
Stickk.com
Commitment Contracts
Marketing Example
September 2011R&D for Financial Wellness Part II: Building on Success Stories
Pilot with finance company in South Africa Took regular mailings to former borrowers, randomly
varied content based on behavioral theories of persuasion Found large effects, relative to price, of content that
triggers automatic (vs. deliberative) cognitive response Extending this work with financial service providers across the world
Banks, credit counseling agencies, HelloWallet, large debt collector
Direct Mail Testing
Messaging Example
September 2011R&D for Financial Wellness Part II: Building on Success Stories
Pilot With savings account
holders at 3 different banks in 3 different countries
Reminders raised balances by 6%
Now extending todebt reduction, budgeting,and planning goals
SMS Reminders for Goal Attainment
Next Generation of R&D:A More Holistic Approach
September 2011R&D for Financial Wellness Part II: Building on Success Stories
Development focused on person (or market), not just on narrowly targeted behavior
Broader, better metrics of success/failure HelloWallet great example of this:
Behaviorally-driven development in all aspects of customer interfaces
Metrics cover entire household balance sheet, and beyond
Other opportunities for more holistic R&D…
Moving Forward:#1. Optimizing Benefits Menu
September 2011R&D for Financial Wellness Part II: Building on Success Stories
Does it work? How well and how cost-effectively, relative to other
benefits you could offer? Could it work better?
Higher take-up with behaviorally-informed marketing and messaging
Greater effectiveness with content and follow-up (messaging) innovations
“Why Should I? We already offer best-practice financial education, counseling, etc.”
Moving Forward:#2. Wellness Before Retirement
September 2011R&D for Financial Wellness Part II: Building on Success Stories
What about other pieces of the balance sheet? “Save in the workplace, borrow in the marketplace”
Trouble for employer as well as employee? Dealing with “rainy days” much more pressing than
retirement for most employees One (of many) potential solution(s): small-dollar loans as
an employee benefit
“Why Should I? We already offer generous retirement plans.”
#2. Wellness Before Retirement:R&D on Small-Dollar Loans
September 2011R&D for Financial Wellness Part II: Building on Success Stories
Business model: Underwrite using
employer data Direct debit
repayments from paycheck
Use these levers to offer lower pricing, longer maturities than payday loans
3rd party financing
R&D opportunities: Does loan benefit work as
intended? Use intermediation
opportunities to optimize benefit: Product presentation
(beyond disclosure) Follow-up messaging Bundle with other
benefits (planning aids)?
Moving Forward:#3. Safe Landings on 401(k) Auto-Pilot
September 2011R&D for Financial Wellness Part II: Building on Success Stories
“Why should I invest in behavioral R&D? We already do pro-savings defaults?”
Opt-out 401(k) enrollment Opt-out of auto-escalating contribution rate
BUT… what makes auto-features so effective?
Limited attention Procrastination/ self – control problems Anchoring
September 2011R&D for Financial Wellness Part II: Building on Success Stories
*Same psychology that moves 401(k) outcomes can lead to
unintended consequences
Employee unthinkingly
contributes to 401(k)
Employee unthinkingly
keeps spending constant
Employee borrows
expensively to do so (credit cards, payday
loans, etc)
NET EFFECT:Lower net
worthLess financial
resiliencyMore small
plan balances
Fault with 401(k) Defaults?ELEPHANT IN THE ROOM
R&D for Safe Landingson 401(k) Auto-Pilot
September 2011R&D for Financial Wellness Part II: Building on Success Stories
Product Presentation (for segmentation) Is 401(k) right for you?
MessagingRe: plans, resources, pitfalls
Product Bundles/EnhancementsDebt, other assets, planning,
commitment
WRAP-UP
September 2011R&D for Financial Wellness Part II: Building on Success Stories
Financial insecurity creates problems and opportunities re: employee productivity
Insights from behavioral social sciences can help: discipline for designing, testing, and improving solutions
Many potential levers/solutions: would customize based on your offerings, appetite, and operational realities
Going Forward
September 2011R&D for Financial Wellness Part II: Building on Success Stories
More content at: www.dartmouth.edu/~jzinman www.poverty-action.org/ushouseholdfinance
Questions? Contact me: [email protected], (603) 667- 5068