Behavioral Economics 101: Applying Behavioral
Strategies to Improve Asset-Building Outcomes
Speakers:
•
•
•
•
Stay Connected!
Katy Davis, ideas42
Anita Drever, CFED
Ethan Geiling, CFED
Josh Wright, ideas42
Moderator:
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Brandee McHale, Citi Foundation
This session is sponsored by the
Financial Inclusion sponsor, Citi.
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 consumer’s financial health.
 Being able to cover monthly expenses with income
 Tracking spending
 Planning ahead and saving for the future
Relationship
 Effective selection Management
& use of financial products
and Program
Progress
 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
New Methods
• Seminars/Workshops
• Text/Email Messaging
• Self Help Books
• Educational Gaming
• Education Classes
• Social Media
• In-Person Counseling
• Automation
• Financial Planners
• 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
Eldar Shafir,
Princeton University
With an ambitious goal:
To help millions of people by applying the theories of
Behavioral Economics and Behavioral Psychology to solve the
world’s toughest problems.
10
IDEAS42 APPLIES BEHAVIORAL ECONOMICS FOR
SOCIAL GOOD
Educate
Assist
Invent
Conduct Executive
Education
Improve existing
products and
programs
Create new
products, policies
Use technology to
make BE insights
more widely
accessible
Produce new
applicable research
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
Think of things
that are white
Mind is
Blank
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.
“Don’t you get it? I have to pay my rent now.”
18
NEXT, A LITTLE PUZZLE
19
REPRESENTATION LEADS TO SOLUTION
20
REPRESENTATION WE HAVE OF PEOPLE LEADS
TO SOLUTIONS
odd choice.
21
STORY OF THE B-17
“Excellent airmen commit no errors.”
22
REPRESENTATION WE HAVE OF PEOPLE INSTEAD OF
SITUATIONS ALSO LEADS TO SOLUTIONS
23
BEHAVIORAL MODEL
Decision
Yes
No
Actions
A
B
Outcome
Yes
No
• We decide yes if benefits > costs
• Action naturally follows from decision
24
BEHAVIORAL MODEL
Decision
Outcome
Actions
Yes
No
???
Failed to choose, didn’t
consider at all
A
Yes
No
???
B
Yes
No
???
Yes
No
Process
changes
decision
25
THERE ARE MANY INFLUENCES ON DECISION
MAKING AND ACTIONS
Attention: Focus & Neglect
Construal: What’s in the Choice Set
•
•
•
•
•
•
•
•
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
Acceptance (of what’s 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
LET’S EXAMINE A FEW THAT ARE OFTEN LINKED
TO SAVINGS BEHAVIOR
27
INSIGHT #1: PEOPLE HAVE LIMITED ATTENTION
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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
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INSIGHT #4: COGNITIVE CAPACITY IS SCARCE
“Executive functions”
•
•
•
•
•
Problem-solving
Reasoning
Planning
Sustaining attention
Exerting self-control
32
“MONEY PROBLEMS” IMPOSE A REAL COST
33
III. Our Secret Sauce
BEHAVIORAL APPROACHES MATTER IN BIG AND
SMALL WAYS
Often overlooked design features matter…
– A lot
– An unreasonable amount for their size
So how do we find these opportunities?
35
OUR PROCESS INVOLVES FOUR STAGES
DEFINE
DIAGNOSE
DESIGN
TEST
36
OUR PROCESS IS ITERATIVE
Ask the right questions.
REDEFINE
PROBLEM
FIND ANOTHER
BOTTLENECK
DEFINE
DIAGNOSE
ACTIONABLE
BOTTLENECKS
DEFINED
PROBLEM
STATED
PROBLEM
CAPACITY AND
SCALABILITY
BEHAVIORAL
MAP
DISENTANGLE
PRESUMPTIONS
ideas42
partner
DESIGN
CONTEXT
RECONNAISSANCE
consumer
sequential
SCALABLE
INTERVENTION
INTERVENTION
CONCEPT
HYPOTHESIZED
BOTTLENECKS
TEST
POLISH
INTERVENTION
DETERMINE
FEASIBILITY
iterative
as necessary
CLARIFY
OUTCOMES
ROBUST
EXPERIMENT
IDENTIFY
SIDE EFFECTS
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.
100%
80%
60%
40%
20%
0%
Opt In
Opt Out
40
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
100%
75%
50%
25%
0%
Did not trust the
government
Did not feel
comfortable
buying bonds
Did not like
bonds because
wanted more
liquidity
Did not have a Had specific plan
baseline to
for how they
compare to
were going to
bonds interest
spend refund
rate
42
INTERVENTION #1: REMINDERS
Karlan, McConnell, Mullainathan, and Zinman, 2010
43
INTERVENTION #2: PRESENTATION
`
33% Credit vs. 50% Match
Make a $600
contribution and
receive a 33%
($200) rebate
Make a $400
contribution and
receive a 50%
($200) match
“Match” doubled contribution
amount
INTERVENTION #3: MAKE IT EASY
FAFSA form details were pre-filled using an individual’s tax return
data to decrease user effort
40%
35%
30%
25%
20%
15%
10%
5%
0%
35%
22%
Submit FAFSA
Bettinger, Long, Oreopoulos & Sanbonmatsu, 2009
27%
27%
Matriculate
45
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%
46
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]
The Behavioral Economics Technical
Assistance (BETA)Project
Anita Drever, Director of Applied Research, CFED
Ethan Geiling, Senior Policy & Research Associate, CFED
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…
1
Articulate a problem with future
potential for scale
Low deposits levels into emergency
savings accounts that are specifically
targeted at LMI individuals
2
Participate in Behavioral
Diagnosis process
Map process of account enrollment and
deposits and identify behavioral issues
3
Provide input and feedback on
behavioral intervention design
Text message reminders that frame not
depositing as a lost opportunity, coupled
with deposit coupon book with same frame
4
Pilot the behavioral intervention,
collect data, and share results
with learning community
Test text messages and framing over
six months by giving new approach
to half of the participants
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
program’s 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 program’s 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
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
October 4
Questions?
Talk to the BETA Project Team
Anita Drever, Director of Applied
Research, CFED [email protected]
Josh Wright, Managing Director,
ideas42 [email protected]
Ida Rademacher, Chief Programs
Officer, CFED [email protected]
Katy Davis, Senior Associate, ideas42
[email protected]
Ethan Geiling, Senior Policy & Research
Associate, CFED [email protected]
Matt Darling, Senior Associate, ideas42
[email protected]
Leigh Tivol, Director of Savings &
Financial Security, CFED [email protected]
BETA Project Coffee Hour
Main Ballroom – Friday, 7:30am
Questions & Answers