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BEHAVIORALFINANCIAL PRODUCT DEVELOPMENT:
Primer, Progress, FrontiersJonathan Zinman
Dartmouth College andIPA’s U.S. Household Finance Initiative
(also J-PAL, NBER, etc.)
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A. Primer
Symptoms and Causes: Behavioral (Household Finance) Economics 101
Applications: Markets Your employees
Scope today More about product development Much less about marketing, persuasion
Tmrw at Behavioral Finance Forum
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Financial I l lness: Symptoms
Widespread low financial resiliency
Little savings for many households High debt reliance: expensive High “money on the table”
Poor shopping, mediocre
management
Low financial sophistication
Problems => Opportunities
A. Primer
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Financial I l lness: Causes(Behavioral Economics 101a)
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
A. Primer
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Financial I l lness: Causes(Behavioral Economics 101b)
Mistakes borne of misguided heuristics, other cognitive limitations
Information/choice overload Anchoring Low (financial) literacy, numeracy
# 2
A. Primer
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Financial I l lness: Causes(Behavioral Economics 101c)
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
A. Primer
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Financial I l lness: Causes(Behavioral Economics 101d)
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
A. Primer
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DECISION
Biases in preferences• Time-inconsistency• Loss aversion
Biases in expectations• Overconfidence• Over-optimism
Biases in price perceptions/valuation• Exponential growth bias• Anchoring
“Cross-cutting” biases/heuristics/ limitations• Anchoring• Limited attention• Innumeracy
A. Primer
Taxonomy of Behavioral Factors (see DellaVigna JEL)
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DECISION
Preferences
Biases/limitations in cognition that affect perceptions about how to maximize utility
subject to constraints(And hence affect other key parameters we
might model: expectations, prices, transaction costs…)
A. Primer
Alternate Taxonomy
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B. Progress
By way of examples: 10 pilots (alpha-/beta-tests) All with “retail” financial service firms (D2C) “Wholesale”– particularly through
employers– is another promising channel (E2C). A la HelloWallet
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B. Progress
Completed Pilot 1: Performance Bond for Smoking Cessation
“Put Your Money Where Your Butt Is!” Bank offered in Philippines Bank account offered to smokers “Deposit money you were spending
on cigarettes” Agree to a urine test in 6 months
If nicotine free: get your money back (no interest) If not nicotine free: your money goes off to charity
Result: 11% opened an account 30 percentage point increase in smoking cessation
Example of a “commitment contract”
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Commitment Options
B. Progress
Commitment contract = voluntary restriction, or self-provided added incentive, in service of goal attainment Performance bonds Liquidity restrictions (e.g., spending limits) “Cut me offs” Peer support/social reputation (stickk.com, other
models) (Also automation; e.g., auto-deductions)
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Completed Pilot 2:Messaging as a Product Feature
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
B. Progress
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Completed Pilot 3:Borrow Less Tomorrow (BoLT)
B. Progress
Behavioral Kitchen Sink for Debt Reduction Decision Aid Escalating Repayments Peer Support Reminders/Feedback (Monitor progress using credit reports)
Save More Tomorrow™ as a guide High-touch pilot test at free tax prep site in Tulsa
41% take-up rate 37% plan escalating repayments; 26% enlist peer supporters 51% on-schedule after 12 months (is this high or low??)
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Pilots 4-10: Financial Products Innovation Fund
“The Financial Products Innovation Fund was created as a joint effort between IPA’s US Household Finance Initiative and the Ford Foundation to support the development of scalable, market-tested products that help households make better financial decisions, escape cycles of debt, build assets and achieve financial resiliency.”
• Emphasis on product development informed by behavioral research• Theory, evidence, principles
• Competitive call for proposals launched in August 2011
• Seven projects awarded funding in January 2012
• Product development and “alpha-testing” for feasibility and level of demand• Will also be doing some analysis of demand determinants
• Pilot tests currently underway (Apr – Dec 2012); results by May 2013B. Progress
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“Pay Yourself Back” – Two Pilots
• Problem: Hard to get started saving
• Solution: Seamless conversion of loan/DMP payments to savings once loan/DMP is paid off
• Behavioral approaches: Harness habit formation, redirect mental accounting, easy on-ramp (use existing accounts)
• Key Features: Upfront commitment, back-end automation
• Take-up rate of about 10%
B. Progress
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Pay Back Yourself– “Get Saving!”
B. Progress
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“Frictionless Savings” – Two Pilots
• Problem: Easy to spend on impulse, but not to save (on impulse)
• Solution: Clear path to saving at times when you are most liquid• For example: at the check cashing window
• Approaches: Redirect impulsivity, meet people where they prefer to conduct business, streamline bank account sign-up
• Key Features: MicroBranch: Upfront commitment, back-end automation; RiteCheck: “impulse saving”
• Target Market: Low-income check cashing customers in San Jose & New York City
• Take-up rate: about 25%.B. Progress
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“Frictionless Savings” – Two Pilots
B. Progress
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“TGIF: The Goal is Freedom” Loan
• Problem: Small dollar loans are expensive, and have high default rates
• Solution: Borrowing accepting 5-day delay in disbursement gets 28% - 69% discount
• (Sister product: emergency line of credit with “frictionful” drawdowns)
• Approaches: Incentivize planning, risk screening-by-sorting
• Key Features: Delayed disbursement, frame interest as savings to incent improved financial planning; (voluntary liquidity restriction)
• Target Market: Roanoke credit union members, 61% designated low-income
• Take-up rate: about 40%B. Progress
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“The Trust Card” Credit Card
• Problem: Yield-maximizing strategy for many households is to pay down high- interest debt, but many only make minimum payments each month
• Solution: Behavioral Credit Card for debt consolidation
• Approaches: Decision aid; default option; commitment options
• Key Features: default to accelerated payment plan; built-in planning tool; restricted access to liquidity going forward; option of further voluntary restriction
• Target Market: Low-income credit union members in Washington Heights, NYC
• Takeup rate: About 17%B. Progress
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“The Trust Card” Credit Card
B. Progress
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“Now and Later Account” Restricted Withdrawal Account
• Problem: The temptation of lump sums (some jobs, many tax refunds)
• Solution: Voluntarily restrict own access to lump sums
• Approach: Decision aid, commitment, and automation bundled with savings account
• Features: Budget commitment to withdrawal schedule
• Target Market: Students via Single Stop USA’s Community College Initiative (smooth disbursement of student loan payments)
• Expected Launch: August 2013
B. Progress
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“The Now & Later Account”(See also “Aid Like a Paycheck”)
The Now&Later Account
B. Progress
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Next Steps
• Pilot products: Scale, Refine, Evaluate• With randomized-control testing
• New ideas: Develop and launch several new alpha-tests
B. Progress
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Progress: How We Make it
A Virtuous Cycle:R
DTest
B. Progress
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C. Some Frontiers
Innovations in small-dollar space Documentation Peer referrals Commitment options
Loan shopping Cracking willingess-to-pay key Transparent pricing <-> Scalability
Personal financial management Content, take-up, engagement
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Summing Up
Behavioral insights can help guide how you help people (customers, employees) deal with money Product DesignMarketingPricingProcess (e.g., “on-ramps”)Communication/Engagement Etc.