Primer, Progress, Frontiers

fanaticalpumaMechanics

Nov 5, 2013 (3 years and 7 months ago)

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BEHAVIORAL

FINANCIAL PRODUCT DEVELOPMENT:

Primer, Progress, Frontiers

Jonathan Zinman

Dartmouth College and

IPA’s U.S. Household Finance Initiative

(also J
-
PAL, NBER, etc.)

A. Pri mer


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






Fi nanci al Il l ness:
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

Fi nanci al Il l ness:
Causes

(Behavi oral Economi cs 101a)


C
ognitive 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

Fi nanci al Il l ness:
Causes

(Behavi oral Economi cs 101b)


Mistakes borne of misguided heuristics, other
cognitive limitations



Information/choice overload


Anchoring


Low (financial) literacy, numeracy


# 2



A. Primer

Fi nanci al Il l ness:
Causes

(Behavi oral Economi cs 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

Fi nanci al Il l ness:
Causes

(Behavi oral Economi cs 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

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 Behavi oral
Factors (see
Del l aVi gna

JEL)

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

Al ternate Taxonomy

B
. Progress




By way of examp
les
:


10 pilots (alpha
-
/beta
-
tests)


All with “retail” financial service firms (D2C
)


“Wholesale”


particularly through
employers


is another promising channel
(E2C
).


A la
HelloWallet





B. Progress

Compl eted Pi l ot 1: Performance
Bond for Smoki ng Cessati on



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”




Commi tment

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
)




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 to

d
ebt

reduction, budgeting,

a
nd

planning goals

SMS Reminders for Goal Attainment

B. Progress

Compl eted Pi l ot 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??)




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 2013


B. Progress

“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

Pay Back Yourself



Get Saving!


B. Progress

“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

“Frictionless Savings”


Two Pilots

B. Progress

“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

“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

“The Trust Card” Credit Card

B. Progress

“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

“The Now & Later Account”

(See also “Aid

Like a Paycheck”)

The
Now
&
Later

Account

B. Progress

Next Steps



Pilot products: Scale, Refine, Evaluate


W
ith randomized
-
control testing





New ideas: Develop and launch several new alpha
-
tests

B. Progress

Progress: How We Make i t

A Virtuous Cycle:

R

D

Test

B. Progress

C
. Some Fronti ers

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


Summing Up

B
ehavioral
insights can
help guide how you help people
(customers, employees) deal with money



Product Design


Marketing


Pricing


Process (e.g., “on
-
ramps”)


Communication/Engagement


Etc.