BEHAVIORALFINANCIAL PRODUCT DEVELOPMENT:

Primer, Progress, FrontiersJonathan Zinman

Dartmouth College andIPA’s U.S. Household Finance Initiative

(also J-PAL, NBER, etc.)

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

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

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

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

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

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

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)

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

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

B. Progress

Completed Pilot 1: Performance Bond for Smoking 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”

Commitment Opti ons

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 todebt reduction, budgeting,and planning goals

SMS Reminders for Goal Attainment

B. Progress

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??)

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

“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• With randomized-control testing

• New ideas: Develop and launch several new alpha-tests

B. Progress

Progress: How We Make it

A Virtuous Cycle:R

DTest

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

Behavioral insights can help guide how you help people (customers, employees) deal with money Product DesignMarketingPricingProcess (e.g., “on-ramps”)Communication/Engagement Etc.