behavioral research & product development for financial wellness october 2011 jonathan zinman...
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BEHAVIORAL RESEARCH &PRODUCT DEVELOPMENTFOR FINANCIAL WELLNESS
October 2011
JONATHAN ZINMANProfessor, Dartmouth College
Academic Director, U.S. Household Finance Initiative, IPA
My Approach Today
October2011Financial Products Innovation Fund
Outline problems and opportunities Symptoms of financial illness Causes (Behavioral Economics 101)
Outline disciplined approach to address these problems using behaviorally-driven R&DPut forth ideas for product-focused R&D under USHFI Ford initiative. Key criteria:
Behaviorally-informed development on new products or features Potential for scalability
For passing market or sustainability test
Financial I l lness: Symptoms
October 2011
Widespread low financial resiliency
Little savings for many households High debt reliance: expensive High “money on the table”
Poor shopping, mediocre mgmt
Low financial sophistication
Financial Products Innovation Fund
Financial I l lness: Causes(Behavioral Economics 101a)
October 2011
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
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Financial I l lness: Causes(Behavioral Economics 101b)
October 2011
Mistakes borne of misguided heuristics, other cognitive limitations
Information/choice overload Anchoring Low (financial) literacy, numeracy
# 2
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Financial I l lness: Causes(Behavioral Economics 101c)
October 2011
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
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Financial I l lness: Causes(Behavioral Economics 101d)
October 2011
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
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Financial Products Innovation Fund
“Win-win”
Opportunity and Approach
October2011
Use insights from behavioral social sciences to:
Help financial service providers innovate and succeed
Whatever their bottom line(s)Help end-users make better decisions
Financial Products Innovation Fund
3-Pronged Approach to R&D
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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.
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3-Pronged Approach to R&D
October 2011
“D” based on “R” Work with financial service providers to apply behavioral research through innovations in:
Product development Pricing Marketing Enrollment Customer communication
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3-Pronged Approach to R&D
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Testing keeps the “R” and “D” honestWork with financial service providers to evaluate innovations: Develop success/failure metrics Implement gold-standard methodologies that deliver sharp, actionable results
E.g., Randomized-Control Trials (RCT) Adapted per operational realities, other constraints
Reveal mechanisms underlying success or failure
A first-step is often an “alpha test”: if you build it, do people want it? Can you sustain it? This is the focus of our Ford Initiative Of course an RCT component will make a proposal more attractive
Or a clear path to an RCT after alpha test concludes
# 3
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Experimentati on & the Learning Organizati on
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A Virtuous Cycle:R
DTest
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The Skinny on Seven Product Ideas
• Pay Back Yourself– Convert loan payments to savings once loan paid off
• Borrow Less Tomorrow– Save More Tomorrow with bigger bang for buck
• Personal Loan Shopper– Search is where the money is
• Card Control Features– Making them work: specs, marketing, communication, pricing
• Affordable Small Dollar Loans– Innovations in distribution, intermediation, screening
• Frictionless Saving– Get people when they’re liquid: impulse/on-demand saving
• Private Banking for Main Street– Solutions for the entire household balance sheet
October 2011Financial Products Innovation Fund
Idea 1. Pay Back Yourself Problem: hard to get started saving. Solution: seamless conversion of loan payments to
savings/investment once loan paid off Small-dollar loans, auto loans, home equity, Approach: harness habit formation, redirect implusivity
Key features: upfront commitment, back-end automation
Can reinforce this with messaging “You’ve almost paid off your loan, get ready to pay yourself” “… paid off your car/home, time to save for maintenance”
October 2011Financial Products Innovation Fund
Idea 2. Borrow Less Tomorrow• Problem: yield-maximizing strategy for many households is to pay down
high-interest debt• Solution: target this “investment opportunity” with behavioral levers• Marketing for attention and motivation: Help consumers identify
whether they should borrow less• Simple Decision Aid: Help making concrete plan to borrow less
– Accelerate repayment– Limit borrowing going forward
• Commitment: Offer creative ways for clients to incentivize themselveso *Social commitment: peer supporters/refereeso Financial commitment: performance bondso Access commitment: “cut me off if I don’t…”
• Ongoing Messaging: Feedback/reminders for follow-thru and maintenance
October 2011Financial Products Innovation Fund
Idea 3. Personal Loan Shopper
• Problem: consumers pay too much for loans– mortgages (Hall&Woodward); cards (Stango&Zinman)– because they hate to shop, don’t know how, inattention, etc.
• Solution: shopping engine• Consumers passively input information
– Credit report access– Account access
• Engine outputs product recommendations– And/or general guidelines: “don’t pay more than this”– And/or fills out application forms?– And/or negotiates for the client?
October 2011Financial Products Innovation Fund
Idea 4. Card Control
• Problem: consumers lack (self-)control• Solution: MasterCard inControl-type features. Allow holder
can self-impose spending limits based on– Time (“no charging on Fridays”)– Amount (per-transaction, per time period)– Place: merchant, merchant category
• Challenge: value as consumer commitment contract?– Communicating value to consumer (framing issue)– Providing UI that helps consumer use wisely
• Don’t want people calling in to revoke/change limits
– Pricing/monetizing• E.g., teaser subscription pricing strategies
October 2011Financial Products Innovation Fund
Idea 5. Small Loans, Big Impacts
• Problem: small-dollar loans are expensive– Wrong term structure: way too short
• Potential solution 1: delayed disbursement as screening technique– “Pre-approval” with no disbursement for a week or so– Borrower willing to take this deal probably has their act
together: lower risk• Potential solution 2: deliver through workplace
– Use data on job stability to lessen, price credit risk– Use HR to intermediate (info, education, messaging) for better
outcomes• Adapting lessons from retirement savings (401k)
October 2011Financial Products Innovation Fund
Idea 6. Frictionless Saving
• Easy to spend on impulse, but not to save• When can you save on impulse? When liquid.• When liquid? Tax time.– Auto transfers from refund to savings already making
inroads.• Other liquid time? Payday! So we’re looking for
ways to clear path to saving at:– Check cashing window– Direct deposit (increase adoption of auto-transfer to
savings)October 2011Financial Products Innovation Fund
Idea 7. Private Banking for Main Street
• Idea: services at level of the household balance sheet• One motivating trend: “forced ” or “collateralized” saving is popular
feature of small-dollar lending worldwide: require savings deposit(s) along with loan repayment
• Problem: at market rates this is a money pump!• Approach: redirect psychology of mental accounting and habit
formation in more (cost)-effective directions• Solutions:
– Lend less, message to mental account for that, smooth transition to saving on back-end
– Force saving, but pay loan rate on that saving.• This makes business sense if habits can be formed with little saving
– Offset account that allocates liquidity from liquid assets to loan repayment based on automated rules (a la Redfrog)
October 2011Financial Products Innovation Fund
Summing Up
• These ideas merely a sample of our favorites, we are open to others
• Ford initiative requires first two stages of R&D: product development and “alpha-testing” for feasibility and level of demand– Adding third stage, randomized-control testing to
measure impacts cleanly, will strengthen proposal• Product development work only part of our
research portfolio: feel free to contact us with other ideas and areas of interest October 2011Financial Products Innovation Fund
Content and Contacts
More content at: www.dartmouth.edu/~jzinman www.poverty-action.org/ushouseholdfinance
Questions, vetting ideas? Rebecca Rouse: [email protected]
October 2011Financial Products Innovation Fund