behavioral economics 101: applying behavioral strategies to
TRANSCRIPT
Behavioral Economics 101: Applying Behavioral Strategies to Improve Asset-Building Outcomes
This session is sponsored by the Financial Inclusion sponsor, Citi.
Speakers: • Katy Davis, ideas42 • Anita Drever, CFED • Ethan Geiling, CFED • Josh Wright, ideas42 Moderator: • Brandee McHale, Citi Foundation
Network ID: ALC2012 Password: ideasintoaction Join the Conversation: #alc2012
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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.
Relationship Management and Program
Progress
Being able to cover monthly expenses with income Tracking spending Planning ahead and saving for the future Effective selection & use of financial products 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
• Seminars/Workshops
• Self Help Books
• Education Classes
• In-Person Counseling
• Financial Planners
New Methods
• Text/Email Messaging
• Educational Gaming
• Social Media
• Automation
• 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
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.
Eldar Shafir, Princeton University
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Educate Conduct Executive Education Use technology to make BE insights more widely accessible
Assist Improve existing products and programs
Invent Create new products, policies Produce new applicable research
IDEAS42 APPLIES BEHAVIORAL ECONOMICS FOR SOCIAL GOOD
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II. Intro to Behavioral Economics
FIRST, A QUESTION
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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
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INHIBITION
Milk is on your mind
Mind is Blank
Think of things that are white
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GOAL INHIBITION
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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
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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.”
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NEXT, A LITTLE PUZZLE
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REPRESENTATION LEADS TO SOLUTION 20
odd choice.
REPRESENTATION WE HAVE OF PEOPLE LEADS TO SOLUTIONS
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STORY OF THE B-17
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“Excellent airmen commit no errors.”
REPRESENTATION WE HAVE OF PEOPLE INSTEAD OF SITUATIONS ALSO LEADS TO SOLUTIONS
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BEHAVIORAL MODEL
A
B
Decision Actions
Yes
No
Outcome
Yes
No
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• We decide yes if benefits > costs
• Action naturally follows from decision
BEHAVIORAL MODEL
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A
B
Decision Actions Outcome
Failed to choose, didn’t consider at all
???
Yes
No
Process changes decision
Yes No ???
Yes No ???
Yes
No
THERE ARE MANY INFLUENCES ON DECISION MAKING AND ACTIONS
Attention: Focus & Neglect • 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
Construal: What’s in the Choice Set • 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
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LET’S EXAMINE A FEW THAT ARE OFTEN LINKED TO SAVINGS BEHAVIOR
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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
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INSIGHT #4: COGNITIVE CAPACITY IS SCARCE
“Executive functions” • Problem-solving • Reasoning • Planning • Sustaining attention • Exerting self-control
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“MONEY PROBLEMS” IMPOSE A REAL COST
III. Our Secret Sauce
Often overlooked design features matter…
– A lot
– An unreasonable amount for their size
BEHAVIORAL APPROACHES MATTER IN BIG AND SMALL WAYS
So how do we find these opportunities?
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DEFINE DIAGNOSE DESIGN TEST
OUR PROCESS INVOLVES FOUR STAGES
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DEFINE DIAGNOSE DESIGN TEST
REDEFINE PROBLEM
FIND ANOTHER BOTTLENECK
STATED PROBLEM
DISENTANGLE PRESUMPTIONS
CAPACITY AND SCALABILITY
INTERVENTION CONCEPT
CONTEXT RECONNAISSANCE
BEHAVIORAL MAP
HYPOTHESIZED BOTTLENECKS
POLISH INTERVENTION
DETERMINE FEASIBILITY
CLARIFY OUTCOMES
IDENTIFY SIDE EFFECTS
ROBUST EXPERIMENT
Ask the right questions.
ideas42 partner sequential iterative as necessary
ACTIONABLE BOTTLENECKS
SCALABLE INTERVENTION
DEFINED PROBLEM
consumer
OUR PROCESS IS ITERATIVE
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IV. Designing Interventions
___ Enroll in 401(k) ____ Deduction
___ Not to Enroll in 401(k) ____ Change Deduction
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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.
0%
20%
40%
60%
80%
100%
Opt In Opt Out40
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
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EITC PSYCHOLOGY
0%
25%
50%
75%
100%
Did not trust thegovernment
Did not feelcomfortable
buying bonds
Did not likebonds becausewanted more
liquidity
Did not have abaseline tocompare to
bonds interestrate
Had specific planfor how theywere going tospend refund
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INTERVENTION #1: REMINDERS
Karlan, McConnell, Mullainathan, and Zinman, 2010 43
INTERVENTION #2: PRESENTATION
Make a $600 contribution and receive a 33% ($200) rebate
Make a $400 contribution and receive a 50% ($200) match
`
33% Credit vs. 50% Match
“Match” doubled contribution amount
Bettinger, Long, Oreopoulos & Sanbonmatsu, 2009
27% 22%
35%
27%
0%5%
10%15%20%25%30%35%40%
Submit FAFSA Matriculate
FAFSA form details were pre-filled using an individual’s tax return data to decrease user effort
INTERVENTION #3: MAKE IT EASY
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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%
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]
Anita Drever, Director of Applied Research, CFED Ethan Geiling, Senior Policy & Research Associate, CFED
The Behavioral Economics Technical Assistance (BETA)Project
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…
Articulate a problem with future potential for scale
Provide input and feedback on behavioral intervention design
Pilot the behavioral intervention, collect data, and share results with learning community
Low deposits levels into emergency savings accounts that are specifically targeted at LMI individuals
Text message reminders that frame not depositing as a lost opportunity, coupled with deposit coupon book with same frame
Test text messages and framing over six months by giving new approach to half of the participants
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Participate in Behavioral Diagnosis process
Map process of account enrollment and deposits and identify behavioral issues 2
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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
October 4 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
Questions?
Talk to the BETA Project Team
Anita Drever, Director of Applied Research, CFED [email protected]
Ida Rademacher, Chief Programs Officer, CFED [email protected]
Ethan Geiling, Senior Policy & Research Associate, CFED [email protected]
Josh Wright, Managing Director, ideas42 [email protected]
Katy Davis, Senior Associate, ideas42 [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