Framing, Choice,and Household Finance:

Results, Implications, and Related Work

Jon ZinmanDartmouth CollegeOctober 17, 2005

http://www.dartmouth.edu/~jzinman/

Links to Papers

• Will mention several papers, all available (or coming soon) at http://www.dartmouth.edu/~jzinman/

Marketing Experiment in a Consumer Loan Market

• “Pricing Psychology: A Field Experiment in the Consumer Credit Market” (with Bertrand-Karlan-Mullainathan-Shafir)

• Use randomized marketing “treatments”, adminstered via direct mail and phone, to:– Learn about consumer choice– Learn about how (social) marketing, can change

financial decisions

• Simultaneously randomize price (interest rates)

Setup

• Consumer lender in South Africa• High-interest loans to (working) poor• Neoclassical model:

– Loan terms drive decision: “economic content”– Describing offer in different ways, holding economic

content constant, should not impact loan demand

• Test this:– Designed 10 treatments motivated by “behavioral”

findings from lab experiments • Frames: e.g., gain vs. loss• Cues: e.g., “priming” phone call

Results

• 5 of the treatments affected loan demand to some extent– Effects very large relative to price

• 5 (or more) did not• So results challenge both:

– neoclassical economics (preference instability, bounded cognition important)

– the value of modeling psychological “realism”• When context matters, it’s hard to predict behavior

Potential Implications forSaving and Financial Education

• Content:– Strongest result is on “information overload”

• Applications: if frames and cues matter, “treatments” can be applied via other channels as well:– Financial ed– Sales pitches– Information packets– Product design

Extension:Marketing & Selling Savings Products

• Currently working with:– Bank in Peru– Major U.S. financial services company

• Designing frames and cues to test, e.g.:– Our borrowing study finds that showing a

male client a picture of an attractive woman increases takeup

– If this is an “arousal” effect, can we cue “sober” saving motives (photo of family, house, sickbed, etc.)?

Other Zinman WorkRelated to Financial Education

• How (well) do households make financial decisions?– High-frequency:

• Pretty well• Consistent with neoclassical model (at least based on available

evidence)• See “Debit or Credit” and “A Behavioral Mirage”; also Miravete 2003

– Low-frequency:• More problematic, “behavioral”• Bounded cognition result:

– Most households underestimate the true cost/yield of an interest rate: “Present-biased computation”

– Bias is correlated with: using rule-of-thumb (focus on payments), higher borrowing costs, more borrowing, less saving

– See “Fuzzy Math and Red Ink: Present-Biased Computation and Household Finance” (with Victor Stango)