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 josh@ideas42.org

Katy Davis, Senior Associate katy@ideas42.org

Matthew Darling, Senior Associate matthew@ideas42.org

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 adrever@cfed.org

Ida Rademacher, Chief Programs Officer, CFED ida@cfed.org

Ethan Geiling, Senior Policy & Research Associate, CFED egeiling@cfed.org

Josh Wright, Managing Director, ideas42 josh@ideas42.org

Katy Davis, Senior Associate, ideas42 katy@ideas42.org

Matt Darling, Senior Associate, ideas42 matthew@ideas42.org

Leigh Tivol, Director of Savings & Financial Security, CFED ltivol@cfed.org

BETA Project Coffee Hour Main Ballroom – Friday, 7:30am

Questions & Answers