BEHAVIORAL

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BEHAVIORAL FINANCIAL PRODUCT DEVELOPMENTPrimer,
Progress, Frontiers
Jonathan Zinman Dartmouth College and IPAs U.S.
Household Finance Initiative (also J-PAL, NBER)
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A. Primer

• Symptoms and Causes
• Behavioral (Household Finance) Economics 101
• Applications
• Markets
• Your employees
• Scope today
• More about architecture
• Much less about marketing, persuasion

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Financial Illness 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 gt Opportunities

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Financial Illness Causes (Behavioral Economics
101a)
1

• 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 Illness Causes (Behavioral Economics
101b)
2

• Mistakes borne of misguided heuristics, other
  cognitive limitations
• Information/choice overload
• Anchoring
• Low (financial) literacy, numeracy

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Financial Illness Causes (Behavioral Economics
101c)
3

• 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 (whats right debt load for me/my
  family)?
• Changing life circumstances creates moving
  targets

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Financial Illness Causes (Behavioral Economics
101d)
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• 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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Taxonomy of Behavioral Factors (see DellaVigna
JEL)
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Alternate Taxonomy
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B. Progress

• By way of examples
• 3 completed pilots
• 7 in-progress pilots
• All with retail financial service firms (D2C)
• Wholesale particularly through employers is
  another promising channel (E2C)

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Completed Pilot 1 Performance Bond for Smoking
Cessation

• By way of examples
• 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

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Commitment Options

• 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)

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Completed Pilot 2 Messaging as a Product Feature
SMS Reminders for Goal Attainment

• Pilot
• With savings account holders at 3 different
  banks in 3 different countries
• Reminders raised balances by 6
• Now extending to
• debt reduction, budgeting,
• and planning goals

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Completed Pilot 3 Borrow Less Tomorrow (BoLT)

• 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??)

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Pilots 4-10 Financial Products Innovation Fund
The Financial Products Innovation Fund was
created as a joint effort between IPAs 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 2013

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Pay Back Yourself 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
• MCUCD target market members of 3 participating
  Montana credit unions
• LSSSMN target market graduates of LSSMNs
  Debt Management Plan program
• MCUCD launch date May 1, 2012 LSSMN launch
  date May 23, 2012

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Pay Back Yourself Get Saving!
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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
• Launch dates April 15, 2012 June 1, 2012

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Frictionless Savings Two Pilots
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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
• Launch Date May 17, 2012

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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
• Launch Date April 2, 2012

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The Trust Card Credit Card
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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 USAs
  Community College Initiative
• (smooth disbursement of student loan
  payments)
• Expected Launch August 2012

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The Now Later Account
The NowLater Account
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Progress How We Make it
A Virtuous Cycle
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C. Frontiers

• 2 big ideas in need of development, piloting,
  testing/refinement
• (Getting to scale is key here not claiming these
  are brand-new ideas)
• Looking for partners!

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Idea Personal Loan Shopper

• Problem consumers pay too much for loans
• mortgages (HallWoodward) cards (StangoZinman)
• Why? Distaste, lack skill, inattention,
  procrastination, over-optimism, etc.
• Solution shopping engine
• Consumers passively input information
• Credit report access
• Account access
• Engine outputs product recommendations
• And/or general guidelines dont pay more than
  this
• And/or fills out application forms?
• And/or negotiates for the client?
• Skinny Search is where the money is

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Bigger Idea Private Banking for Main Street

• Huge asset management industry
• Wheres the debt management industry?
• Trillions of dollars in U.S. household debt
• Return (cost) dispersion much bigger on
  liability than on asset side of household balance
  sheets
• Helping consumers reduce borrowing levels, costs
  is where the money is hundreds of basis points
  on table
• Existing solutions limited in scope, value

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Private Banking for Main Street (continued)

• Opportunities for enhanced products/features
• Advice how make attractive, credible, effective?
• Delegated implementation (by rule, by active
  management)
• Commitment contracts
• Offset accounts (running leaner)
• Skinny Own the balance sheet! (Especially the
  liability side)

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Summing Up

• Behavioral insights can help guide how you help
  people (customers, employees) deal with money
• Product Design
• Marketing
• Pricing
• Process (e.g., on-ramps)
• Communication/Engagement
• Etc.