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Smoketree Roundtable

Behavioral Economics and Disruptive Innovation Jonathan Zinman Professor of Economics, Dartmouth College Scientific Director, U.S . Household Finance Initiative. Smoketree Roundtable. July 12, 2014. What is Behavioral Economics (BE)?. At its best it melds:

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Smoketree Roundtable

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  1. Behavioral Economics and Disruptive Innovation Jonathan Zinman Professor of Economics, Dartmouth College Scientific Director, U.S. Household Finance Initiative Smoketree Roundtable July 12, 2014

  2. What is Behavioral Economics (BE)? • At its best it melds: • Psychologist’s rich understanding of decision making (complexity, biases, and fallability) • Economist’s rich understanding of markets • At its worst… • Rejects homoeconomicus without offering constructive alternative • “People are irrational”… how/when/where/why? • “Context matters?”… how/when/where/why? • Used to justify prescriptions that far outstrip evidence

  3. How is BE being applied in consumer finance? • Communications • Marketing • Reminders • Feedback • Pricing • Process • “on-ramping” • Default options (opt-out 401k’s) • Product development • SMaRT • (Harder savings commitments) • (Spending controls)

  4. Long history of BE-like applications for ill A few examples: • “Monthly payments” marketing • Teaser pricing • Rebates • Bundling add-ons • Etc.

  5. Can BE be harnessed to improve outcomes? • Probably, but the jury is still out • Mounting evidence on how to apply BE for behavior change • Much less evidence on if/when behavior change actually makes people better off

  6. Outcomes-based measurement: Which outcomes?

  7. Can BE be harnessed for good, in a game-changing way? • I’m optimistic • Will illustrate with 4 high-level ideas • 2 for policy and 2 practice

  8. BE-informed disruptive innovation:Information policy Old approach: point-of-sale disclosure BE-approach: • Rethink timing: decision point of pre-POS • Rethink content (amount, density, framing, etc.) • Including meta-information (build “wariness”) • Including the possibility of persuasive content • Rethink channels • Rethink sender Examples: CFPB Office of Engagement, Smart Disclosure, ??

  9. BE-informed disruptive innovation:Principles-based regulation BE opens possibility that some products/transactions harmful even if not deceptive, fraudulent per se. But… how define and measure harm? Are we moving toward a regulatory environment where it will make sense for more firms to turn “compliance” on its head?

  10. BE and disruptive innovation:BE as a discipline Methods for applying BE: • Assume you know enough to write RXs • Many cautionary tales here • Throw out a bunch of stuff and see what sticks (a lot of AB testing uses this approach) *3. Use BE to innovate more efficiently • What to test? • What do test results tell us about promising approaches to future innovations? • Subsequent rounds of testing • In other functions/units of the business

  11. BE and disruptive innovation:BE -> new products, industries? Example: “Liability Management” Consumer pain points (high-level): • How do I find the best loan for me? • Many overpay, a lot • Whom can I trust to help me? • Advice market fragmented, lots of low-quality providers Business case premise: • Huge asset management industry • But debt is where the money is for most consumers • Hundreds of basis points on trillion of dollars Bottleneck: “consumers won’t pay” • BE helps us see this is, very likely, utter nonsense

  12. From BE to a new business model “People won’t pay out-of-pocket for value-added financial services…” But: People do pay for credit report management, identity protection, tax prep, etc. People will pay when they are liquid(tipping the teller at the check-cashing window; tax-refund frenzy) Pricing/business models often succeed in convincing people to buy something they (don’t know they) want. Examplesfrom other contexts: • Fee bundled in/extracted from a lump-sum disbursement • Monthly subscription, often starting with a teaser • Money management fees • Pay-for-performance BE can help bridge contexts and build-out from pricing -> business model • Timing the offer • Framing the offer • On-ramping from offer to take-up

  13. Discussion…

  14. Some BE-informed Design Principles • Simplify • Streamline (on-ramping) • Just-in-time (reach people at decision point) • Meet people where they’re at • Facilitating, nudging more effective than felt-change • Diagnose, treat, and measure success or failure • Be humble: we still have a lot to learn • Mixed and limited evidence, especially outside the lab • A premise of behavioral social science is that context matters

  15. Messaging for rainy day savings • “If you make… deposits, you will receive [small yield incentive]” • “If you miss a deposit, you will lose [small yield incentive]” • “If you make… deposits, you will receive [small yield incentive] that you can use to reach your saving goal of [client’s goal]” • “If you miss a deposit, you will lose [small yield incentive] that you could use to reach your saving goal of [client’s goal]” • Results: • 1 and 2 push • 3 and 4 push • 3 and 4 >> 1 and 2 • Test 1. Which works better at encouraging regular savings deposits?

  16. Messaging for financial resiliency • Test 2. Which works better at controlling discretionary spending among a sample of active HelloWallet users? • Email every Friday re: the budget for that weekend • Same as #1, but every other week • Same as #1, but don’t start until 4 weeks after enrollment • Results: • 3 > 2 > 1

  17. Diagnoses • Struggles in Managing Desires • Bandwidth constraints (e.g., limited attention) • Biased forecasting (e.g., excessive optimism) • Getting the math wrong (low numeracy, math biases) • Getting basic facts wrong (low financial literacy) • Limited/biased learning (about oneself, about finance)

  18. Treatments (Levers) • Commitment (hard and soft) • Default options • Automation • Reminders • Framing • Cuing • Priming • Information

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