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R&D for Financial Wellness Part 1

R&D for Financial Wellness Part 1. Jonathan Zinman Professor, D artmouth College Director, U .S. Household Finance I nitiative, IPA Member, Research Advisory Board, HelloWallet. My Approach Today. Outline problems and opportunities Symptoms of financial illness

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R&D for Financial Wellness Part 1

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  1. R&D for Financial WellnessPart 1 Jonathan Zinman Professor, Dartmouth College Director, U.S. Household Finance Initiative, IPA Member, Research Advisory Board, HelloWallet

  2. My Approach Today • Outline problems and opportunities • Symptoms of financial illness • Causes (Behavioral Economics 101) • Outline disciplined approach to address these problems using behaviorally-driven R&D • [Steve and HelloWallet: detailed example of approach] • Identify other concrete examples of how this approach can deliver better solutions • Put forth actionable ideas for R&D we could do together R&D for Financial Wellness: Part 1

  3. Financial Illness: Symptoms Many employees suffer low financial resiliency • 29% no savings, most with little savings (EBRI) • High debt reliance: expensive • High “money on the table” • Poor shopping, mediocre mgmt • Low financial sophistication Financial stress Reduced productivity R&D for Financial Wellness: Part 1

  4. 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) R&D for Financial Wellness: Part 1

  5. Financial Illness: Causes • (Behavioral Economics 101b) # 2 Mistakes borne of misguided heuristics, other cognitive limitations • Information/choice overload • Anchoring • Low (financial) literacy, numeracy R&D for Financial Wellness: Part 1

  6. 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 (what’s right debt load for me/my family)? • Changing life circumstances creates moving targets R&D for Financial Wellness: Part 1

  7. Financial Illness: Causes • (Behavioral Economics 101d) # 4 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 R&D for Financial Wellness: Part 1

  8. Opportunity and Approach Use insights from behavioral social sciences to: • Improve benefit features, delivery and utilization at low cost • Improve workforce financial resiliency Reduce stress Increase productivity R&D for Financial Wellness: Part 1

  9. 3-Pronged Approach to R&D # 1 Behavioral Research on what makes consumers and markets tick • Lots of suggestive evidence from theory, lab, surveys (much of it competing) • Little actionable evidence from real-world settings of interest • Very logic of behavioral research suggests that setting can matter a lot: importance of “context”, “frames”, “cues”, etc. R&D for Financial Wellness: Part 1

  10. 3-Pronged Approach to R&D # 2 “D” based on “R” Work with companies to apply behavioral research through innovations in: • Product development • Pricing • Marketing • Customer communication (messaging) R&D for Financial Wellness: Part 1

  11. 3-Pronged Approach to R&D # 3 Testing keeps the “R” and “D” honest Work with companies to evaluate innovations: • Develop success/failure metrics • Implement gold-standard methodologies that deliver sharp, actionable results • E.g., Randomized-Control Trials • Adapted per operational realities, other constraints • Reveal mechanisms underlying success or failure R&D for Financial Wellness: Part 1

  12. Experimentation & the Learning Organization A Virtuous Cycle: R&D for Financial Wellness: Part 1

  13. Examples • HelloWallet • More from JZ R&D for Financial Wellness: Part 1

  14. R&D for Financial WellnessPart II:Building on Success Stories Jonathan Zinman Professor, Dartmouth College Director, U.S. Household Finance Initiative, IPA Member, Research Advisory Board, HelloWallet

  15. Product Development Example Commitment Contracts • Performance bonds for goal attainment • Financial • Reputational/social • Pilot: Successful for increasing savings • Second application: smoking cessation with Green Bank in the Philippines • Now extending all over world • Banks • Other financial service providers • Credit counseling agencies • HelloWallet • Stickk.com R&D for Financial Wellness Part II: Building on Success Stories

  16. Marketing Example Direct Mail Testing • Pilot with finance company in South Africa • Took regular mailingsto former borrowers, randomly varied content based on behavioral theories of persuasion • Found large effects, relative to price, of content that triggers automatic (vs. deliberative) cognitive response • Extending this work with financial service providers across the world • Banks, credit counseling agencies, HelloWallet, large debt collector R&D for Financial Wellness Part II: Building on Success Stories

  17. Messaging Example 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 R&D for Financial Wellness Part II: Building on Success Stories

  18. Next Generation of R&D: A More Holistic Approach • Development focused on person (or market), not just on narrowly targeted behavior • Broader, better metrics of success/failure • HelloWallet great example of this: • Behaviorally-driven development in all aspects of customer interfaces • Metrics cover entire household balance sheet, and beyond • Other opportunities for more holistic R&D… R&D for Financial Wellness Part II: Building on Success Stories

  19. Moving Forward: #1. Optimizing Benefits Menu “Why Should I? We already offer best-practice financial education, counseling, etc.” • Does it work? • How well and how cost-effectively, relative to other benefits you could offer? • Could it work better? • Higher take-up with behaviorally-informed marketing and messaging • Greater effectiveness with content and follow-up (messaging) innovations R&D for Financial Wellness Part II: Building on Success Stories

  20. Moving Forward: #2. Wellness Before Retirement “Why Should I? We already offer generous retirement plans.” • What about other pieces of the balance sheet? • “Save in the workplace, borrow in the marketplace” • Trouble for employer as well as employee? • Dealing with “rainy days” much more pressing than retirement for most employees • One (of many) potential solution(s): small-dollar loans as an employee benefit R&D for Financial Wellness Part II: Building on Success Stories

  21. #2. Wellness Before Retirement: R&D on Small-Dollar Loans Business model: • Underwrite using employer data • Direct debit repayments from paycheck • Use these levers to offer lower pricing, longer maturities than payday loans • 3rd party financing R&D opportunities: • Does loan benefit work as intended? • Use intermediation opportunities to optimize benefit: • Product presentation (beyond disclosure) • Follow-up messaging • Bundle with other benefits (planning aids)? R&D for Financial Wellness Part II: Building on Success Stories

  22. Moving Forward: #3. Safe Landings on 401(k) Auto-Pilot “Why should I invest in behavioral R&D? We already do pro-savings defaults?” • Opt-out 401(k) enrollment • Opt-out of auto-escalating contribution rate BUT… what makes auto-features so effective? • Limited attention • Procrastination/ self – control problems • Anchoring R&D for Financial Wellness Part II: Building on Success Stories

  23. Fault with 401(k) Defaults? ELEPHANT IN THE ROOM *Same psychology that moves 401(k) outcomes can lead to unintended consequences R&D for Financial Wellness Part II: Building on Success Stories

  24. R&D for Safe Landings • on 401(k) Auto-Pilot • Product Presentation (for segmentation) • Is 401(k) right for you? • Messaging • Re: plans, resources, pitfalls • Product Bundles/Enhancements • Debt, other assets, planning, commitment R&D for Financial Wellness Part II: Building on Success Stories

  25. WRAP-UP • Financial insecurity creates problems and opportunities re: employee productivity • Insights from behavioral social sciences can help: discipline for designing, testing, and improving solutions • Many potential levers/solutions: would customize based on your offerings, appetite, and operational realities R&D for Financial Wellness Part II: Building on Success Stories

  26. Going Forward • More content at: • www.dartmouth.edu/~jzinman • www.poverty-action.org/ushouseholdfinance • Questions? Contact me: • jzinman@dartmouth.edu, (603) 667- 5068 R&D for Financial Wellness Part II: Building on Success Stories

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