Getting from “R” to “D”: Cutting Edge Research for Product & Market Development

1. Getting from “R” to “D”:Cutting Edge Research forProduct & Market Development Jonathan Zinman Department of Economics Dartmouth College September 20, 2007

2. Where’s the “I”Going to Come From? • Academic research as source of inspiration • Substantive innovation • Academic research as a discipline • Process innovation

3. My Perspective/Approach “R”: scientific standard • Robust • General • Learn something about the “whys” of consumer behavior “D”: double bottom line standard

4. My Perspective/Approach • Economic research at the intersection of economics/psychology/decision sciences • Beyond Ec 101 • Not homo economicus • More like homo anomalous • But basic models still powerful • Challenge is to integrate the right sort of realism with the general • Economic methods still powerful

5. Plan for Today • Innovation from research • Lessons from “behavioral retail finance”, and how they’ve been applied. • Examples of taking R to D • Stuff you can grab off-the-shelf • Innovation through research • GYO: organic innovation • Done strategically, systematically, scientifically

6. Big Substantive Takeaway • Design matters for consumer decision making • There is no “neutral” architecture • Baggage carousel example • Think about analogies in your customer environment

7. Design Matters • The environment, context you create (or neglect) is going to affect (potential) member decisions • Shaping/nudging vs. teaching • “Libertarian Paternalism” (Sunstein & Thaler) • Must engage design: no benign neglect • Academic research is a source of inspiration/guidance

8. Design Matters:Product Presentation Example #1 • “R”: defaults have huge effects on behavior • 401k: Are you opted out or opted in? • Opting in has huge effects on participation • Default portfolio “sticks” • “D” • Firms that want to increase participation change default to opt-in • Policy changes now too

9. New “D” on Defaults • How do I change the default? • To promote saving? • To encourage enrollment? • To encourage financial planning?

10. Design Matters:Product Presentation Example #2 • “R”: Advertising content can have huge effects • Large relative to price in our work • No “neutral” direct mailer • But hard to predict ex-ante what types of content spur demand • “D”: theorize, test, refine, retest • Direct mail discipline • What the leading FIs do

11. Design Matters:Product Presentation Example #3 • “R”: choice overload • Not just about target marketing • Also that too much choice demotivates • “D”: tailor menus, limit choices • How strike the right balance? Test. • But err on side of few choices • E.g., in our research 1 did much better than 4

12. 2 more speculative examples • “R” is there • Just starting to test some “D’s”

13. Design Matters:Product Presentation Example #4 • “R”: people systematically underestimate the cost of intertemporal tradeoffs • These are biases in perceptions of costs and benefits, not biases in preferences or expectations • People underestimate interest rate on short-term installment debt when shown monthly payments • People underestimate future values from saving (compounding problem)

14. Design Matters:Biased Cost/Benefit Perceptions • “D”?? (speculative here) • Make future values vivid (don’t lean on annual yields, particularly for long-term products) • Credit disclosures matter • Steal customers by “debiasing” those duped by competing lenders • Your new savings customers might be borrowing now • With the right pitch, will they switch?

15. Design Matters:Product Presentation Example #5 • “R”: people are inattentive, procrastinate, impulsive • They end up regretting their financial decisions and worrying they don’t save enough • “D”: make it easy • Impulse saving? • Fine line with product development… • Other ways of changing front end…

16. Design Matters:Product Development Example #1 • “R”: limited attention to saving • “D”: make it easy • “Keep the change” • Mortgage saving

17. Design Matters:Product Development Example #2 • “R”: saving requires commitment that’s in short supply. • Easier to spend/borrow than save • “D”: provide products with commitment • SMART • SEED • Customized spending/borrowing limits

18. Design Matters:Product Development Example #3 • “R”: commitment/self-control problems more generally: • Weight • Exercise • Smoking • Calling grandma • “D”: commitment contracts • Templates designed & enforced by 3rd-party • “Bet on yourself”

19. Recap So far: • Research (and applications) you can grab off the shelf Now: II. Doing your own “R”. Real research you can bank.

20. What is “R”? • Systematic experimentation • Identify something you think will work based on theory, practice, market research • Test it • Can build in features that will reveal why it works (or doesn’t) • Gold-standard testing: Randomized-control trials • Think “treatment” & “placebo” for financial decision-making • Refine it • Retest

21. That Sounds Like a Lot of Work • Actually not in direct mail especially; other direct marketing • But yes in other spaces: • Product presentation in-branch • Product development

22. Should I Do It? • Payoffs over years, not quarters • Benefits to learning why things work and don’t are even longer-term • Doing right by your customers may only pay off over long haul • Is doing right by my customers a source of comparative advantage

23. Is R to D for me? Key question: Does R to D create comparative advantage?

24. Is R to D a Sourceof Comparative Advantage? • My half-baked assessment is that answer is “yes” for many CUs • Large CUs vs. other large FIs • Longer horizon (less quarterly pressure)? • More of a double bottom line? • If yes then testing whether and why innovations work should pay off

25. R to D andComparative Advantage • Small/mid CUs vs. community banks • Scale matters for this type of process (the tyranny of sample size) • CUs better at cooperating to reach scale?

26. Why Not Just GrabOff the Shelf? • First-mover advantage • Context can matter • What works over there might not work over here • “R” just starting to get a handle on when and why context is critical • Process and productivity transformation…

27. Experimentation is its Own Reward • It’s a process innovation • Use to cultivate a learning organization • Lever for leveraging better use of existing information, resources • Increase productivity, morale • Discovery is fun and rewarding