R&D FOR FINANCIAL WELLNESS PART 1 September 2011 JONATHAN ZINMAN Professor, Dartmouth College...

R&D FOR FINANCIAL WELLNESSPART 1

September 2011

JONATHAN ZINMANProfessor, Dartmouth College

Director, U.S. Household Finance Initiative, IPAMember, Research Advisory Board, HelloWallet

My Approach Today

September 2011R&D for Financial Wellness: Part 1

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

Financial stress Reduced productivity

Financial I l lness: 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 I l lness: Causes(Behavioral Economics 101a)


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)

# 1

Financial I l lness: Causes(Behavioral Economics 101b)


Mistakes borne of misguided heuristics, other cognitive limitations

Information/choice overload Anchoring Low (financial) literacy, numeracy

# 2

Financial I l lness: Causes(Behavioral Economics 101c)


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

# 3

Financial I l lness: Causes(Behavioral Economics 101d)


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

# 4

Reduce stress Increase productivity

Opportunity and Approach


Use insights from behavioral social sciences to:

Improve benefit features, delivery and utilization at low cost Improve workforce financial resiliency

3-Pronged Approach to R&D


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.

# 1



“D” based on “R” Work with companies to apply behavioral research through innovations in:

Product development Pricing Marketing Customer communication (messaging)

# 2



Testing keeps the “R” and “D” honestWork 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

# 3

Experimentati on & the Learning Organizati on


A Virtuous Cycle:R

DTest

Examples


1. HelloWallet2. More from JZ

R&D FOR FINANCIAL WELLNESSPART II:

BUILDING ON SUCCESS STORIES

September 2011

JONATHAN ZINMANProfessor, Dartmouth College

Director, U.S. Household Finance Initiative, IPAMember, Research Advisory Board, HelloWallet

Product Development Example

September 2011R&D for Financial Wellness Part II: Building on Success Stories

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

Commitment Contracts

Marketing Example


Pilot with finance company in South Africa Took regular mailings to 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

Direct Mail Testing

Messaging Example


Pilot With savings account

holders at 3 different banks in 3 different countries

Reminders raised balances by 6%

Now extending todebt reduction, budgeting,and planning goals

SMS Reminders for Goal Attainment

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…

Moving Forward:#1. Optimizing Benefits Menu


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

“Why Should I? We already offer best-practice financial education, counseling, etc.”

Moving Forward:#2. Wellness Before Retirement


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

“Why Should I? We already offer generous retirement plans.”

#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)?

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


*Same psychology that moves 401(k) outcomes can lead to

unintended consequences

Employee unthinkingly

contributes to 401(k)

Employee unthinkingly

keeps spending constant

Employee borrows

expensively to do so (credit cards, payday

loans, etc)

NET EFFECT:Lower net

worthLess financial

resiliencyMore small

plan balances

Fault with 401(k) Defaults?ELEPHANT IN THE ROOM

R&D for Safe Landingson 401(k) Auto-Pilot


Product Presentation (for segmentation) Is 401(k) right for you?

MessagingRe: plans, resources, pitfalls

Product Bundles/EnhancementsDebt, other assets, planning,

commitment

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

Going Forward


More content at: www.dartmouth.edu/~jzinman www.poverty-action.org/ushouseholdfinance

Questions? Contact me: [email protected], (603) 667- 5068

http://www.dartmouth.edu/~jzinman

http://www.poverty-action.org/ushouseholdfinance

mailto:[email protected]

R&D FOR FINANCIAL WELLNESS PART 1 September 2011 JONATHAN ZINMAN Professor, Dartmouth College...

Documents

Transcript of R&D FOR FINANCIAL WELLNESS PART 1 September 2011 JONATHAN ZINMAN Professor, Dartmouth College...