Behavioral Financial Product Development
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Transcript Behavioral Financial Product Development
BEHAVIORAL
FINANCIAL PRODUCT DEVELOPMENT:
Primer, Progress, Frontiers
Jonathan Zinman
Dartmouth College and
IPA’s U.S. Household Finance Initiative
(also J-PAL, NBER, etc.)
A. Primer
Symptoms and Causes:
Behavioral (Household Finance) Economics 101
Applications:
Markets
Your employees
Scope today
More about product development
Much less about marketing, persuasion
Tmrw at Behavioral Finance Forum
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 => Opportunities
A. Primer
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
A. Primer
Financial Illness: Causes
(Behavioral Economics 101b)
#2
Mistakes borne of misguided heuristics, other
cognitive limitations
Information/choice overload
Anchoring
Low (financial) literacy, numeracy
A. Primer
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
A. Primer
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
A. Primer
Taxonomy of Behavioral
Factors (see DellaVigna JEL)
Biases in expectations
• Overconfidence
• Over-optimism
“Cross-cutting”
biases/heuristics/
limitations
• Anchoring
• Limited attention
• Innumeracy
Biases in price
perceptions/valuation
• Exponential growth bias
• Anchoring
Biases in preferences
• Time-inconsistency
• Loss aversion
A. Primer
DECISION
Alternate Taxonomy
Preferences
Biases/limitations in cognition that affect
perceptions about how to maximize utility
subject to constraints
(And hence affect other key parameters we
might model: expectations, prices, transaction
costs…)
DECISION
A. Primer
B. Progress
By way of examples:
10 pilots (alpha-/beta-tests)
All with “retail” financial service firms (D2C)
“Wholesale”– particularly through
employers– is another promising channel
(E2C).
A la HelloWallet
Completed Pilot 1: Performance
Bond for Smoking Cessation
“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”
B. Progress
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)
B. Progress
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
B. Progress
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??)
B. Progress
Pilots 4-10: Financial Products
Innovation Fund
“The Financial Products Innovation Fund was created as a joint
effort between IPA’s 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
B. Progress
“Pay Yourself Back” – 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
• Take-up rate of about 10%
B. Progress
Pay Back Yourself– “Get Saving!”
B. Progress
“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
• Take-up rate: about 25%.
B. Progress
“Frictionless Savings” – Two Pilots
B. Progress
“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
• Take-up rate: about 40%
B. Progress
“The Trust Card” Credit Card
• Problem: Yield-maximizing strategy for many households is to pay down highinterest 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
• Takeup rate: About 17%
B. Progress
“The Trust Card” Credit Card
B. Progress
“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 USA’s Community College Initiative
(smooth disbursement of student loan payments)
• Expected Launch: August 2013
B. Progress
“The Now & Later Account”
(See also “Aid Like a Paycheck”)
The Now&Later Account
B. Progress
Next Steps
• Pilot products: Scale, Refine, Evaluate
•With randomized-control testing
• New ideas: Develop and launch several new alpha-tests
B. Progress
Progress: How We Make it
A Virtuous Cycle:
R
Test
D
B. Progress
C. Some Frontiers
Innovations in small-dollar space
Documentation
Peer referrals
Commitment options
Loan shopping
Cracking willingess-to-pay key
Transparent pricing <-> Scalability
Personal financial management
Content, take-up, engagement
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.