Behavioral Economics and Effective
Employee Communications
Lessons from Academia
Workshop 14, 1:20 pm to 2:10 pm
Sunday, October 18, 2015
Dr. Julie Agnew
Session Goals
• Recognize reasons for behaviors that cause
participants to make mistakes
• Learn how to develop more effective
communication and education strategies using
insight from behavioral economics
Individuals Face Difficult Pension
Decisions
Further Complications
• ‘Financial Literacy around the World’ project
documents low levels of financial literacy around
the world
– Highlights that the general population of most
countries have difficulty correctly answering three
basic questions related to interest rates, inflation and
risk Source: Lusardi and Mitchell (2011)
• Research demonstrates that participants
understanding of their own plan features is low
• Financial decisions often are emotionally driven
Source: Agnew, Szykman, Utkus and Young (2013)
Feelings about Retirement Decisions
“This is how I felt when the market started to crash. I felt like I had a knife to my throat. I was in
the hands of other people and I felt totally powerless.”
(Male, Unaware)
“I think the barber represents the managers who
are doing your mutual funds. You are the guy in
the seat and that blade is kind of like them
managing your money: if he’s good at it, then you
will get a good shave. But if he’s not so good, you
might have some nicks there. And that makes me
feel uneasy – how that shave turns out is
completely out of my control.”
(Male, Unaware)
“I feel like him – if I make the wrong choice, I’m going to be hurting myself, cutting myself, losing a lot.
But I can’t tell which choices are right and which are wrong. It’s very scary. I’d like to be able to
understand what’s going on but I just don’t.” (Female, Unaware)
The Result: Behavioral Biases are
Common
Possible Ways to Improve Pension
Decisions
Communication
Methods
Financial
Education
Behavioral
Interventions
Regulation
Choice Architecture:
Retirement Plan Design
Financial
Advisers
Lesson One: Choice Architecture Will Not
Solve Everything
Communication
Methods
Financial
Education
Behavioral
Interventions
Regulation
Choice Architecture:
Retirement Plan Design
Financial
Advisers
Case Study: Saving in Retirement Plans
• If individuals behave rationally and have welldefined preferences, it shouldn’t matter if
they have to opt-in or opt-out of a retirement
plan
• If they don’t, defaults can matter because
– participants view the default as a suggestion by
the policy maker
– accepting the default requires no effort
– defaults often represent the status quo
– participants procrastinate
Example of Choice Architecture
Company
Hire Date Before
Automatic
Enrollment
Hire Date After
Automatic
Enrollment
B
26.4%
93.4%
C
35.7%
85.9%
D
42.5%
96.0%
Participation Rates for Three Companies: 6 Months
Tenure
Source: Table 3, Choi, Laibson,
Madrian and Metrick (2006)
Is There a Downside?
Behavioral Bias: Anchoring
“401(k) Law Suppresses Saving for Retirement” by Anne Tergesen (July 7, 2011) WSJ
Possible Long Run Default Issues
• In the long run, new evidence from a study of plan
choice suggests greater levels of regret associated with
Percent of Respondents Who Regret Original Plan
the default
Choice, by Plan Enrollment
40.00%
35.20%
35.00%
30.00%
25.00%
19.40%
20.00%
15.50%
15.00%
Source: Brown, Farrell
and Weisbenner
(2011), Figure 2
14.00%
11.00%
10.00%
5.00%
0.00%
Traditional Plan, by
Default
All Active Choosers
Traditional Plan, by
active choice
Portable Plan
Self-Managed Plan
Who Defaults?
• Experimental study found that those with lower financial
literacy were more likely to invest in the default asset
Source: Agnew and Szykman (2005)
allocation option than others
% Defaulted
25%
20%
20%
15%
10%
5%
2%
0%
Low Financial Literacy
High Financial Literacy
Additional Evidence
Returning to the study of plan choice (DB, DC, or Hybrid),
the likelihood of defaulting into the DB plan is related to
basic financial literacy, plan knowledge and information
problems
Source: Brown, Farrell and Weisbenner (2011)
Probability of Defaulting
Have basic financial knowledge
Have advanced plan knowledge
Have basic plan knowledge
-3.40%
-6.40%
-2.40%
Lack of awareness of plan default…
Found system information unhelpful
-10.00% -5.00% 0.00%
14.90%
16.06%
5.00% 10.00% 15.00% 20.00%
Summary of Lesson One
• Choice architecture works but it is not the entire
solution
• Consider the long-term consequences of
unengaged participants
• Those with low financial literacy or who experience
information problems may be more susceptible to
behavioral biases
• Main Points:
– Participants must understand their choices or later on
they may regret their action (or inaction)
– Effective communication is critically needed as a result
Prepared by Dr. Julie Agnew
Lesson Two: Can Communicating More
Information Improve Outcomes?
Communication
Methods
Financial
Education
Behavioral
Interventions
Regulation
Choice Architecture:
Retirement Plan Design
Financial
Advisers
Case Study: The Annuity Puzzle
• Most theoretical models examining the decision to
annuitize assume rational investor behavior
• These rational models predict that annuities should play a
much larger role in retirement portfolios than observed in
practice
• The limited demand for annuities that is observed cannot
be completely explained even with extensions to the basic
model
• This well known fact is commonly referred to as “The
Annuity Puzzle”
Theories to Explain Limited Annuity
Demand
•
•
•
•
•
•
Rational
Adverse Selection
High Prices
Pre-existing
Annuitization
Risk Sharing in Couples
Bequests
Incomplete Annuity
Markets
•
•
•
•
•
•
Behavioral
Framing
Financial Literacy
Regret Aversion
Loss Aversion
The Illusion of Control
Trust
Beware of Information Overload
• In a large scale experiment, we examined the choice between
an annuity and a lump sum
• We found that individuals that experienced information
overload were 30 percent less likely to feel confident about
their choice
Source: Agnew and
Szykman (2011)
Long-Run Satisfaction
• Controlling for final payouts, those with more information
overload were also less likely to be satisfied with their decision
when the game was complete
Source: Agnew
and Szykman
(2011)
• Those with low financial literacy were more likely to be
overwhelmed by the information presented to them
Summary of Lesson Two
• Too much information can cause participants to
disengage from decision making and be less
satisfied later on
• Main Points:
– Focus on the quality of the communication
– Keep the message simple to understand
Prepared by Dr. Julie Agnew
Lesson Three: Don’t Assume Even Basic
Financial Knowledge or Plan Awareness
Communication
Methods
Financial
Education
Behavioral
Interventions
Regulation
Choice Architecture:
Retirement Plan Design
Financial
Advisers
Case Study: Target Date Investment Funds
Two or more
target-date funds
only, 2%
Two or more
target date
funds plus
other funds,
6%
One target-date
fund, 46%
One target-date
plus other funds,
46%
Source: Pagliaro and Young (2010)
24
Evidence Participants Unaware of their Own
Choices
• Many people were not aware of their specific 401(k) allocations
n=1,993
Never Heard of
Target -Date Funds
20%
Not Sure of
Allocation
10%
Correct Allocation
Reported
45%
Incorrect Allocation
Reported
25%
• This could be a result of automatic enrollment or other sponsor
actions
• However, some voluntarily enrolled, pure target-date investors
reported that they had never heard of the product
Source: Agnew, Szykman, Utkus and Young (2014)
25
Basic Concepts May Be Misunderstood
• While participants seemed to understand that diversification is
desirable, many did not seem to understand that one target
date fund is sufficient
• When asked how they invest in target date funds one investor
said…
– “…what I did was I took about 10 funds and then I put 10% of my
contribution onto those 10.”
• When asked why he didn’t invest everything in the target date
fund, the investor said…
– “I just wanted to be diversified”
• Another said…
– “I wouldn’t put all of my eggs in one basket. No matter how good the
basket is supposed to be”
26
Asset Awareness in General is Low
Australian Example: Survey Question: If your superannuation
account is invested in a ‘balanced’ investment option, this means
that it is invested exclusively in safe assets such as savings accounts,
cash management accounts and term deposits.
45%
40%
40%
30%
28%
Correct
35%
TRUE
FALSE
25%
20%
15%
10%
32%
5%
0%
Agnew, Bateman
and Thorp 2013
DO NOT KNOW
Unaware of Important Plan Features
• Australian example: Survey asked participants what age they could
access their retirement accounts 48% answered they did not know!
38%
chose 65
86% say
55, 60 or
65 yrs old
Only 14%
were correct
Source: Agnew,
Bateman and Thorp
(2013)
Plan Knowledge Matters
• This lack of knowledge is associated with potentially poor
decisions
– Chan and Stevens (2008) find those who are more knowledgeable
about plan features are more responsive to them
– Clark, Morrill, and Vanderweide (2012) find that individuals may forgo
important benefits because of lack of knowledge and understanding of
benefits
– Agnew et al. (2012) find individuals unaware of their 401(k) plan match
are less likely to participate
– Brown and Weisbenner (2012) find that individuals make sensible
decisions based on what they believe is true but their beliefs are not
always accurate
29
Summary of Lesson Three
• Do not assume participants understand their plan
features or general finance
• Use survey assessments and focus groups to
understand what your participants know and do
not know
• Main Points:
– Tailor your communications to your participant base and
their knowledge
– Test your communication material for understanding
Lesson Four: Pay Attention to the Details
Communication
Methods
Financial
Education
Behavioral
Interventions
Regulation
Choice Architecture:
Retirement Plan Design
Financial
Advisers
Details, Details, Details!
Form Design
• Benartzi and Thaler noticed
that employees at the
University of Chicago
thought that they could
only invest in four funds
• They noticed that the
election form had only four
lines
• They ran a simple
experiment to test how the
form affected behavior
Experimental Results
Source: Bernatzi and Thaler (2007)
Percentage that Chose More
than Four Funds
45.00%
40.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
10.00%
5.00%
0.00%
Four Lines
Eight Lines
Summary of Lesson Four
• Even subtle changes to how decisions are
presented can have a large impact on investor
behavior
– Examples shown include positive versus negative
election and form design
• Main Point: Close attention to details is needed
to avoid unintended consequences!
Prepared by Dr. Julie Agnew
Lesson Five: The Power of Framing
Communication
Methods
Financial
Education
Behavioral
Interventions
Regulation
Choice Architecture:
Retirement Plan Design
Financial
Advisers
Case Study: The Annuity Puzzle
How choices are ‘framed’ can influence decisions
Example 1: Investment vs. Consumption Frame
• Study examines whether viewing the purchase from
a narrow investment frame or from a broader
consumption frame influences the choice
–
Source: Brown, Kling, Mullainathan and Wrobel (2008)
• Researchers hypothesize that individuals in the
consumption frame will prefer annuities to other
non-annuitized products and the reverse will hold for
the investment frame
Percentage That Prefers Life Annuity to
Savings Account
Brown et. al. (2008) Study
• Used internet survey
• Presented subjects
two types of product
choices: annuities and
competing nonannuitized products
(such as a savings
account)
• Presented choices in
two different frames
Source: Brown, Kling, Mullainathan and
Wrobel (2008)
80%
72%
70%
60%
50%
40%
30%
21%
20%
10%
0%
Investment Frame
Consumption Frame
Negative Framing and Healthcare
• For years, marketing researchers have demonstrated
the influence of negative framing on behavior
• Negative framing has been effective in increasing
preventative health behaviors related to colon cancer,
breast cancer, sexually transmitted diseases and skin
cancer
Prepared by Dr. Julie Agnew
Negative Framing and Health Care
• A 1988 study for the Ad
Council by the
Advertising Research
Foundation found that
Public Service
Announcements can be
very effective
• The commercial was
negatively framed and
described in the New York
Times as a “30 second
slice of death”
Awareness of Colon Cancer Before and After PSA
• The study focused on a
PSA related to colon
cancer and the
importance of prescreening
50%
40%
30%
Before PSA
20%
After PSA
10%
0%
Men
Women
Negative Message Framing
• Prospect theory predicts that individuals
weigh losses greater than gains
• The annuity decision can be framed to either
favor the “annuity option” or the “investment
option”
– Favor Annuities
Emphasize the “loss” from
outliving resources through the investment option
– Favor Investment
Emphasize the “loss” from
purchasing an annuity and dying soon after
The Basic Choice
• In our experiment, we had participants play a
“Retirement Game”
• Individuals were given $60 to start the game
• They could use this money to either:
– invest the $60 in a simulated “market” and
determine how much to withdraw for living
expenses on their own each period
– purchase a fairly priced annuity offering a fixed
payment $16.77 each period they lived
Negative Frames in Agnew et. al. Study*
• Prior to making the choice, participants viewed one
of three five minute marketing presentations
• The slide shows were based on actual financial
marketing literature
*This research was funded by a grant from the FINRA Investor Education Foundation
The Results
• The frames had sizeable and significant effects
Probability
Investment Bias
-16%
Annuity Bias
-20%
-15%
-10%
-5%
0%
5%
10%
Probability of Choosing Annuity
14%
15%
20%
42
Summary of Lesson Five
• Research suggests that individuals can be swayed to
purchase one financial product over another based on
how the choice is framed
– We need to be aware of the potential consequences (positive
and negative) of framing on consumers’ financial choices
• Main Points:
– Framing is an effective tool when used correctly for
encouraging sound investment behavior
– It is important to test whether the framing strategy works
Lesson Six: What We Can Learn from
Healthcare
Communication
Methods
Financial
Education
Behavioral
Interventions
Regulation
Choice Architecture:
Retirement Plan Design
Financial
Advisers
Case Study: Lost Australian Retirement
Accounts>$2,000
$16. 8 billion
3.4 million accounts
$4,940 average
balance
Motivation for Consolidation
• If a lost account is never reclaimed, the saver’s
overall accumulation is reduced
• Administrative fees and redundant insurance
premiums are deducted from lost accounts
• Insurance premiums paid could be worthless if
the holder is deemed ineligible for payout
Why Might People Not Consolidate?
• Complicated task with multiple steps
• Procrastination
• Planning fallacy
– People tend to underestimate (overestimate) the time
it takes to complete a long (short) task Kahneman & Tversky 1979
• Memory Issues
• Inattention
– Complexity of decisions and cost of information
processing can lead to “rational inattention” Karlan, McConnell,
Mullainathan, Zinman 2012
Intervention Method 1:
Implementation Intentions
• Goal Intention “I intend to reach X!”
– Makes a noncommittal desire into a binding goal
• Implementation Intention “When situation X
arises, I will perform Y!”
– Establishes the ‘when, where and how’ of responses
that move the person towards the goal
– Response to situational cue is more automatic than
conscious
– Formation may also strengthen memory
• Meta-analysis (Golwitzer and Sheeran 2006) finds
implementation intentions effective
Healthcare Example 1 (Orbeil et al 1997)
• Study to encourage breast self examinations (BSE)
• Women were given questionnaire with
intervention manipulation
• Women were not aware they were in a study
• Follow-up questionnaire sent one month later
• 64% of the intervention group reported a BSE vs
14% of control
– Limiting analysis to those who reported the intention
to follow through improved results (100% vs 53%)
Healthcare Example 1 (Orbeil et al 1997)
• Intervention: Paragraph Added to Questionnaire:
– You are more likely to carry out your intention to perform
BSE if you make a decision about where and when you will
do so. Many women find it most convenient to perform
BSE at the start of the morning or last thing at night, in the
shower or bath, or while they are getting dressed in their
bedroom or bathroom. Others like to do it in bed before
they go to sleep or prior to getting up. Decide now where
and when you will perform BSE in the next month and
make a commitment to do so.
• “Followed by two questions asking subjects to write
down, first, where they would perform BSE in the
next month and, second, what time of the day”
Healthcare Example 2 (Milkman et al 2011)
• Study to encourage flu shot vaccinations
• Large firm offered free on-site clinic for vaccination
• Mailings to employees randomly assigned treatments
– Treatment 1: Prompt to write down the date the employee
planned to be vaccinated
– Treatment 2: Prompt to write down the date and time the
employee planned to be vaccinated
• Control group 33.1% vaccination; treatment 1: 1.5%
higher, insignificant; treatment 2: 4.2% higher
statistically significant
Healthcare Example 2 (Milkman et al 2011)
Control Condition
Treatment 1: Date Plan
Treatment 2: Time Plan
Finance Example (Collins et al 2013)
• Study designed to identify interventions to
decrease home loan defaults
• In an experiment, found that individuals who
– set a plan
– committed to implementation intentions,
and
– had a threat of external monitoring
had lower home loan default rates
Intervention Method 2: Reminders
• Reminders can play a key role in helping
people reach goals when limited attention is a
problem
– Reminders can heighten memory
– Serve as an attention shock
– Make the cost/benefits more salient
• Several finance and healthcare studies show
that reminders (text messages, mailed letters,
surveys) can improve actions
Intervention Method 3: Task Segmentation,
Time Allocation and Instructions
• Due to the planning fallacy, individuals may be
helped to reach their goals by…
– Breaking down the task into subtasks
– Providing realistic estimates of the time to complete
each task
– Providing instructions
• Instructions found helpful for increasing
immunization rates and increasing savings in
retirement accounts
Levanthal, Singer, and Jones (1965): Leventhal, Jones and
Sources:
Trembly (1966); Lusardi, Keller and Keller (2008)
Finance Example (Lusardi et al 2008)
We have outlined 7 simple steps to
help you complete the application.
1. Select a 30 minute time slot right now to
complete the online contribution to your
Supplemental Retirement Account (SRA) during
the next week.
2. 3 minutes. Check to see if you have the
following materials: a) worksheet in your
benefits packet _√_, and b) the name and social
security number of a beneficiary _√_.
3. Select the amount you want to invest for 2006
(minimum: $16/month, maximum: $1,708.33/
month), even if you don’t know your take-home
pay in your first month. If you want, you can
change this amount at a later date. This voluntary
contribution is tax-deferred, you will not pay taxes
on it until you withdraw the funds.
. 5 minutes. Select a carrier. If you do not select a
carrier, the non-voluntary portion of your funds
mill be invested in a Fidelity Freedom Fund, a
fund that automatically changes asset allocation
as people age.
4
5. 5 minutes. Now you are ready to complete your
worksheet. Complete the worksheet even though
you may be unsure of some options. You can
change the options in the future.
6. Take your completed worksheet to a computer
that is available for 20 minutes. If you like, you
can use the one in the Human Resources office.
7. 15-20 minutes. Log on to Flex Online and
complete your online SRA registration within
the 20 assigned minutes. Be sure to click on the
investment company (TIAA-CREF, Fidelity, or
Calvert) to complete the application. You need to
set up your account – otherwise your savings will
not reach the carrier.
Summary of Lesson Six
• Look outside finance for ideas regarding how to
effectively communicate complex
• Stay tuned for the results from our field study in
Australia
• Main Point: By understanding people’s
behaviors, communication methods can be
adjusted to more effectively encourage action
Lesson Seven: One Size Doesn’t Fit All
Communication
Methods
Financial
Education
Behavioral
Interventions
Regulation
Choice Architecture:
Retirement Plan Design
Financial
Advisers
Case Study: Encouraging Younger People to
Save
Temporal Construal Theory predicts that
individuals tend to view things differently
whether the event is in the near or distant
future (Source: Montgomery, Szykman and Agnew 2015)
Young People
Retirement is Distant
High Construal
prefer Abstract
Communications
Old People
Retirement is Close
Low Construal
prefer Concrete
Communications
Savings Ad: Same Front Page
Two Versions of the Second Page
Concrete Ad
Abstract Ad
Abstract Ad Significantly Increased Intent to
Save Among Younger Workers
N=342 Montgomery, Szykman and Agnew 2015
Goal Framing and Construal Theory
• What if we changed the time to the savings goal?
– By setting a biweekly savings goal, we are making our
long-term savings problem into a short-term problem
• Theory would predict that young people would
prefer a concrete ad to match the short-term
nature of the goal
Short Term Goals Added
Concrete Ad
Abstract Ad
Relationship from Original Study
Unchanged
Matches
original
study
Matching Short Term Goal Frame with
Concrete Ad Most Effective
Now concrete ad with
short term goal
increases intent to save
the most
Summary of Lesson Seven
• Understanding how groups view
communications differently should inform
design
– Example shown of how younger people react
differently to communications than older people
• Main Points:
– Communications should be tailored to specific
groups
– A “one size fit all” approach will fall short
Prepared by Dr. Julie Agnew
Successful Communication Requires…
• Recognizing that communication matters (Lesson One)
• Avoiding information overload (Lesson Two)
• Understanding the knowledge level of the participants to
determine what to communicate (Lesson Three)
• Careful attention to even the most subtle details (Lesson
Four)
• Using framing to promote sound investment behaviors
(Lesson Five)
• Taking advantage of successful communication strategies
from different fields (Lesson Six)
• Customizing the communications to target different
demographic groups to increase the efficacy of the messaging
(Lesson Seven)
References
-TO BE COMPLETED-
Agnew, J and L. Szykman. 2011. Annuities, Financial Literacy and Information Overload. In Financial Literacy: Implications for Retirement Security and the
Financial Marketplace (eds.) Olivia S. Mitchell and Annamaria Lusardi, 260-297. Oxford, UK: Oxford University Press.
Lusardi, A., and O.S. Mitchell. 2011. Financial literacy around the world. Journal of Pension Economics and Finance 10 497-508.