BEHAVIORAL RESEARCH &
PRODUCT DEVELOPMENT
FOR FINANCIAL WELLNESS
JONATHAN ZINMAN
Professor, Dartmouth College
Academic Director, U.S. Household Finance Initiative, IPA
October 2011
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
Put forth ideas for product-focused R&D under USHFI Ford
initiative. Key criteria:
 Behaviorally-informed development on new products or features
 Potential for scalability
 For passing market or sustainability test
Financial Products Innovation Fund
October2011
Financial Illness: Symptoms
Widespread low financial resiliency
 Little savings for many
households
 High debt reliance: expensive
 High “money on the table”
 Poor shopping, mediocre mgmt
 Low financial sophistication
Financial Products Innovation Fund
October 2011
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
Financial Products Innovation Fund
October 2011
Financial Illness: Causes
(Behavioral Economics 101b)
#2
Mistakes borne of misguided
heuristics, other cognitive limitations
 Information/choice overload
 Anchoring
 Low (financial) literacy, numeracy
Financial Products Innovation Fund
October 2011
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
Financial Products Innovation Fund
October 2011
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
Financial Products Innovation Fund
October 2011
Opportunity and Approach
Use insights from behavioral social sciences to:
 Help financial service providers
innovate and succeed
Whatever their bottom
line(s)
Help end-users make better
decisions
“Win-win”
Financial Products Innovation Fund
October2011
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.
Financial Products Innovation Fund
October 2011
3-Pronged Approach to R&D
# 2 “D” based on “R”
Work with financial service providers to apply
behavioral research through innovations in:
 Product development
 Pricing
 Marketing
 Enrollment
 Customer communication
Financial Products Innovation Fund
October 2011
3-Pronged Approach to R&D
#3
Testing keeps the “R” and “D” honest
Work with financial service providers to evaluate innovations:
 Develop success/failure metrics
 Implement gold-standard methodologies that deliver sharp,
actionable results
 E.g., Randomized-Control Trials (RCT)
 Adapted per operational realities, other constraints
 Reveal mechanisms underlying success or failure
A first-step is often an “alpha test”: if you build it, do people want it?
Can you sustain it?
 This is the focus of our Ford Initiative
 Of course an RCT component will make a proposal more attractive
 Or a clear path to an RCT after alpha test concludes
Financial Products Innovation Fund
October 2011
Experimentation & the
Learning Organization
A Virtuous Cycle:
R
Test
Financial Products Innovation Fund
D
October 2011
The Skinny on Seven Product Ideas
• Pay Back Yourself
– Convert loan payments to savings once loan paid off
• Borrow Less Tomorrow
– Save More Tomorrow with bigger bang for buck
• Personal Loan Shopper
– Search is where the money is
• Card Control Features
– Making them work: specs, marketing, communication, pricing
• Affordable Small Dollar Loans
– Innovations in distribution, intermediation, screening
• Frictionless Saving
– Get people when they’re liquid: impulse/on-demand saving
• Private Banking for Main Street
– Solutions for the entire household balance sheet
Financial Products Innovation Fund
October 2011
Idea 1. Pay Back Yourself


Problem: hard to get started saving.
Solution: seamless conversion of loan payments to
savings/investment once loan paid off




Small-dollar loans, auto loans, home equity,
Approach: harness habit formation, redirect implusivity
Key features: upfront commitment, back-end
automation
Can reinforce this with messaging


“You’ve almost paid off your loan, get ready to pay yourself”
“… paid off your car/home, time to save for maintenance”
Financial Products Innovation Fund
October 2011
Idea 2. Borrow Less Tomorrow
• Problem: yield-maximizing strategy for many households is to pay down
high-interest debt
• Solution: target this “investment opportunity” with behavioral levers
• Marketing for attention and motivation: Help consumers identify whether
they should borrow less
• Simple Decision Aid: Help making concrete plan to borrow less
– Accelerate repayment
– Limit borrowing going forward
• Commitment: Offer creative ways for clients to incentivize themselves
o
o
o
*Social commitment: peer supporters/referees
Financial commitment: performance bonds
Access commitment: “cut me off if I don’t…”
• Ongoing Messaging: Feedback/reminders for follow-thru and
maintenance
Financial Products Innovation Fund
October 2011
Idea 3. Personal Loan Shopper
• Problem: consumers pay too much for loans
– mortgages (Hall&Woodward); cards (Stango&Zinman)
– because they hate to shop, don’t know how, inattention,
etc.
• Solution: shopping engine
• Consumers passively input information
– Credit report access
– Account access
• Engine outputs product recommendations
– And/or general guidelines: “don’t pay more than this”
– And/or fills out application forms?
– And/or negotiates for the client?
Financial Products Innovation Fund
October 2011
Idea 4. Card Control
• Problem: consumers lack (self-)control
• Solution: MasterCard inControl-type features. Allow
holder can self-impose spending limits based on
– Time (“no charging on Fridays”)
– Amount (per-transaction, per time period)
– Place: merchant, merchant category
• Challenge: value as consumer commitment contract?
– Communicating value to consumer (framing issue)
– Providing UI that helps consumer use wisely
• Don’t want people calling in to revoke/change limits
– Pricing/monetizing
• E.g., teaser subscription pricing strategies
Financial Products Innovation Fund
October 2011
Idea 5. Small Loans, Big Impacts
• Problem: small-dollar loans are expensive
– Wrong term structure: way too short
• Potential solution 1: delayed disbursement as
screening technique
– “Pre-approval” with no disbursement for a week or so
– Borrower willing to take this deal probably has their act
together: lower risk
• Potential solution 2: deliver through workplace
– Use data on job stability to lessen, price credit risk
– Use HR to intermediate (info, education, messaging) for
better outcomes
• Adapting lessons from retirement savings (401k)
Financial Products Innovation Fund
October 2011
Idea 6. Frictionless Saving
• Easy to spend on impulse, but not to save
• When can you save on impulse? When liquid.
• When liquid? Tax time.
– Auto transfers from refund to savings already making
inroads.
• Other liquid time? Payday! So we’re looking for
ways to clear path to saving at:
– Check cashing window
– Direct deposit (increase adoption of auto-transfer to
savings)
Financial Products Innovation Fund
October 2011
Idea 7. Private Banking for Main Street
• Idea: services at level of the household balance sheet
• One motivating trend: “forced ” or “collateralized” saving is popular
feature of small-dollar lending worldwide: require savings deposit(s)
along with loan repayment
• Problem: at market rates this is a money pump!
• Approach: redirect psychology of mental accounting and habit
formation in more (cost)-effective directions
• Solutions:
– Lend less, message to mental account for that, smooth transition to
saving on back-end
– Force saving, but pay loan rate on that saving.
• This makes business sense if habits can be formed with little saving
– Offset account that allocates liquidity from liquid assets to loan
repayment based on automated rules (a la Redfrog)
Financial Products Innovation Fund
October 2011
Summing Up
• These ideas merely a sample of our favorites,
we are open to others
• Ford initiative requires first two stages of R&D:
product development and “alpha-testing” for
feasibility and level of demand
– Adding third stage, randomized-control testing to
measure impacts cleanly, will strengthen proposal
• Product development work only part of our
research portfolio: feel free to contact us with
other ideas and areas of interest
Financial Products Innovation Fund
October 2011
Content and Contacts
 More content at:
 www.dartmouth.edu/~jzinman
 www.poverty-action.org/ushouseholdfinance
 Questions, vetting ideas?
 Rebecca Rouse: rrouse@poverty-action.org
Financial Products Innovation Fund
October 2011