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
 Low financial sophistication
 Problems => Opportunities
A. Primer
Financial Illness: Causes
(Behavioral Economics 101a)
Cognitive biases that stack deck toward
spending/borrowing, away from
 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)
Mistakes borne of misguided heuristics, other
cognitive limitations
 Information/choice overload
 Anchoring
 Low (financial) literacy, numeracy
A. Primer
Financial Illness: 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
A. Primer
Financial Illness: Causes
(Behavioral Economics 101d)
Markets sometimes exacerbate
consumers’ cognitive “bugs”
 Advice markets are a mess and limited in
 Who covers the household balance
 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
• Anchoring
• Limited attention
• Innumeracy
Biases in price
• Exponential growth bias
• Anchoring
Biases in preferences
• Time-inconsistency
• Loss aversion
A. Primer
Alternate Taxonomy
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
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
 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
Performance bonds
Liquidity restrictions (e.g., spending limits)
“Cut me offs”
Peer support/social reputation (, other
 (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
 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
(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
 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%
• (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
• 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:
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
Process (e.g., “on-ramps”)

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