Stay Informed!

By Sean Luechtefeld on 06/29/2010 @ 11:13 AM

Tags: Innovation, Events, Behavioral Economics

Last month, Microfinance USA hosted their annual conference. In addition to CFED President Andrea Levere’s keynote remarks, we were lucky to have our very own Genevieve Melford, Senior Program Manager for Applied Research, lead a discussion on Behavioral Economics. Last week on Innovator-in-Residence Mindy Hernandez’s Applying Behavioral Sciences in the Real World website, Mindy featured Genevieve’s top takeaways from the session and some of the highlights from the research that was presented by Behavioral Economics experts.

To read the full text of Genevieve’s post, visit Applying Behavioral Sciences in the Real World.

These highlights are posted below and can serve as a great reference for anyone who missed the session or who wants to learn more about some cutting-edge research in Behavioral Economics.

• Margaret McConnell of Harvard University presented research that she conducted with her colleagues that examined why some people fail to save. Beginning with three anomalies in financial decision making – many people engage in high cost borrowing, people save and borrow at the same time and there is a demand for commitment savings products – McConnell and her associates wondered why people often encounter difficulties saving for future “shocks,” or unexpected expenses. They found that in some instances, people merely failed to think about the future. After all, as Genevieve points out, people often discount the value of future consumption in favor of gratification in the moment. Additionally, McConnell’s research indicates that people are most effective at saving for the future when they focus on a one-time change with benefits that stick. For example, if part of my paycheck is automatically directed into a 401(k), I only had to sign up once but will enjoy the benefits each month. As a result, saving becomes easy and not something I need to attend to on a regular basis.
  
  
  
  
• Building on research presented at the Applying Behavioral Sciences blog a couple months ago, Alejandra Lopez-Fernandini of the New America Foundation presented findings from the pilot testing of their new loan product, AutoSave. Alejandra noted that people preferred to save the amounts that were pre-checked on their forms, supporting the idea that the anchoring effect of a suggested savings level was very strong. She also noted that participants liked that the AutoSave product wasn’t linked to a transaction account, making it difficult to withdraw funds from the savings account.
• Adair Morse of the University of Chicago School of Business presented research conducted with her colleagues about the effects of payday lending. Adair wondered if payday lending centers, providers of high-risk loan products, were so popular because individuals didn’t fully know the costs associated with borrowing from these outlets. To see whether full disclosure led people to avoid these borrowing practices, Adair assigned borrowers at 77 payday lending locations to one of four groups: the control group, who received their loan in an envelope with no information about the cost of repayment; a group who received their loan in an envelope that showed APR for different types of loans; a group who received their loan in an envelope that showed the typical number of refinancings; and a group who received their loan in an envelope that showed the cost of repayment, in dollar amount, for the payday loan versus alternative loans. In short, Adair found that borrowers who received information on the total dollar cost of loan fees were 10% less likely to take out another payday loan in the following two months.

Genevieve’s blog post has a wealth of other information about how Behavioral Economics can be applied in our everyday lives and a more in-depth recap of the research findings presented during the panel at Microfinance USA. I encourage you to check it out!

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