The Inclusive Economy
Rand Behavioral Finance Forum – Consumer Financial Protection
By Michelle Nguyen on 06/21/2011 @ 01:30 PM
Last month I attended the RAND Behavioral Finance Forum on Consumer Financial Protection– a convening of researchers, policymakers and practitioners to discuss recent findings in behavioral finance and their policy implications for consumer financial protection.
The agenda was jam-packed with fascinating research and discussion – many conversations ran over because there was so much to talk about – and the sessions were led by academics and consumer finance industry leaders. It was a riveting day of research for us fans of behavioral economics, but take comfort that RAND will post video recordings of the forum on their website in the next few weeks. UPDATE: The video recordings can be found here.
A few insights really stood out to me as applicable to our work in asset building and financial access:
- Daniel Bartels’s presentation suggested that feelings of connectedness to your future self impact patience and the ability to make responsible decisions (based on people’s own definition of “responsible”). He stated that being more connected to your future self is correlated with being more likely to recognize intertemporal tradeoffs and the opportunity costs of long-term financial decisions, echoing a previous CFED blog post on the same topic. Consumers restrain their spending the most when they are both cued to think about the tradeoffs (opportunity costs) that will result from spending now rather than later, and feel connected to their future selves. And the good news is that feelings of connectedness can be cued or enhanced through low-cost interventions. This link between connectedness and decision-making could have big results on people’s saving and future planning behavior for a relatively low-cost intervention. For a journal article co-authored by Bartels on the issue, click here.
- Shane Frederick’s presentation about temporal references explored how people process time and their returns on time. Studies show that framing the passage of time as part of a person’s lifetime instead of a number of years can affect how far ahead a person perceives an event to be. For example, framing an event as “when you are 45” instead of “in 20 years” can increase connectedness to future selves, Frederick theorized. It is paradoxical in that people feel that it’s far away, but they picture themselves receiving the reward at age 45 and can be more patient. This could be a particularly crucial insight for program participants saving money over a period of time to build assets. For a journal article co-authored by Frederick on the issue, click here.
- Jonathan Zinman’s presentation described the potential for converting borrowers into savers. First, he stated that the highest, safest return for many households was to pay down their debt. One idea he posed to the consumer finance industry was for a seamless conversion of loan payments to a stream of payments to a savings account, which would harness habit formation and mental accounting. Another idea was for a counselor or financial services company to develop a balance sheet level relationship with a client – he calls this “private banking for main street” - to identify expensive debt, so that people who need to borrow can do it as cheaply as possible.
This research has fascinating implications for our program work in the asset building field, and as researchers continue to learn more about ways to effectively connect people to their future selves and therefore help people meet their own long term goals, we will use their insights to inform our work.