By Daria Sheehan, Citi Foundation, Pamela Chan and Ethan Geiling on 04/22/2013 @ 04:45 PM

Tags: Behavioral Economics, Economic Inclusion, Financial Empowerment

Insights from behavioral economics can transform the way we design programs in the asset-building field, and we’re interested in learning how. That’s why CFED, ideas42 and the Citi Foundation launched the Behavioral Economics Technical Assistance (BETA) Project and issued a request for proposals (RFP) in late 2012 from organizations interested in piloting behaviorally-informed interventions. Working with the selected pilot sites, we hope to also develop technical assistance tools for other organizations in the field.

Through the RFP process, we received 99 proposals from organizations across the country. Today, we released a brief that examines themes among these 99 proposals, explores common challenges and lays out next steps for the BETA Project.

With 99 applications from a diverse set of organizations, you might expect an infinite range of different problems and program challenges. Interestingly, we found that many of the problems organizations reported are quite similar. Almost all of the problems fell into four broad categories:

1. Low take-up of a program or service. For example, many programs offer financial education classes or credit counseling, but have problems convincing individuals to enroll in these programs.
2. Clients fail to follow through on intentions. For example, many programs work with individuals to create “action plans” or similar roadmaps to help people achieve their financial goals. Yet individuals do not follow through on these plans.
3. Clients have trouble prioritizing savings or changing savings habits. For example, some organizations were interested in leveraging tax time to help people save, since individuals often get a windfall tax refund.
4. Clients have difficulty making economically beneficial financial decisions. For example, many organizations are trying to help individuals manage and repair credit, usually through one-on-one financial counseling.

Although many of the problems identified in the proposals were similar, we believe that the underlying reasons why these problems exist could be very different for each organization.

For example, take the problem of getting more people to sign up for a financial education class. If the class has a good curriculum, and has led to successful outcomes, why is it hard to get people to sign up?

It’s easy to assume that the underlying reason for this problem is about the advertising and promotion of the program, and that if more people knew about the program, more would sign up. However, the reality could be that people know about the program and had the intention to sign up, but did not act upon it. In this case, it would not matter how effective a new advertising campaign is—the problem was not the advertisements.

All behaviorally informed interventions start with a statement of the problem. Over the coming months, the BETA Project will share lessons from our three selected test sites: Neighborhood Trust Financial Partners (New York), Cleveland Housing Network (Cleveland) and Accion Texas (San Antonio). We’ll start by analyzing the original problem statement provided by each of the sites in their application:

Designing effective solutions ultimately depends on how we represent the problems. That means that we must disentangle the core challenge from preconceptions or hidden assumptions. Stay tuned for lessons on how we take these original problem statements and refine them into the core challenges that can be addressed by behavioral diagnosis and design.

By sharing insights from these sites, we hope more organizations will come to appreciate how accounting for client behavior in the context of service delivery can greatly impact program outcomes.

Click here to read the full brief.

By Ethan Geiling on 12/06/2012 @ 10:00 AM

Tags: Behavioral Economics

We’re excited to announce the three partner organizations that CFED and ideas42 will work with through the Behavioral Economics Technical Assistance (BETA) Project: Accion Texas, Cleveland Housing Network and Neighborhood Trust Financial Partners. The Project, funded by the Citi Foundation, will work closely with these partners to diagnose, design and test behaviorally informed interventions that can improve service delivery and financial outcomes for customers.

Almost 100 organizations submitted proposals to the Project--an exciting response demonstrating substantial interest in behavioral economics across the asset-building field. The insights and lessons we learn along the way will be widely shared with the assets field through CFED’s Behavioral Economics website.

And the three test sites are…

Accion Texas Inc.

Accion Texas Inc. is one of the largest microlenders in the country, successfully lending to low-income consumers who are often shut out of traditional credit channels. Through the BETA Project, Accion Texas will explore behavioral barriers to successful loan repayment that often prevent low-income entrepreneurs from improving their credit scores and climbing the economic ladder. Learn more about the behavioral questions Accion Texas will explore.

Cleveland Housing Network

The Cleveland Housing Network – the largest nonprofit, single-family affordable housing developer in the country – builds vibrant neighborhoods and strong families through healthy affordable housing. Through the BETA Project, Cleveland Housing Network will examine behavioral barriers to using online payment tools among families in the Network’s flagship Lease-Purchase program. Learn more about the behavioral questions Cleveland Housing Network will explore.

Neighborhood Trust Financial Partners (New York City)

Neighborhood Trust promotes long-term financial security among low-income families by helping individuals become banked, start saving, and begin adhering to a long-term financial plan. Through the BETA Project, Neighborhood Trust will explore the behavioral barriers that prevent low-income individuals from signing up and actively using transaction accounts. Learn more about the behavioral questions Neighborhood Trust will explore.

Over the coming months, we’ll share insights, lessons and early findings from the project. In the meantime, visit our newly-updated behavioral economics website to get the latest BE news and resources. For example, check out these resources:

• Matthew Darling of ideas42 discusses behavioral economics in the assets field in a recent blog post.
• The revamped Behavioral Economics 101 Primer page provides a dynamic introduction to the field of behavioral economics.
• Mindy Hernandez’s paper offers the top lessons gleaned from a year of applying behavioral research to asset-building initiatives.
• The Research and Resources page includes the latest Behavioral Economics news stories, like this article in The New Republic discussing how the Consumer Financial Protection Bureau is helping solve “behavioral market failures.” Or this article in Marketplace exploring the psychology of poverty and how the poor have less room for error when making financial decisions.

The BETA Project is part of the Assets & Opportunity Network’s Intensive Learning Clusters - which are time-limited, thematically-based opportunities for organizations to learn from each other and from outside experts to advance a learning agenda on specific topics or approaches of critical importance to the assets field. To learn more about this and other learning community opportunities, visit our Learning Community page.

By Matthew Darling, Guest Contributor on 11/09/2012 @ 03:45 PM

Tags: Behavioral Economics

In the last few years, behavioral economics has taken off in the asset building community. Numerous pilot programs have been launched that make use of behaviorally-inspired interventions such as reminders, defaults, and social norms. But at ideas42, we’ve learned that behavioral economics isn’t just about designing interventions. It’s about correctly defining the problem and accurately diagnosing what is leading to the problems we see.

For example, one of the most powerful behavioral interventions is using defaults to increase enrollment is 401(k) savings plans. By switching the form from “opt in” (you had to check a box if you wanted to enroll) to “opt out” (you had to check a box to not enroll), companies were able to achieve an astounding effect. Enrollment rates leaped from as little as 13% to as much as 80%. And the “nudge” stuck. Years later, employees were still enrolled in the 401(k) program, and still saving.

The success of this intervention has led to a temptation to think of defaults as a magic bullet. After all, they are cheap (only requiring the rewriting of a few forms) and tremendously effective. And defaults have been extended to some contexts (such as organ donation) without losing their punch.

But the asset building community has struggled. An innovative EITC VITA site experimented with using defaults to encourage savings at tax time. Everyone was given the opportunity to elect to have a portion of their refund in the form of a savings bond, but a randomly selected group was defaulted to receive 10% of their refund as a bond.

In the control group, who were defaulted to receive their refund in cash, 9% elected to receive a portion of their refund as a savings bond. In the treatment group, the number of people who received a savings bond was…still 9%! Defaults had no effect at all.

It is tempting to conclude that defaults do not work in this case, perhaps because low-income people are unable to save for structural, technical or dispositional reasons. But we believe that that the problem lay in diagnosis. While both the 401(k) and EITC defaults were an attempt to increase savings, the psychology behind the both the decision to save and the action of saving are wildly different in either case.

How so? Interviews of employees who have not enrolled in a 401(k) program reveal that over two-thirds of them of them recognize that they are not saving enough. And while one-fourth of employees plan to start saving more in the next 2 months, virtually none do. Employees were not saving because they failed to translate their intentions into action.

The psychology behind EITC refunds is very different. In a follow up survey of VITA volunteers to determine why so few people took up the savings bond, nearly 80% of the tax preparers said that people came to the VITA site with a pre-existing plan for how they were going to spend the refund. The refund is a commitment account. It allows low-income people to receive a large amount of cash for purchases they could not afford living paycheck to paycheck. Getting people to save their EITC refund is difficult because to those who get it, the EITC refund is accumulated savings. People were not failing to follow through on an intention – the intention the program designers were looking for was simply not present. The thing that made defaults too powerful in the case of 401(k) enrolment was simply missing.

CFED and ideas42 are collaborating on the BETA project, with the goal of tackling tough social problems by designing and testing behavioral interventions on real world products, processes and/or services. But we have built in a behavioral mapping process that teases out the sequence of events from client engagement to client outcomes. The goal is to understand every possible step in the process and unearth the barriers and potential psychologies at play that are inhibiting decision choice, action, or both. That way, we can ensure that we are using the right tools for the job.

Works Cited

Bronchetti, E. T., Dee, T. S., Huffman, D. B., & Magenheim, E. (2011). When a Nudge Isn’t Enough: Defaults and Saving Among Low-Income Tax Filers (No. w16887). National Bureau of Economic Research.

Madrian, B. C., & Shea, D. F. (2000). The power of suggestion: Inertia in 401 (k) participation and savings behavior (No. w7682). National Bureau of Economic Research.

Romich, J. L., & Weisner, T. (2000). How families view and use the EITC: Advance payment versus lump sum delivery. National Tax Journal, 53(4; PART 2), 1245-1262.

Matthew Darling is a Senior Associate at ideas42.

By Elvis Guzman on 09/20/2012 @ 06:20 PM

Tags: ALC 2012, Behavioral Economics

With the help of the Citi Foundation, today some ALC attendees took part in a Behavioral Economics 101 session. One of the major challenges asset-building organizations face is how to ensure people follow through on intentions. Many in the assets field work hard to provide families with opportunities, yet families often continue to fall short of their goals. Why is this? Why would people choose not to better themselves by investing in their future? The fact is that every day all of us make financial decisions that may or may not be to our best interest. Could it be that some of us are more "financially savvy" than others? Financial education is certainly a piece of the puzzle, but the speakers in this session emphasized the need to think beyond financial education - families need to build financial capability.

How do we build financial capability? Behavioral economics can help us understand the process of decision-making. People think in a certain way due to their life circumstances. In fact, there are many influences to decision-making and actions. A person experiencing extreme poverty thinks and acts differently than a middle-class individual who faces fewer financial challenges. Behavioral economics has made significant strides in the past few years to help the assets field understand problems and find appropriate solutions.

Unfortunately, not all solutions work for every situation. This makes it difficult for practitioners trying to help people make the right decisions. Some possible solutions which the behavioral economics field has found successful are reminders, incentives, and commitments from both practitioners and program participants. These strategies may not be successful in every circumstance but they are a good starting point in helping people stay the course and better themselves and their families.

The behavioral economics session was a great success with an eager and active audience. CFED would like to thank our guest speakers and the ALC attendees who helped make it into an informative and fun meeting.

Click here to access the powerpoint from the presentation.

Posted on 09/04/2012 @ 04:00 PM

Tags: Behavioral Economics, Financial Empowerment, Assets & Opportunity Initiative

This morning, CFED, ideas42 and the Citi Foundation announced the launch of the Behavioral Economics Technical Assistance (BETA) Project. The goal of the BETA Project is to tackle tough social problems by designing and testing behavioral interventions on real world products, processes and/or services.

What is behavioral economics? It is the study of how people make choices – not in a simplified economic model, but in the textured and rich reality of daily life. Traditional economic models assume that people are highly rational and pursue their goals consistently, without mistakes or need for help. For example, retirement planning, under the traditional economic model simply involves a household calculating the funds needed for retirement and then reducing consumption to meet the savings goal. As we all know, however, the reality is that Americans consistently under-save and are often unprepared for retirement.

The BETA project brings insights from behavioral economics to the asset-building field. Through the BETA project, CFED and ideas42 will work collaboratively with three to five organizations to pilot a behavioral intervention within an asset-building program or service. Behavioral interventions come in a wide range of forms, but can be broadly defined as manageable, low-cost program adjustments informed by research in behavioral economics and psychology. For example, an organization may help low-income clients save by sending them short text messages reminding them of their savings goals on payday. Past research has shown that small tweaks like this can have a powerful impact.

These three to five pilot organizations will be selected through a competitive application process. Click here to read more about the project, selection criteria and timeline.

On October 4, CFED and ideas42 are hosting a Q&A webinar to explain the structure of the BETA Project, describe the ideal pilot program, provide tips for a successful application, and give participants the opportunity to ask questions. There will also be multiple behavioral economics sessions at the 2012 Assets Learning Conference, including Behavioral Economics 101 and Behavioral Interventions to Boost Savings Rates.

Through the BETA Project, CFED, ideas42, and selected organizations will participate in a behavioral mapping process to tease out the sequence of events from client engagement to client outcomes. The behavioral mapping process is performed from the perspective of the client or customer, rather than the organization. The goal is to understand every possible step in the process and unearth the barriers and potential psychologies at play that are inhibiting decision choice, action, or both.

CFED and ideas42 experts will work collaboratively with selected organizations to design a behavioral intervention using an understanding of the program's context, processes, goals and barriers. The intervention may involve adding, changing or taking away from current processes. The BETA Project team will then evaluate the intervention and share findings with the broader field.

All of us at CFED, ideas42 and the Citi Foundation are incredibly excited to embark on this project. We believe that applying a behavioral economics lens will provide us with a fresh perspective on many of the challenges asset building organizations are facing.

Click here to learn more and download the request for proposals. Proposals are due October 19.

The BETA Project is part of the Assets & Opportunity Network’s Intensive Learning Clusters – which are time-limited, thematically-based, small groups that learn from each other and outside experts to advance a learning agenda on specific topics or approaches. Learnings from the BETA Project, along with a myriad of behavioral economic-related research and resources, will be featured on CFED's Blog and Behavioral Economics site.

Opportunities to participate in these Intensive Learning Clusters are limited exclusively to members of the Assets & Opportunity Network. Click here to join the Network!

By Stephanie Halligan on 05/08/2012 @ 12:00 PM

Tags: Behavioral Economics, Individual Development Accounts

In February, CFED hosted a webinar Behavioral Strategies for Successful Individual Development Account (IDA) Programs. The webinar was presented on behalf of the Assets for Independence (AFI) program, the largest source of federal funding for IDAs and featured former CFED Innovator-in-Residence, Mindy Hernandez. Mindy, one of the leaders in the field of applying behavioral economics research to real world challenges, Mindy presented on findings from behavioral research and provided strategies for asset building and IDA programs to improve program outcomes (for a recording of the webinar, please visit the IDA Resources website).

Applying Behavioral Economics to the Asset Building Field:
But how exactly can behavioral economic strategies help asset building programs? We all know about the benefits of opening a bank account, making regular deposits and saving for the future. Yet getting clients through the door and enrolled in an asset building program – like an IDA program or free tax prep – and follow through with their intentions to save money is often surprisingly challenging.

That’s where behavioral economics comes in. Research and experimentation from the field are continuously finding new ways to help people act on their intentions and form good savings habits. Program “tweaks” can help:

1. Improve program enrollment and retention;
2. Promote better participation through automation, reminders, and simplified processes; and
3. Enhance clients’ capacity to follow through on their intentions.

During the webinar, CFED also announced the release of the Behavioral Strategies for Successful IDA Programs guide, developed in partnership with behavioral economist Mindy on behalf of the Assets for Independence (AFI) IDA Resource Center. The guide outlines easy, cost-effective tactics for improving IDA program recruitment, enrollment and retention.

Examples of Behavioral Economics and Asset Building
We think there are a lot of promising opportunities to apply behavioral economics principles to other asset building programs. You can find a lot of examples and research of behavioral economics in action in CFED’s publication Applying Behavioral Research to Asset-Building Initiatives. In this paper, Mindy describes her partnerships with three different asset building practitioners to design and test behavioral program tweaks. What she found (and what other studies around the world have confirmed) is that little adjustments in a program can make a big difference in client behavior. Here are just a few examples of some effective strategies from the field (you can learn more about these examples in the webinar recording):

• Mental accounting: An experiment in India working with low-income construction workers found that they were saving just three percent of their income. Working closely with social workers, the construction workers were asked how much they would be able to save beyond that 3% and asked to commit to either one savings goal or multiple savings. The workers were then paid every month with their earnings divided into two envelopes: one for saving and one for spending. Some workers received envelopes with a photo of their savings goal written down (for example, their children or a new motorbike). If a worker wanted to spend his savings, he would literally have to tear through the photo of his own child to get to the money!
  
  What the study found was that just dividing the money was incredibly helpful. Even more valuable, however, was naming the savings goal and adding the visual picture. Finally, the study also concluded that having multiple savings goals corresponded with a decrease workers’ savings.
  
  How does this apply to my program?
  First, label saving goals: the more specific clients are about their savings goals, the more it will resonate and the more likely they will save. Second, literally separate money: just as people often create mental “buckets” of how and when they can spend their money, physically separating the money will encourage that clients follow through with their intentions. Third, be visual: using photos is a powerful tool to remind clients of why they are saving in the first place. Finally, keep it simple: the more complicated, and the more goals a client has, the less-likely he is to succeed or save money.
• Well-designed reminders: Reminders are an easy and relatively inexpensive way to help people adhere to behaviors, like saving consistently or for entrepreneurs, filing quarterly taxes. CFED and Mindy have begun working with one IDA program to test the effectiveness of text messages to promote more consistent savings by young clients. Text reminder studies in abroad have shown positive results: clients that received texts reminding them to save increased their savings by 6%, and clients receiving a reminder with a message associated with their specific goal increased their savings by 16%.
  
  How does this apply to my program?
  First, be specific: The text message study shows a 10% difference in client savings between generic savings reminders and goal-specific savings reminders. The more personal the message is to the individual, the more powerful.
  
  Second, focus on the how: just as being specific about the goal is important (the end result), articulating the how and when (the means) can influence a client’s likelihood to follow through on his intentions. It’s not just a reminder to save, but to remember to “drop off your deposit to the bank downtown after you leave work.”

Want to learn more about applying Behavioral Economics to your work?
CFED will be holding several behavioral economics sessions during the Assets Learning Conference in September. To learn more and to register, please visit www.assetsconference.org. We’re excited about the synergies between behavioral economics and asset building, and we hope you are too!

By Sean Luechtefeld on 03/29/2012 @ 05:00 PM

Tags: Behavioral Economics, Financial Empowerment

In a brilliant display of nerd-dom, my friend, Jade, and I had a discussion at the dinner table the other night about the ways in which people make sense of their financial situations. Though perhaps geeky, it got me thinking about how service delivery should be informed by how people perceive their financial behavior.

Let me explain.

The conversation actually started in relation to our students. In addition to both working in the assets & opportunity field, Jade and I also teach at the University of Maryland. We were discussing some of the things that motivate our students. For example, when a student fails an exam, how do you encourage them to move forward and think about preparing well for the next exam, rather than dwelling on the last exam. The conclusion we came to is that students need to recognize that failing is something they did, but it isn’t who they are. In other words, they’re someone who struggled with an exam; they’re not an all-out failure. As another example, students who cheat – and get caught – ought to be told that they’re a student who made a bad decision, not that they themselves are cheaters. Unfortunately situations like these are just that: unfortunate situations. They do not define the entirety of one’s character.

This led Jade and I to think about the same logic applied to individuals and families who struggle financially. Indeed, we talk about the notion of financial literacy, suggesting that those who lack financial education are somehow illiterate. Of course, that’s not true, and in most cases, those who struggle with making on-time bill payments or who find it difficult to save are by no means incapable. They may struggle, but when it comes to managing resources, everyone is capable to some degree.

If you agree with this premise – and you may not – then doesn’t it make sense to ensure that people working to improve their financial futures can do so by encouraging them? Wouldn’t clients be better served by understanding that they are people who struggle with money, rather than financially illiterate or incapable? Research finds that the power of affirmation is undeniable; that when positioned to believe they are capable of making good financial decisions, even those with limited means can make strides toward financial stability. Of course, quite the opposite is also true; if someone believes they are destined to face financial hardship forever, then they no longer feel empowered to make well-informed financial decisions to begin with.

Of course, I readily admit that this is more a hypothesis than anything else. Nevertheless, it leads me to wonder: what would a behaviorally-informed research experiment that tests this hypothesis look like? Moreover, is there research that tests this hypothesis already? If you have answers to these questions – or want to play devil’s advocate – use the comments below.

By Kim Pate on 03/27/2012 @ 03:45 PM

Tags: Behavioral Economics, Entrepreneurship, Events

I’m not typically one for shameless self-promotion, but I’m really excited to share with you all information about an upcoming webinar that I am moderating. The webinar, co-presented with NeighborWorks America, is called “Applying Behavioral Economics for Improved Program Delivery and Greater Impact,” and it’s taking place on Tuesday, April 3 from 1 – 2 pm (Eastern).

As CFED’s Director of Entrepreneurship, I’m always working with partner organizations and folks working on-the-ground to identify ways to leverage tax time to the benefit of low-income entrepreneurs. What’s exciting about this webinar is that it explores that topic from the perspective of behavioral economics. It has also been designed to permit a more in-depth conversation than many webinars offer. The conversation will include CFED’s 2010 Innovator-in-Residence, Mindy Hernandez, and Foundation Communities’ Tax Services Manager Linda Paulson. The hour-long session will permit plenty of time for participants to jump in and ask questions, so I hope you’ll be able to join us.

You can find all of the details, including how to register, by visiting our Knowledge Center. Of course, if you have questions, you can also leave them below and we’ll be happy to answer them publicly. I hope to see you there!

By Stephanie Halligan on 02/21/2012 @ 10:00 AM

Tags: Behavioral Economics, Financial Empowerment, Individual Development Accounts, Matched Savings

It’s officially America Saves Week! From February 19 - 26, the America Saves campaign is calling on educators, nonprofits and financial institutions to promote good savings behavior and for consumer to assess their own personal saving status.

So how are American’s financial habits faring during America Saves week? The Bureau of Economic Analysis (BEA) reported last month that the national personal savings rate is up to 4 percent (up from 3.5 percent in November); this means, on average, Americans are saving 4 cents for every dollar of disposable incomes. While that’s more encouraging than the negative rate that Americans were saving at a few years back, it’s far from ideal. Since the BEA began measuring this statistic in 1959, the savings rate has fluctuated from 8.3 percent in the early 60’s to 14.6 percent during the recession in the mid-70s (ironically, a recession usually increases the average savings rate, and a bad economy can scare folks into saving more money.

Even though our current savings rate as a country sits comfortably above a negative percentage, it certainly doesn’t mean that everyone is doing it, and it doesn’t mean that saving money has gotten any easier – after all, if savings were easy, we’d all be doing it! Using this year’s America Saves theme of “Set a Goal, Make a Plan and Save Automatically,” how can we help the average American consumer (that’s all of us!) set aside some of the money we have today for something in the future?

Set a Goal. Saving for the sake of saving is boring. Most people need inspiration or a compelling reason to set aside their hard-earned money for any period of time. First, decide on something that has personal value or meaning that may require some financial foresight and savings – a vacation, a first home, or even a rainy day. Secondly, consider opening a targeted savings account or naming an existing savings account something that will motivate you to save and remind you of your goal. What’s more compelling: setting aside $25 every month in your ABC Bank savings account or putting that money into your “My Dream Vacation with the Family” fund? Better yet, eligible individuals can open up an Individual Development Account (IDA) that helps participants save for their first home, continuing education or small business development. Visit the IDA Program Directory to find an IDA program in your area.

Make a Plan. Online savings tools like SmartyPig can help make your savings goal into a reality by helping you keep track of your savings goals and offering suggestions for how often you should be depositing money. Need more personal help in creating a plan and sticking to it? Eligible individuals can take advantage of financial services and education provided by local nonprofits. Local Initiatives Support Collaboration (LISC) Financial Opportunity Centers, for example, take a multi-faceted approach to providing individuals with one-on-one career and personal finance services and coaching. Other providers in your area may offer programs to help you create a savings plan.

Save Automatically. Let’s face it – we’re all human. If you have to consistently and consciously take money out of your paycheck or bank account every month and then put it away toward your savings goal, you are fighting an uphill battle. Creating an automatic transfer or deposit into your savings account is a critical step to achieving your savings goal. Behavioral economics theory and studies suggest that “setting and forgetting” with automatic transfers or direct deposit can have a hugely positive impact on a person’s savings rate and habits. And don’t forget to take advantage of the Earned Income Tax Credit (EITC) at tax time, where you can automatically deposit a portion of your tax refund into a savings account or U.S. Savings Bond.

Savings takes commitment, practice and the appropriate tools to make it happen. And while everybody has a different amount of disposable income to work with, everybody has the ability to save something – even a penny is a good place to begin. So why not start this week?

To find an America Saves Week organization or to join the campaign, visit http://www.americasavesweek.org/.

By Chelsea Prescotti, Guest Contributor on 11/17/2011 @ 11:45 AM

Tags: Behavioral Economics, Financial Empowerment, Matched Savings, Recommended Reading

Saving money for the future is never an easy thing for anyone, no matter what our educational or financial background is. As the field of behavioral economics has established, instant gratification over long-term planning is both ingrained psychologically and culturally in consumer societies. For low-income earners especially, who do not have the luxury of financial planners or even the basic means to substantially contribute to their financial future, saving is doubly difficult.

A Connecticut-based organization, Innovations for Poverty in Action, however, hopes to encourage low-income earners to save with a relatively new product launched this past summer. Called the Super Saver CD, it has enabled selected participants to put away money regularly like a typical CD, but its minimum deposit of $15 makes the savings product an affordable one. Another unique aspect of the Super Saver CD is that it can mature when a certain goal has been met, as long as participants have committed to saving for at least three months. For example, if an individual using the Super Saver CD is saving for the purpose of paying school tuition, she may withdraw funds once the school year begins.

The Super Saver CD developed by Innovations for Poverty in Action was modeled after a similar program in New York City, reports the Financial Security Project of Boston College. But, unlike the New York-based program, the Super Saver CD offered through a federal credit union in D.C., will also send some participants text message and email reminders. This part of the program is designed to address one of the core problems that obstructs savings behaviors—short attention spans. According to Boston College article, not all participants will receive reminders so that developers of the pilot program will be able to determine whether such reminders are affective in getting people to consistently deposit money.

Although the Innovation for Poverty in Action Super Saver CD has been implemented for several months now, it is still too soon to track its success. A Chicago Tribune article followed up on the project in September and reported that interest in the Super Saver CD has been “encouraging,” according to project coordinator Rebecca Rouse.

Innovations for Poverty Action was founded in 2002 by Dean Karlan, a professor of economics at Yale University. Interested specifically in behavioral economics, Karlan founded the organization in an attempt to, as noted on the IPA website, “design and evaluate programs in real contexts with real people, and provide hands-on assistance to bring successful programs to scale.”

Using randomized controlled trials as the basis of its methodology, IPA works on various development projects both globally and domestically, including projects that involve agriculture; charitable giving; education; health; microfinance and enterprise; governance and community participation; and water and sanitation.

Chelsea Prescotti is a consultant for www.creditscore.net. The Inclusive Economy thanks Chelsea for her thoughtful contribution!

By Chelsea Prescotti, Guest Contributor on 11/17/2011 @ 11:45 AM

Tags: Behavioral Economics, Financial Empowerment, Matched Savings, Recommended Reading

Saving money for the future is never an easy thing for anyone, no matter what our educational or financial background is. As the field of behavioral economics has established, instant gratification over long-term planning is both ingrained psychologically and culturally in consumer societies. For low-income earners especially, who do not have the luxury of financial planners or even the basic means to substantially contribute to their financial future, saving is doubly difficult.

A Connecticut-based organization, Innovations for Poverty Action, however, hopes to encourage low-income earners to save with a relatively new product launched this past summer. Called the Super Saver CD, it has enabled selected participants to put away money regularly like a typical CD, but its minimum deposit of $15 makes the savings product an affordable one. Another unique aspect of the Super Saver CD is that it can mature when a certain goal has been met, as long as participants have committed to saving for at least three months. For example, if an individual using the Super Saver CD is saving for the purpose of paying school tuition, she may withdraw funds once the school year begins.

The Super Saver CD developed by Innovations for Poverty in Action was modeled after a similar program in New York City, reports the Financial Security Project of Boston College. But, unlike the New York-based program, the Super Saver CD offered through a federal credit union in D.C., will also send some participants text message and email reminders. This part of the program is designed to address one of the core problems that obstructs savings behaviors—short attention spans. According to Boston College article, not all participants will receive reminders so that developers of the pilot program will be able to determine whether such reminders are affective in getting people to consistently deposit money.

Although the Innovations for Poverty Action Super Saver CD has been implemented for several months now, it is still too soon to track its success. A Chicago Tribune article followed up on the project in September and reported that interest in the Super Saver CD has been “encouraging,” according to project coordinator Rebecca Rouse.

Innovations for Poverty Action (IPA) was founded in 2002 by Dean Karlan, a professor of economics at Yale University. Interested specifically in behavioral economics, Karlan founded the organization in an attempt to, as noted on the IPA website, “design and evaluate programs in real contexts with real people, and provide hands-on assistance to bring successful programs to scale.”

Using randomized controlled trials as the basis of its methodology, IPA works on various development projects both globally and domestically, including projects that involve agriculture; charitable giving; education; health; microfinance and enterprise; governance and community participation; and water and sanitation.

Chelsea Prescotti is a consultant for www.creditscore.net. The Inclusive Economy thanks Chelsea for her thoughtful contribution!

By Cäzilia Loibl, Guest Contributor on 09/13/2011 @ 11:00 AM

Tags: Behavioral Economics, Individual Development Accounts, Matched Savings

Can a savings program really foster savings habits? Yes!

Findings from a study on savings habit development in IDAs

Cäzilia Loibl is an Assistant Professor at the Department of Consumer Sciences at The Ohio State University. For more information about Cäzilia's other papers on the IDA program and savings behavior in general, please visit her publications page.

Savings habits are a topic covered in every financial education workshop, and play a particularly important role in Individual Development Account (IDA) programs. IDA participants have both the time and the structure to foster good savings behavior during financial education classes and meetings with case managers. I was interested in finding out whether we could, in fact, quantify the impact of the IDA program on savings habit development. We captured our findings in the study, Accounting for the Role of Habit in Regular Savings.

Background: For the purpose of this study, savings habits were defined as frequently practiced behaviors, done without a particular sense of awareness, with the goal of freeing up funds for saving or debt reduction. Automatically packing lunch for work, browsing supermarket shelves for discounted products and calling friends after 9 p.m. are thrifty money-saving behaviors that should be habitual for many people. Our “treatment” group consisted of current participants in the IDA program of the Assets Ohio network, a statewide IDA program managed by the Ohio CDC Association. The “treatment” group received a paper survey distributed to them by their case managers. The “comparison” group comprised low-income individuals of the general population who lived in counties served by the IDA network, but who were not savings program participants. We collected and analyzed survey data to:

1. Validate the role of habit in regular saving
2. Test whether participation in a savings program (i.e., an Individual Development Account program) facilitates habit formation
3. Examine the role of habit in individual’s perception of financial strain

The results showed that habit mattered for regular saving. Habit strength increased over time during program participation and savings habits reduced the stress of financially difficult situations.

Result #1: Habit influences savings
Habit emerged as a significant predictor of savings deposits, confirming its role as an independent factor in explaining saving.

Result #2: Savings program participation supports habit formation
Compared to non-participants, the savings habit of IDA program participants increased over time, peaked at 19-24 months, and then flattened. There was no difference in savings habit between non-participants and new enrollees, thus supporting successful habit formation during savings program participation.

Result #3: Habit eases financially stressful experiences
Results support the independent role of habit for reducing the perception of financial strain above the influence of household income and savings. This analysis parallels earlier findings on the influence of mental habits on self-esteem (Hilton and Devall 1997).

Admittedly, the idea that long-term savings may be achieved by habitualizing behavior is controversial in the world of behavioral economics. Behavioral economics favors commitment devices that reduce the behavioral component to a minimum – in other words, the less action required, the more successful the saver will be. Examples include auto-enrollment in retirement plans (Madrian and Shea 2001), the use of life-cycle investment funds, and employer-sponsored matched savings (Choi et al. 2006).

However, our analysis focuses on the financial behaviors in everyday life, the ideal scenario for building savings habits. Many of these decisions tend to occur frequently (packing a sack lunch, brewing your own coffee, parking in a cheaper parking lot), tend to affect small amounts of money in the “peanuts” range (Prelec and Loewenstein 1991; Markowitz 1952), and are targeted toward the greater goal of freeing up money for saving or debt reduction. These savings habits may funnel funding toward an institutionalized commitment mechanism (e.g. a checking account balance that is invested automatically) or develop independently, but both help achieve the greater goal of asset building for the purposes of short-term and long-term savings.

Reference:
Loibl, Cäzilia, David S. Kraybill, and Sara Wackler DeMay. 2011. Accounting for the role of habit in regular saving. Journal of Economic Psychology, Volume 32, Issue 4, August 2011, Pages 581-592. Accessible here: http://dx.doi.org/10.1016/j.joep.2011.04.004

By Tiffany Anderson and Carl Rist on 08/24/2011 @ 10:30 AM

Tags: Behavioral Economics

Refund to Savings (R2S) Initiative: Exploring the Intersection of Behavioral Economics and Asset Building at Tax Time and Beyond

If a natural disaster struck your home or vehicle, how soon would you be able to access the funds to make the necessary repairs? Recent research reveals that 47% of Americans couldn’t raise $2,000 within a month in the event of an emergency. The Refund to Savings (R2S) Initiative aims to address Americans’ lack of savings by encouraging taxpayers to save part or all of their tax refunds.

In a previous blog post, researchers from the University of North Carolina at Chapel Hill described the R2S initiative and outlined its primary goal—to apply the principles of behavioral economics to design and test savings prompts, financial incentives, and various financial products integrated into the customer experiences in tax preparation software, such as TurboTax. R2S, spearheaded by partners from UNC, Duke University, and Intuit Inc., has a number of promising features, such as:

• A focus on increasing savings without relying on federal resources
• An innovative partnership between researchers and private industries to test ideas
• Potential for broad impact and reach through partnership with Intuit Inc., a leader in tax time products and services

In a one-day meeting in February 2011, UNC researchers convened leaders in the field of savings and asset building to discuss the R2S project components and the project’s potential implications for policy and practice. A new report from UNC, based on this meeting, sheds light on what we already know and what remains to be learned about saving at tax time.

What We Know
Research suggests a number of key findings on tax-time savings for LMI individuals and families:

• People often intend to save a portion of their tax refund, but they just can’t for various reasons (i.e., debt payments, home repairs or other expenses that claimed their money long before it was received).
• Providing matching incentives for saving is a good way to encourage participation in savings; however, raising the match cap is a better predictor of savings rates.
• Framing and providing information about tax savings opportunities is important to a filer’s reception of savings programs. As a result, the tax preparer plays a significant role in the take-up rate of consumers’ tax-time savings products.
• Many individuals that open savings accounts through the refund process are first time savers.
• By offering chance rewards to participants, instituting lotteries can be an effective incentive for increasing saving.

Data from TurboTax on their customers’ behavior sheds further light on the savings behavior and intentions of taxpayers.

• Regardless of household income, intent to save for retirement is low—lower income households plan to spend more of their refund for living expenses.
• Settling debt is one of the most popular uses of refunds, regardless of household income.
• Flexibility to spend on non-essential items goes up as the refund amount increases.

Aside from the fact that people generally don’t like paying taxes in the first place, participants at this meeting discussed a number of obstacles to greater savings at tax time:

• Uncertainty about the level of tax savings significant enough to positively change an individual’s financial security
• The need to shift pre-tax spending intentions to incorporate a more savings conscious mind-set
• Complexities of opening savings accounts which may deter people from saving
• Banks tend to worry about accounts with low deposits and numerous overdrafts

What Remains to be Learned
During the meeting, attendants discussed the merits and limitations of saving “prompts” used to help accumulate savings. These prompts require careful consideration and are important in the promotion of actual behavior change at tax time. These include:

• Social proofs that provide data on the savings behavior of one’s peers. Listing, for example, the number of people saving in a particular zip code can serve as a benchmark for taxpayers.
• Providing positive testimonies about the products offered, with the rationale that others will listen to people like them and be influenced.
• Affirmations that evoke positive emotions (i.e. think of something happy before asking about refund savings) can influence the willingness to save.
• Regret opportunities prompt taxpayers to think of the future and consider what will happen long term if they don’t save today.

By Jason Zavala, Guest Contributor on 07/18/2011 @ 01:15 PM

Tags: Behavioral Economics, Individual Development Accounts, Matched Savings

Jason Zavala is president of MitiGate, Inc., a consumer financial education consulting firm. As a former counseling practitioner, he has been observing and teaching about homeownership, foreclosure and general money issues nationally for over a decade.

Inciting and incenting behavior: the IDA saver
Imagine yourself as an IDA practitioner. Now consider what makes an IDA program participant respond, engage or consume differently than other typical students… Do we (in)advertently cajole or coerce their savings behaviors? How are these savers impacted if they give you the “wrong answers” or pursue undesirable directions? Are IDA participants seeking a certain level of social significance and belonging? Do they seek to please?

With these types of motivations in mind, how can we maximize Match Savings Accounts outcomes?

IDA savers may be better teachers of actions than we are. Their behavior – as it relates to their matched savings account – suggests that there are a few easy wins that can be tied to our behavioral messaging. Once we understand more about the target IDA audience (which has changed over time), the answer lies in redefining the match methodology by integrating behavioral triggers.

Formulaically, we know (generally) that IDA savers can represent each and all of the following:

• Very modest income
• Low annual cash resources
• High financial returns on program investments
• Goal use restrictions
• Responsiveness to program training requirements and deposit benchmarks
• Heightened awareness of mandatory engagement
• Elevated expectations of success

Mix in some tenets about actions related to finances: none of us really like details, preparation, nuances, complexity, or evaluation. For example, think about…

• What you did the last time you were on a phone and a customer service person invited you to stay on the line after your call for a quick survey
• How we sense a need to buy before the sale ends (even if the price was marked up)
• How your retirement fund automatically supports, at a baseline, the least risky denominator, and how that affects your involvement
• How difficult it is to make a choice in the toothpaste aisle (not to mention all of the decisions you don’t make!)

These types of behavioral economics triggers – hassles, loss aversion, power of default and proliferation of choice – can be applied to matched savings programs. IDA participant behavior is the trigger point to build upon and help reenergize the matched savings field. In doing so, we may be able to identify more cost efficient, outcome-relevant designs.

So how would a new, tiered match savings interface with behavioral change? Below is an example of some prescribed match thresholds that a participant can achieve and be “rewarded.” Consider giving your customers the options to “access” anywhere from 1:1 to 3:1 matches based not on the goal itself but the continuation of asset security, i.e. the behavioral shift. The effort is both graduated and optional. For example, at a 2:1 match, the next option may invite them to engage a health specific goal. Let the participant identify the success that brings them to 2.5:1 match. It’s like inviting them to be part of the gold, platinum, and diamond level and while they design the rewards themselves at the same time.

Here is a partial list of segments for a tiered design with behavioral trigger cues to develop:

Consider a Tier 1 and Tier 2 engagement. Begin to think about time variants at which a saver attempts a new behavioral exercise and how you can incorporate values that measure and weight applications based on ease of application or impact, and identifying behavioral benchmarks pre and post goal attainment. Do you know how long they sustain the patterns or behaviors? Were behaviors triggered only when the participants were expecting rewards?

Tiered match savings planning: facilitating positive social and financial outcomes
Acquiring or purchasing is often the saver’s first goal, and sometimes the only goal. The win-win for both the saver (consumer) and the program comes in management of the goal and the continuation of positive savings behaviors. For some savers, the goal is a car; for the program managers, it is an economical car and economical use. For a saver it might be a business venture; for the program manager it includes a risk conscious application. These completed efforts model savings beyond tomorrow, in that it is ideally planning in perpetuity.

A tiered matched savings structure not only helps achieve IDA program outcomes but can help encourage participants to sustain their positive actions. So how can you behaviorally link your match plan to a tiered formula for your participants?

By Anne Li on 07/13/2011 @ 10:30 AM

Tags: Behavioral Economics, Innovation, Innovators

Yesterday, Rural Dynamics, Inc., headquartered in Great Falls, Montana, featured former CFED Innovator-in-Residence Mindy Hernandez in a webinar called “Applying Behavioral Science to Asset Building Programs: What Works and How We Can Learn More!”

As they see it, “the success of almost all anti-poverty efforts depends on changing behavior in some way - from wanting people to save more, wanting folks to finish college or hoping for increased attendance to job training classes. Yet, so few of these programs and policies are informed by the science of HOW and WHY people behave the way they do. Mindy decided to change this standard, exploring and utilizing the insights from behavioral science, focusing on the WHY and the reasoning behind the often surprising decisions we all make - and applying these insights to the challenges facing the asset building field. The potential is powerful.”

You may want to read Mindy’s report on her CFED Innovation Year. It provides many great insights into principles of behavioral economics and how they are being put to use to make asset-building programs more effective.

You may also want to mark your calendar for Rural Dynamics’ Mobilizing Rural Communities Conference, September 14 - 15 in Great Falls, the ‘Electric City.’ Check out who is speaking and what 2009 participants had to say.

By Ethan Geiling and Stephanie Halligan on 07/07/2011 @ 03:15 PM

Tags: Behavioral Economics, Children's Savings Accounts, Innovation

A Nudge in the Right Direction: Applying Behavioral Economics to Children’s Savings Programs

We all have the best intentions to exercise, keep our New Year’s resolutions (remember those?) and save money…but even our best intentions don’t always translate into action. This is especially true when the goal is a long way off, like saving for retirement or your child’s college education. Most people have some desire to save more money, and most people have the opportunity to access a financial product to make that happen. In an Individual Development Account or children’s savings program, for example, families enroll with the intention of saving money in their program account. Yet we know that many individuals in these programs don’t take full advantage of their incentive funds or drop out of the program entirely. Why is this? Behavioral economics would argue that the desire to save and access to an account are not enough to change behavior.

Our friends at the New America Foundation recently released a report titled Accelerating Financial Capability Among Youth, which examines the psychological barriers to savings and argues that youth savings programs need to focus on more than just access and financial education. According to the paper, “access + education” may lead to advanced knowledge and skills, but it underemphasizes the most challenging component of a savings program: behavior. Programs looking to increase savers participation need to address the psychological barriers – or “biases” – that get in the way of strong savings habits.

Personal finance includes frequent decision-making challenges about spending, saving and borrowing for the future. Yet behavioral research suggests that people are generally present-oriented: we prefer to have things now rather than save to have things later; we have trouble following through on plans when they require ongoing conscious actions, like remembering to make a savings deposit; and we are bad at predicting the probability of future events and risks (like future job loss or an unpredictable medical expense).

Given these biases, saving money isn’t always easy – especially for low-income families. But with the right support, encouragement and a few behavioral “nudges,” savings programs can help combat those inherent biases and guide savers in the right direction. Here are a few suggestions for applying effective, low-cost “nudges” to a Children’s Savings Program:

1. Send reminders - Reminders are a simple and effective tool for encouraging positive savings behavior. A recent experiment found that simply texting savers and reminding them to save money increased their savings-account balances by 6%. Programs not already using an automatic texting service can use the service at “Oh, don’t forget…”
2. “Set it and forget it” – Automation is one of the most effective behavioral economics tools. Even more so than reminders, automation helps ensure that your “future self” will follow through with your intentions to save. Signing up account holders for automatic deposits, for example, sets in motion a positive, continuous savings habit that doesn’t require the saver to actively and manually make deposits in the future.
3. Create a culture of savings – Behavioral economics suggests that individual behavior is strongly shaped by social pressure. Consider providing periodic reports on how much money families have collectively saved or offering friendly competitions among different groups of participants. Rewards can be as simple as recognition in a newsletter or a special party for the winner. These simple “social pressures” can encourage others to actively participate in a saving program.

Experts in the field have only just begun to explore the applications of Behavior Economics in Children’s Savings Programs, but we here at CFED are excited to continue exploring these little nudges and monitoring the big changes they produce.

By Sean Luechtefeld on 07/01/2011 @ 03:00 PM

Tags: Behavioral Economics, Financial Inclusion

Traditional thought concludes that the reason many people are poor is because they lack the self-control or individual motivation to move beyond their current financial situations. While public discourse about health care and entitlement reform has contributed to a more complex way of thinking about these issues, those entering these discussions often form their opinions from the speculation of others – either you believe poverty is caused by lack of self-control, or you believe poverty is beyond the control of the individual, but little evidence exists either way.

This week, we came across an article in The New Republic that challenges the notion that lack of self-control causes poverty and suggests that, on the contrary, poverty may cause a lack of self-control. For more background, read the full version of “Why Can’t More People Escape Poverty?” here.

Drawing conclusions based on research conducted in the field of behavioral economics over the past 13 years, contributor Jamie Holmes shows the link between poverty and self-control by arguing that when immense mental energy has to be expended on making decisions, then subsequent decision-making is more difficult and thus less thorough because humans lack the capacity to exert self-control in multiple, consecutive settings.

Okay, so what did I just say? Well, let’s take one of the examples Holmes gives. Imagine something as simple as deciding where to go to dinner. For those of us included within the mainstream economy, we make that decision based on preference. If we are in the mood for seafood, we go get seafood; if we crave Mexican, we get Mexican. However, for individuals whose income constrains their ability to go out to eat often, the decision is much more involved. Can I afford to go out in the first place? Can I afford to spend a little bit more to get what I really want? Does the occasion really merit me going out to eat? What if it costs more than I expect?

Since so much is wrapped up in this one decision, the next decisions that need to be made (e.g., should I work extra hours at work this weekend? Should I make a larger payment on my credit card this month or should I pay to repair the washing machine?) become much more difficult. Since we have self-control fatigue, we either withdraw from the decision-making process altogether, or we expend less effort and risk making a poor economic choice.

As another example, think about the comfort items and services many of us take for granted – washing machines, access to a personal vehicle and help with child care. Each of these saves valuable time, time the middle class spends on entertainment and the acquisition of more comfort items. However, for those living in income and asset poverty, the activities associated with these luxuries – going to the Laundromat, taking the bus rather than driving and taking your children with you as you run errands – further drains the ability to exert self-control. Of course, with self-control fatigue comes higher financial risk.

So, while in no way do I mean to suggest that the jury is in with regard to the correlation between self-control and poverty. But, imagine for a minute that the findings Holmes cites are correct. What might that mean for the priorities we set in terms of making certain services accessible? How does this influence the policies we might advocate on behalf of? How might these findings be applied to other behaviorally-informed research endeavors? Share your thoughts and resources in the comments section below and let us know your take on this issue!

Special thanks to CFED’s resident behavioral economics expert, Genevieve Melford, for sending this article my way!

By Michelle Nguyen on 06/21/2011 @ 01:30 PM

Tags: Behavioral Economics, Recommended Reading

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:

1. 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.
2. 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.
3. 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.

By Sean Luechtefeld on 04/22/2011 @ 01:00 PM

Tags: Behavioral Economics, Innovation, Innovators, Recommended Reading

Today, CFED published Applying Behavioral Research to Asset-Building Initiatives, the findings from 2010 Innovator-in-Residence Mindy Hernandez’s year of experimentation. The publication is now available on the newly-redesigned Behavioral Economics site, found here.

During Mindy’s residency, she partnered with three different asset building practitioners to design and test program tweaks informed by research in the field of behavioral economics. With each organization, she walked through the programs’ goals and processes to target critical leverage points, propose behaviorally-informed design changes and evaluate intervention as rigorously as possible.

Applying Behavioral Research to Asset-Building Initiatives describes these projects and their findings in detail. It is Mindy’s hope, and the hope of all of us here at CFED, that the lessons learned from her residency can be a useful blueprint for practitioners and researchers interested in applying behavioral sciences to a vast array of programs and challenges.

For more information about this publication, about the field of Behavioral Economics or for resources relating to CFED's ongoing work in applying a behavioral sciences approach to asset building, click here.

Posted on 03/28/2011 @ 01:00 PM

Tags: Behavioral Economics, Innovation, Innovators

Take Home Refunds Seven Times as Large: The Campaign for Working Families VITA Site Helps Self-Employed Clients Follow Through on Intentions to Prepare for Tax Day

A project with the Campaign for Working Families of Philadelphia.

Program background: The Campaign for Working Families (CWF) is a partnership that promotes increased resources for low-wage working families by providing free filing of the federal Earned Income Tax Credit (EITC) and connecting Philadelphia residents to other tax credits, work supports and asset-building resources.

The goal of our project was to help self-employed clients receive the refunds they earned by increasing their preparation for tax day by having their paperwork and receipts in order.

Behavioral insight: Preparing for tax time is a hassle and the short-term stress may eclipse the longer-term reward of a potential refund. Rationally, if we believe something is important, we should simply follow through on our intended plans. In a strict cost-benefit analysis, the hours it may take to collect tax information is surely worth the possible cash reward. But in reality, it is easy to let the present costs of hassle and stress eclipse future rewards.

CWF hoped the information and persuasive messages conveyed during orientation would motivate people to overcome the perceived stress of tax preparation and actually gather and organize the necessary tax information. But this was not happening. We hypothesized that the hassle of preparation might pose a significant barrier, and that people needed reminders and a sense of accountability to follow through on their intentions to prepare.

To make the reminders as powerful as possible, we wanted to leverage the following behavioral insights:

• Commitment and consistency: Telling others that we intend to behave in a certain way helps us keep our word. We like to appear consistent to ourselves and others, so we find it important that our actions and beliefs align, or at least appear to align. In fact, some early behavioral theorists considered the desire to be consistent as a central motivating human behavior. (Festinger, 1957; Heider, 1946; & Newcomb, 1953).
  
  For example, in one study people were called and asked to predict what they would say if asked to spend a few hours volunteering for the American Cancer Society. Most people wanted to appear charitable, and many predicted they would agree to help. This small commitment device produced a 700 percent increase in volunteers when representatives from the American Cancer Society came to their door asking for volunteers a few days later. (Sherman, 1980).
  
  Our desire to be consistent can be especially effective when faced with written evidence of a commitment in our own handwriting. As the well-known behavioral theorist Robert Cialdini explains, “There is something magical about writing things down.”
• Planning or "implementation intentions": There is evidence that implementation intentions can also help people follow through and accomplish a desired goal. (Gollwitzer, 1993). An implementation intention spells out the when, where and how of what one will do to reach a goal. For example, asking people to create a “voting plan” (What time will you vote? How will you get to the voting station?) significantly increased voter turnout in comparison to simply asking if someone would vote and encouraging the person to do so. (Nickerson & Rogers, 2010). Detailing the steps needed to implement our goals helps us follow through on our intentions.
• Channel Factors: Making things easy makes a difference. Research tells us that adjusting small nuances in our situation can have a surprising impact on our ability to close the gap between our intentions and actions. In a well-known study by Leventhal, Singer and Jones (1965), college seniors were given persuasive messages about the value of an inoculation against tetanus. While the messages were effective at changing the students’ beliefs and attitudes, few actually took the step of getting a tetanus shot. Other students received the same messages but were also given a map of the campus with the infirmary circled and urged to think about a particular time and route they would take to the infirmary. This small adjustment led to a significant increase in the percentage of students who actually got their inoculation.

Intervention: Building on the behavioral findings described above, the CWF project sought to improve self-employed tax assistance clients’ level of tax preparedness by asking then to formulate a tax preparation plan (implementation intentions), write it down for the CWF staff to see (commitment) and then sending the preparation steps back to the clients (consistency) along with another copy of the preparation worksheet (ease or channel factor).

Every self-employed tax client at CWF must complete an orientation before the tax session. We varied the orientations between treatment and non-treatment sessions. Every other orientation was a treatment or a control session, which takes advantage of the fact that a client’s selection of one class over the next is largely random.

At the close of the treatment pre-tax orientation, the group was asked to complete a form detailing their three next steps in preparing for their tax appointment. One of the steps had to be completion of a tax preparation worksheet handed out by CWF.

This form would later be used as their appointment reminder. A few days after orientation, clients received this sheet in the mail with their appointment date, an extra tax prep worksheet, and a list of preparation next steps written in their own hand. The control group went through the same orientation but did not go through the next steps exercise. They received a reminder letter in the mail with only their appointment time.

Findings:

Experimental Design, Sample Size = 41 clients

The treatment seemed to significantly impact clients’ tax refund amount. The treatment group had refunds that were significantly larger (in fact, seven times larger) than those in the control group: $1,837 for the treatment group compared to $241 in the control group. Note that because a taxpayer’s EITC amount is correlated with final tax refund, our comparison is based on their tax refund without the EITC.

This is a large effect, and we wanted to be confident that it was not the result of different populations in the treatment and control groups. That is, was there something about the treatment group that made them more likely to receive higher refunds? In statistical analyses, we found the two groups to be randomly distributed and similar. Each group had similar EITC refunds, W-2 incomes and business incomes.

Discussion: These findings may be very powerful, with the potential to increase refunds—and therefore incomes—for thousands of self-employed people. More broadly, behaviorally-informed reminders may help people follow through on a variety of high-stress, high-hassle goals like creating a budget or completing complex forms like the FAFSA. More research is needed before we can be confident that these results are replicable with a self-employed or even more general population. This is especially true given the study’s relatively small sample size. Because the intervention had such an unusually large effect, this is an especially exciting area for further exploration.