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!

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.

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!

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/.

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!

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

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.

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?

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.

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.

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!

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.

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.

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.

Tags: Behavioral Economics

The Refund to Savings Initiative: Can tax-time be the catalyst that saves our national savings rate?

As has been frequently noted, Americans are poor savers and we have been getting worse over time. Our low savings rate and tendency to prioritize spending in the present over spending in the future makes us vulnerable to financial crises. Recent research reveals that 47% of Americans report they couldn’t raise $2,000 within 30 days for an emergency expense, such as a major car repair or medical bill (or just paying the rent in the event of a job loss).

However, amidst all of the dreary statistics on our lack of savings shines one very encouraging number: the average IRS tax refund was nearly $3,000 in 2008. This represents more than a month’s take-home pay for the median income earner. So the question for the pro-savings crowd is: How do we turn this annual windfall into a savings opportunity to boost financial security all year long (and maybe for future years too, through long-term education and retirement savings)?

Researchers at the University of North Carolina, led by Michal Grinstein-Weiss, and Duke University, led by behavioral economist Dan Ariely, have teamed up with Intuit Corporation, makers of TurboTax, to answer this question. The team is using principles of behavioral economics to design and test savings prompts and incentives that will be embedded into TurboTax’s online tax preparation software. The prompts are simple and provide both non-financial and financial incentives, such as priming participants to think about a specific savings goal (e.g. a home renovation project or a child’s education) just before asking if they would be interested in saving any part of their refund if given an easy way to do it. An example of a financial incentive prompt is asking if they would be willing to direct a portion of their refund to a savings account during the filing process if offered a match on the money.

The study centers on three primary questions:

1. What are the best ways to persuade people to save their refunds?
2. What are the best vehicles or products for tax-time savings?
3. Can and should we encourage people to increase their withholdings so they have larger refunds to save in the future?

After testing numerous prompts in 2011 and 2012, the team plans to “go live” in 2013 with an intervention that will employ the most successful prompts and incentives and offer tax filers the chance to actually save part of their refunds, automatically directed into an existing or new account, all with the click of a button. Capping off America Saves Week, the team hosted a meeting in February at the University of North Carolina with leaders in the field, top policy makers, world renowned researchers, key foundation representative and government representatives to gain more insight on how this project could fill gaps in the field. Participants were very enthused at the potential reach of this initiative and the chance to bring research, business, policy, and community practitioners together. The research from this initiative will answer critical questions for the field:

1. Which types of prompts/incentives motivate the most people to save?
2. Do certain prompts/incentives work better with particular demographic groups?
3. What are the most cost-effective and scalable options for encouraging people to save?

This information, expected in 2013, will have important implications for research, products, and policies aimed at increasing the savings and assets of households in the U.S., especially low- and moderate-income households who are the most vulnerable to economic shocks.

Participant organizations in the February 25 meeting:

• The Alleghany Foundation
• Annie E. Casey Foundation
• Bureau of the Public Debt, U.S. Department of Treasury
• CFED
• Center for Community Capital, University of North Carolina
• Center for Economic Progress
• Center for Financial Services Innovation
• D2D Fund
• Duke University, Center for Behavioral Economics
• Ford Foundation
• Internal Revenue Service, U.S. Department of Treasury
• Intuit Financial Freedom Foundation
• Intuit, Inc.
• New America Foundation
• North Carolina Department of State Treasurer
• Office of Domestic Finance, U.S. Department of Treasury
• University of North Carolina School of Social Work
• Z. Smith Reynolds Foundation

Tags: Behavioral Economics

The Campaign for Working Families (CWF) offers special tax preparation services for self-employed individuals and is also a partner in CFED’s Self Employment Tax Initiative. To encourage clients to come prepared for tax day, clients must complete a tax orientation before tax preparation with CWF.

But CWF staff noticed that despite the orientation, many clients came to their tax appointments with little or no preparation, a common challenge for VITA sites (and tax preparers) around the country. Because, really, who wants to prepare for tax day?

Specifically, clients at CWF very often did not have business receipts or itemized lists of business expenses. For self-employed individuals, failure to prepare for the tax season can have significant and expensive repercussions. Every piece of business expense documentation is tax-deductible, and therefore the more self-employed people are able to document, the more they are eligible to receive in tax deductions. CWF believed that the failure to prepare at tax time was costing their clients hundreds of dollars.

Before going into detail about our intervention, it's important to figure out if CWF's assumption is correct: does tax preparedness lead to greater returns?

It's a reasonable assumption, but nobody had actually tested it to see if it held up. I wanted to find out more.

It turns out it matters. A lot.

In a study with Foundation Communities in Austin Texas, tax preparers rated clients preparedness on a scale of 0 to 3 where 0 was not at all prepared and 3 was extremely prepared. We then analyzed the data to see if there was a correlation between refund amount and level of preparedness.

We found a very clear (and statistically significant) correlation: the more prepared a client was, the higher her refund. And we found this to be true when all other variables available (business type, business income) were accounted for.

Is it possible there is some unobservable difference between the people who come prepared and those who do not that might explain this refund amount difference? Absolutely. This makes it an interesting area for further research.

What might happen if we took similar people, randomized them, and then used some behavioral insights to motivate half to come prepared while the others received the standard information?

That is exactly what we did in Philadelphia. The results surprised everyone.

Check out the next blog post for details.

Tags: Behavioral Economics, Financial Empowerment, Innovation, Innovators

Over the next few weeks we are thrilled to post early excerpts from a paper to be published this spring by 2010 Innovator-in-Residence, Mindy Hernandez.

For her Innovation Year, Mindy partnered with select asset-building organizations to create innovative projects. With each organization, Mindy walked through the programs' goals and processes to target critical leverage points, propose behaviorally-informed design changes and evaluate each intervention as rigorously as possible.

The soon-to-be-released white paper describes the surprising, exciting and potentially powerful lessons from her Innovation Year. The paper also includes helpful hints on how practitioners can design, implement and evaluate similar behavioral interventions in their own programs.

Upcoming blog: We learn the outcome of the Campaign for Working Families (CWF) study in which Mindy and CWF designed an intervention to help self-employed clients at the CWF tax site prepare for tax day with the hope that better preparation would lead to higher tax refunds.

• Does preparation really lead to bigger refunds for self-employed VITA clients?
• What works in getting self-employed clients to prepare? And what's that worth in dollars?

The results are exciting and surprising. Check out the next post for more details!

Tags: ALC 2010, Behavioral Economics

EDITOR'S NOTE: The article below comes from Matt Wallaert, Co-Head and Lead Scientist for Churnless, a digital strategy and production consultancy that helps companies and organizations identify consumer behaviors and decision-making challenges. Special thanks to Matt and to Dave Clarke, who facilitated the production of this article.

As experts devoted to financial health, we tend to assume that people should self-evidently want to save money. From our perspective, asset building is unambiguously good, and we don’t delve too deeply into why it actually matters in people’s lives. So I'd like to make the case for actually thinking about our goals. As we gather in D.C. to talk about ways to steer people to spend less and save more, it is worth thinking about why we are working so hard to create this "save and invest" economy.

I'll stop right here and note that this isn’t meant to be a philosophical argument. The reasoning behind our stated goals has very real implications for the products we build and the policies we enact. And lest this be thought of as a rhetorical article, I have a thesis: The true goal of asset building is human health, happiness, and satisfaction.

I'm a behavioral psychologist. I study the relationship between choices and happiness, and specifically how choices result in satisfaction (the long term experience of positive emotion) and delight (the momentary experience of positive emotion). So it’s natural that I think of assets in terms of an end currency of happiness. But even though most of you aren’t psychologists, I'm suggesting that you actually think of assets in the same way. And if you identify assets as being about happiness, you may change the way you go about helping people build them.

As an example, take the security of assets - not their physical security, but the psychological security they provide by allowing us to have cash on hand for dark times. When we say we want people to have money for “a rainy day”, we are actually making a happiness statement. What we are saying is that we want people to get through hard times with the minimum number of negative experiences. Happiness - or the lack thereof - is how we tend to measure that experience.

I promised that this was about practical application, so let's stick with the security example for a moment. Imagine we want to build a product that helps people save money specifically for rainy day events. There are several relevant variables. How much do they need to save? How visible should we make the process of saving? And how visible, and accessible, should we make the result?

The conventional response to "how much" might be to gather data on the types of rainy day events people have, their frequency, and their cost. This would help determine an average amount needed. And that's good math that’s certainly valuable to product design. But what if the amount that equation yields isn't enough for people to "feel" secure in a crisis? Certainly we've helped them save for the event, but we haven't really maximized what we actually care about, which is how they experience the event.

So imagine that we do the "how much" math first. It yields a number. We then ask a group of people how much money they think they need to save for a rainy day, and how much they would feel comfortable saving. Better yet, we ask them to imagine having a certain amount of money in a rainy day account and rate how stable and happy it makes them feel. Or, best of all, we measure how much money real people have set aside for a rainy day and then ask them how happy and stable they are, controlling for other variables, and continue to query them as they experience a “rainy day.” Then we know how the behavioral goal (the amount saved) is related to the experience of a negative event, and just how much money buffers how much trauma.

That may actually be more work than we need to do to design our product, but you can see how taking into account feelings about money actually changed our outcome. Take the visible/accessible question from earlier (what restrictions should we place on rainy day money to make sure it is not spent frivolously, while maximizing the ability of people to feel like they can "get at it when they need it?”). These psychological considerations of satisfaction are more important in behavior than we tend to think. Many people, particularly lower income people, keep large amounts of cash at home for precisely this reason - they need to feel like it is easily accessible in an extreme emergency. The trouble, of course, is that that sort of accessibility also makes it easy for them to dip into the cash for non-emergencies.

And that is where our hedonics feed back into product design. If we could create a debit card that displayed your balance on the card itself, we increase both the tangibility and accessibility of the money on it. From a financial perspective, of course, our light-up debit card isn't actually any more tangible or accessible than a standard one. But it feels that way. And feelings are both the drivers and outcomes of behaviors.

I'm trying to keep this short and conversational, so I'll end it here. I'll be roaming around at the Asset Learning Conference along with Avi Karnani (Lead Strategist) and Dave Clarke (Communications Strategist), and we're all happy to talk about how psychology, and happiness, influence product design. But we're not the only ones. Read Dan Arriely's Predictably Irrational or Barry Schwartz's The Paradox of Choice and discover the expert psychologists that are doing this research. They want to improve the lives of people just as much as you do - give them the chance to help, and they will.

So to sum it up: satisfaction matters. Happiness matters. How we feel about products plays a lead role in how we use them. And if we want to truly produce behavioral change through product and policy, we need to start considering the happiness and satisfaction that asset building underlies. Money is not collected for money's sake - we build assets for reasons and those reasons are worth thinking about.

Matt Wallaert is the Co-Head and Lead Scientist at Churnless, a digital strategy and production consultancy that help companies and organizations identify customer behaviors and decision-making challenges. Formerly, he was the Lead Scientist at Thrive, a free personal finance management site. A behavioral psychologist specializing in choice, judgment and decision-making, Matt seeks to bridge the gap between psychological research and social policy by applying knowledge derived from the study of people to the affairs of populations.

Tags: Behavioral Economics

Mindy Hernandez, Founder, One Decision

I’ve actually never been to CFED’s Assets Learning Conference before but I’ve heard great things. I’m especially intrigued by the following:

• This quote from the Huffington Post from Jonathan Lewis: “For an imminent Category Three event, check out the 2010 Corporation for Enterprise Development Assets Learning Conference in Washington, DC, in September. I know, I know...the name is not exactly a heart-pounder, but the content will make your blood race.” Racing blood sounds exciting!
• Speed dating for researchers and practitioners! How often do you get to date at a conference?
• The first-ever Innovation Marketplace where social innovators will present their ideas for expanding economic opportunity. I’m especially intrigued by Blair Benjamin and his work with Assets for Artists and Rimmy Malhotra and his work with Affordable Mutual Fund Investing.
• Crystal Hall, who was a guest blogger here, will be presenting on Behavioral Economics 101: Decision Making in the Context of Poverty. She is a great speaker so I’m excited to see her presentation.

I will also be presenting on my projects during the CFED Residency as well as some previous work supported by the Annie E. Casey Foundation. I’m looking forward to sharing some exciting initial findings. I’ll be discussing the research in detail at the Conference, but until then, here is a sneak peek of some early lessons:

Timing Matters: People seem to be more open to some opportunities at very particular moments in time. Designing outreach efforts to coincide with these unique and opportune moments seems to increase interest and enrollment in opportunities like financial management classes. Specifically, after receiving a tax refund, people may feel a relief from their usual efforts to make ends meet and have more mental bandwidth to take up new opportunities.

Reminders Help: Small, well-placed reminders like post cards and letters written in the person’s own handwriting seem to help people follow through on their intentions to enroll in a class or prepare for their tax appointments.

Simplification is Key: Simplifying forms and letters seems to increase people’s ability to follow through on intentions like keeping their debt counseling appointments and dedicating part of their paycheck to savings.

Small Cash Prizes Can Have a Big Impact: Well-designed cash prizes seem to increase people’s participation in automatic savings and can be cost-effective.

These are exciting preliminary findings, but we recognize that more research is needed before we can fully understand the impact of these interventions. The only way to know if these findings can be replicated in new and different contexts is for more practitioners to join our research efforts and attempt to replicate them and learn. Come to my session at the Assets Learning Conference to find out more about how you can implement studies in your organization. If you are ready to start exploring an applied research partnership at the ALC, then sign up for Speed Dating for Researchers and Practitioners.

Tags: Innovation, Innovators, Behavioral Economics

At the end of next month, 2009 Innovator-in-Residence Mindy Hernandez’s residency will officially come to an end, but as you can see from her update below, Mindy continues to lead the way in bringing together assets practitioners and behavioral economics researchers. We look forward to continuing to work with Mindy as her contributions have been significant, and we’re especially pleased with her leadership role in planning two sessions on Behavioral Economics at the 2010 Assets Learning Conference. Be sure to check out Behavioral Economics 101 and 201 at #ALC2010!

CFED is currently partnering with Mindy on developing specialized behavioral economics (BE) technical assistance to improve the participation of self‐employed households in the services and products provided through CFED’s Self Employment Tax Initiative (SETI). SETI was launched in 2005 to support microentrepreneurs using tax time to strengthen their businesses with asset-building opportunities and to use that interface to connect them with other business support services. Two SETI innovation sites - Foundation Communities in Austin, Texas and the Greater Philadelphia Urban Affairs Coalition - are receiving customized BE technical assistance and are partnering with Mindy and her research colleagues to study the effects of their programmatic experiments.

Mindy’s project is also exploring opportunities to assist the Cities of San Francisco and Washington, DC with their initiatives to bring low‐ and moderate‐income residents into the financial mainstream through direct deposit and banking access initiatives. In addition, she has collaborated with CFED to create a website and blog – “Applying Behavioral Sciences in the Real World” – that serves as a home for a rich and evolving set of resources for anyone interested in policy and programmatic applications of behavioral insights. The blog includes guest posts from practitioners and researchers who are experimenting with behaviorally-informed interventions, providing a channel for those findings to be disseminated to the broader field and for practitioners to communicate directly with their peers.

If you have questions for Mindy, use the comments section below to share them with the community.

Thanks for the update, Mindy!

Tags: Innovation, Innovators, Behavioral Economics

Innovator-in-Residence Mindy Hernandez’s most recent blog post at Applying Behavioral Sciences in the Real World was published last week. This most recent Behavioral Economics research examines innovative ways to encourage people to save for their retirement, a practice that millions of Americans identify as important, but often fail to engage.

To read the full text of Mindy’s latest blog post, Feeling Connected to Your Inner Old Man, click here.

Mindy’s post highlights the findings of research conducted by researchers Ersner-Hershfield, Bailenson and Carstensen, who hypothesized that perhaps one of the reasons people don’t save for their retirement – even when they know they should – is that they can’t picture themselves as older individuals. To test their hypothesis, they used immersive virtual reality to generate avatars of participants that depicted them as older individuals. Participants then used the virtual reality software to “see” themselves as older and afterwards were given retirement savings surveys.

Their research found that those who had seen their “future selves” saved significantly more money for retirement (the mean saved by participants in the control group was about $75, whereas the mean saved by participants in the experimental group was about $175).

Of course, we don’t all have access to virtual reality software than can allow us to see ourselves as older. But, as Mindy points out, that’s exactly the challenge: how do we use these findings to inform the way we incent saving behavior? How might one’s ability to see themselves in the future impact the way they behave now? These questions aren’t just fascinating, but they get at the crux of Behavioral Economics research – how can we use these academic pursuits to inform financial decision making and the ways practitioners administer their programs?

I know, I know…lofty questions for a Thursday afternoon. Think about it this evening and share your thoughts below in the morning!

Tags: Innovation, Innovators, Behavioral Economics

Yesterday, Innovator-in-Residence Mindy Hernandez posted an interesting piece to her Applying Behavioral Sciences in the Real World blog that argues that decisions made by soccer players in the World Cup can demonstrate an important lesson in Behavioral Sciences.

To read Mindy’s blog post, check it out here.

In the post, Mindy posts a variety of interesting resources that examine a simple question: while soccer players are statistically most likely to score a point by shooting down the middle of the goal, they almost always kick to the left or right side of the goal. Why?

While the resources Mindy shares are interesting, I won’t do them the justice they deserve here. Instead, given my interest in Behavioral Economics, I’ll share the main takeaway. It turns out that shots fired directly at the middle of the goal, although more likely not to be blocked by the keeper, are also perceived as the easiest shots to make. Therefore, there is a fear among soccer players that if they miss these allegedly-easy goals, they’re weak players. To mitigate the potential impact such a perception would have on the player’s image, players tend to shoot for the sides so that a miss seems like the skill of the goalkeeper, rather than a weakness on behalf of the person attempting to score.

In other words, soccer players act in their own self-interest. Rather than do what it takes to score a point, they often engage face-saving measures to avoid appearing unskillful. While this sounds terrible on face, such behavior is consistent with what we know about Behavioral Sciences. A guiding principal in this research is that people, especially when making financial decisions, tend to act in their own self-interest. The key, then, is to understand how to transform that knowledge into products that promote healthy economic decision-making.

In a few short paragraphs, Mindy has explained the entirety of behavioral economics research! Okay, not really – it’s WAY more complicated than that. Nevertheless, Mindy once again provides an interesting framework with which we can think about Behavioral Sciences in a way that we can relate to. Thanks, Mindy!

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!

Tags: Behavioral Economics

Genevieve Melford, Director of Research, CFED

Behavioral Economics and Microfinance

At its core, microfinance is about empowering low-income people, through access to small-scale financial products and services, to improve their financial condition. Insights from the study of behavioral economics have a lot of value to add to the practice of microfinance. They help us understand how people make decisions, and the way that the immediate context of their decisions guides financial behavior, and can even undermine the ability to meet financial goals. Armed with this knowledge, we can design products, systems, and financial regulations that meet people where they are, and therefore have the potential to support their financial success in much more significant ways.

A few weeks ago I had the pleasure of introducing and moderating a session on Behavioral Economics and Microfinance at the 2010 Microfinance USA conference. As readers of this blog likely already know, there are myriad ways that insights from the behavioral sciences can apply to everyday life, and to financial decision making. We chose to focus the session on behaviorally- informed interventions to affect savings and borrowing decisions, two of the building blocks of personal financial management and opportunity, and key areas of interest for the microfinance field.

Why Personal Financial Management Is So Hard

Standard microeconomic theory does not do a very good job of describing people’s personal financial behavior. It assumes that people always have perfect information and act rationally on that information all the time. It would suggest that we are able to effortlessly compute every step and decision along the way to reaching our life-long goals, and then take action every day in a manner consistent with those long-term plans (like saving for retirement or a home purchase or building good credit).

The reality is that almost no one does that. Our intentions, especially when related to a distant payoff, often do not translate into actions.

Personal financial management - regardless of one’s income level - includes frequent decision-making challenges about spending, saving and borrowing. It requires the ability to predict and plan for future needs, have the self-control to defer present consumption in favor of future needs and choose between sometimes complex product options (like health insurance, mortgages or retirement investment funds).

However, behavioral research suggests that people are in fact very present-oriented. A few examples of this are that:

• We discount the value of future consumption in favor of gratification in the moment (we REALLY prefer to have things now rather than save to have things in the future).
• We have trouble following through on plans when they require ongoing conscious actions (like remembering to make savings deposits or insurance payments on a regular basis), and are very likely to stick with default settings or the status quo.
• We are bad at predicting the probability of future events and risks (like unpredictable health care costs, or a future job loss, or our ability to pay back a payday loan in two weeks), or even what our preferences will be in the future.

And all of this has consequences for our financial choices and outcomes, which is why many of us automate as much as possible in our financial lives - taking advantage of direct deposit, automatic bill pay and automatic transfers into regular and tax-advantaged retirement savings accounts – to help us overcome these very human challenges.

Microfinance World: Take Note!

The trio of speakers on the panel – Margaret McConnell from Harvard, Alejandra Lopez-Fernandini from the New America Foundation and Adair Morse from the University of Chicago - presented on a number of practical and concrete ways to leverage behavioral insights to help people do three very important, and frankly difficult, things:

1. Take action today to save for the future– this includes savings reminders and account labeling;
2. Follow through on savings intentions over time – account structure (e.g., making the account very easy to open, and savings somewhat difficult to access) and automation are key; and,
3. Make a choice to borrow that’s truly well-informed – frame disclosure and options in ways that overcome predicable biases.

For readers who just want the top line takeaways from these presentations, here you go:

1. Reminders increase savings deposits, and reminders focused on specific future expenditures (like school fees) increase savings even more.
2. Savings accounts with automaticity and other features to make savings behavior “easy” and “sticky” can facilitate greater levels of saving.
3. Payday borrowers who received information on the total dollar cost of loan fees were less likely to take out another payday loan in the following two months.

For those who would like a bit more detail on the behavioral principles and mechanics of these studies, read on…

How Reminders Increase Saving

Ms. McConnell presented on joint research conducted with Dean Karlan, Sendhil Mullainathan and Jonathan Zinman. She and her co-authors wanted to explore the following observed anomalies in financial decision making:

• Many people engage in high-cost borrowing;
• People save and borrow (at high cost) at the same time; and,
• There is demand for “commitment” (restricted access) savings products.

They wondered if people fail to save enough for future and emergency needs, resulting in high rates of expensive borrowing, because people are only able to plan for expenditures that are closer to the “top of the mind.” That is, they simply are not accurately predicting their future expenditure needs (in psychology this is called the “planning fallacy”). As Ms. McConnell pointed out in her presentation,

“When a shock [unexpected expense] occurs, debt is your friend, ready to be there, right when your attention is on your ‘shock.’ Savings, on the other hand, is not…it had to be planned.”

To find out if lack of attention paid to future expenditure needs does in fact reduce savings in the present, researchers randomly assigned new savings accountholders in three countries (Peru, Bolivia and the Philippines) to receive generic reminders to save, as well as reminders focused on a particular savings goal / specific future expenditure. They found that reminders increase savings deposits, and that reminders focused on specific future expenditures (like school fees) increase savings even more, supporting the hypothesis that simply failing to think about future expenditures may explain at least some portion of people’s failure to save enough, and therefore to resort to expensive borrowing.

Interestingly, the authors conclude that their findings “suggest that reminders or other attention shocks may be most (cost-)effective when they focus on inducing a one-time change with ‘sticky’ consequences (e.g., 401(k) enrollment, fertilizer prepayment or automatic payment of annual car registration fees).” That is, rather than sending people reminders to save every month, it would be better to use an attention shock technique to get people to sign up for a savings account that would have money automatically deposited from a paycheck or checking account each month.

Automation and Other Account Features Can Also Increase Saving

The need for “sticky” consequences, or a financial product structured to reduce the need for conscious follow through, is a key element of the New America Foundation’s AutoSave pilot. The program is designed to offer employees the opportunity for automated, regular savings via their employer’s existing payroll infrastructure. Working with CFED’s own Innovator-in-Residence Mindy Hernandez, Ms. Lopez-Fernandini and her colleagues designed the AutoSave product and enrollment process to leverage multiple behavioral principles to increase savings.

Mindy and Ms. Lopez-Fernandini wrote an excellent post on AutoSave, describing its features and rationale, for this blog just a few months ago, so I will skip to some of the key findings here:

• The anchoring effect of a suggested savings level was very strong: 51% of participants chose the recommended savings dollar amount pre-checked on the enrollment form.
• Many participants liked the fact that the AutoSave account is not linked to a transaction account, making it more difficult to access the savings (this supports the observation of demand for “commitment” savings products referenced by McConnell in her presentation). People know that they will face temptation to spend rather than save, and like having that temptation lessoned or made easier to resist through savings product design features.
• Ease of enrollment appears related to take up of the product, as does apparent strong support and follow up from employers, though the size of these effects are difficult to quantify.

The Way Costs are Disclosed Can Reduce Payday Borrowing

The third panelist, Adair Morse, presented on a fascinating research project conducted with her colleague, Marianne Bertrand. In the one presentation to focus directly on use of credit, Ms. Morse spoke about her project to determine if high-cost payday borrowing may be an irrational decision, resulting from the inability of most people to do complex math in their heads. If it is indeed a decision that consumers are making without fully understanding the costs, then Morse argues one policy remedy may be to mandate disclosure of costs in such a way as to “debias” the consumer by “exposing the population at risk of mistake with site-relevant information at moment of a possible mistake (e.g., at point of payday loan or mortgage).”

In order to study the effect of different methods of presenting the cost of payday loans, Morse and Bertrand randomly assigned borrowers at 77 payday lending branch locations in 11 states to receive their loaned cash in one of four different envelopes. The “control” envelope, the standard one provided by the lender, was simply printed with a calendar and the date on which the loan was due.

The other three “treatment” envelopes presented the cost of payday borrowing in three different ways:

• As an APR, compared to the APRs of other types of loans,

• Total dollar cost of loan fees into the future, compared to the dollar cost of borrowing on a credit card, and

• Information on the typical number of refinancings of a payday loan.

I encourage people to read more of the details of this fascinating study, but in a nutshell the finding was this: 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.

Interestingly, researchers working on a different project on “confused” mortgage borrowers recommend the same form of disclosure - total dollar cost – as a method by which consumers can realistically make a well-informed choice between different mortgage options and brokers.

Tags: Innovation, Innovators, Behavioral Economics

This morning, I realized that I missed last week’s guest post at Applying Behavioral Sciences in the Real World (a surprising realization, given that I stalk Mindy’s blog regularly!). In the latest post, Mindy features research at the intersection of behavioral economics and self-affirmation theory conducted by Crystal Hall, Assistant Professor of Public Affairs at the University of Washington.

To read the full text of the article, Can Combating Self-Perceived Stereotypes Change Behavior?, click here.

Crystal’s central research question asked whether or not it was possible for people to overcome the stereotype threats that typically hinder performance. She gives a clear example of the stereotype threat facing female mathematicians. As women are typically regarded as unable to excel in areas like math and science, women tend to do poorly on tests in these subjects when primed to think about their gender prior to the exam. Likewise, low-income individuals tend to be associated with poor financial decision making, making it even harder for them to overcome the challenges they face. Crystal wanted to know if individuals could confront these stereotype threats and reverse the trends they typically produce.

To address these questions, Crystal and her colleagues set up an experiment in which low-income individuals from a soup kitchen in New Jersey were placed into either a control group or an experimental group. Those individuals in the experimental group were asked to describe a moment during which they felt extremely proud of themselves, eliciting positive emotion and higher levels of self-efficacy. Those individuals in the control group were asked to describe the type of foods they typically eat. Once they completed their written responses, they were given a gift card, thanked for their participation and allowed to leave. Participants thought this signified the end of the study. However, once they left, they were approached with information about how they may be able to take advantage of the Earned Income Tax Credit.

Crystal and her colleagues found that members of either the experimental group or the control group were equally as likely to stop and talk to the person offering information on the EITC. However, members of the experimental group (whose self-worth were affirmed) were far more likely to take the potentially financially-beneficial information with them than were members of the control group. In other words, the individuals who were empowered by having recalled an experience when they felt proud were more likely to take information that could benefit them. Although more research needs to be done to enrich these findings, this study suggests that such empowerment contributed to the feeling that individuals could overcome financial difficulties and break down the barriers constructed by stereotype threats.

Not only do I find this research fascinating, but I also think it’s a good representation of the type of behavioral economics research Mindy conducts and features at Applying Behavioral Sciences. The Website is full of rich tidbits of information and tools for expanding economic opportunity. Crystal’s research is a perfect example – empowering people more generally allows them to feel empowered to take control of their financial well-being. While it’s a simple concept, this research contributes to our understanding of economic decision making. Better yet – it’s innovative. Thanks, Mindy, for sharing yet another wonderful resource!

Tags: Behavioral Economics

Guest Blogger: Crystal Hall, Assistant Professor of Public Affairs, University of Washington

Stereotype Threat and Self-Affirmation

We all know what the word “stereotype” means. What some may not be familiar with are the effects of stereotyping when someone perceives that their self-worth is negatively evaluated against these preconceived notions. In psychology, this is known as stereotype threat.

Many studies have found that stereotype threats actually impair a person’s performance and ability to take certain actions. For example, consider the case of a female student, who has excelled at math and science, winning a scholarship to an elite university. Even though she has proven that the gender stereotype of females’ lower ability in the domains of math and science does not apply to her, she may still feel threatened when her gender (with its implicit negative stereotype) is made salient before taking a standardized math or science exam. In fact, a 2005 study by Steele and Ambady has shown that priming female mathematicians to focus on their gender before a test has a negative effect on their test performance.

Is it possible to overcome this stereotype threat that impairs a person’s ability? The answer is yes. A theory known as self-affirmation can offset some of the negative effects of the stereotype threat. Self-affirmation, or affirmation priming, helps individuals overcome the stresses and negative impact associated with negative stereotypes of the group to which they belong. Self-affirmation theory is based on the general premise that individuals are strongly motivated to protect their feelings of their own self-worth. Individuals may respond to the stereotype threat by using psychological adaptation of affirming alternative self-resources. For example, a female mathematician could draw on her rigorous educational background and her accomplishments in a short writing exercise to compensate for and decrease the stress she may feel when her gender identity is primed before a mathematics task she has to tackle.

Self-Affirmation Among Low-Income Populations

Inspired by the use of self-affirmation in an educational context, I wanted to explore how the use of a self-affirmation intervention can be used to influence decision making by low-income individuals. One stereotype that may be associated with being impoverished is the inability to manage one’s finances. Working with a soup kitchen in Trenton, New Jersey, I designed an experiment to test whether or not self-affirmation could increase take-up of a particular financial service. Like minority students in an academic setting, low-income individuals might face similar types of psychological threat associated with potential stereotyping. This would be further increased by approaching individuals in a decidedly low-income context (a soup kitchen), and might affect their willingness to show interest in a program or service geared at their demographic.

The Challenge

In the population we worked with, many individuals were not filing their taxes and therefore not receiving large rebates they might be entitled to, based on the Earned Income Tax Credit (EITC). Thus, I used willingness of individuals to receive information about the EITC and free volunteer income tax preparation as the behavior of interest.

The Experiment

In this experiment, I partnered with the Trenton Area Soup Kitchen. Patrons of the soup kitchen were recruited to participate after they completed their meal, and were randomly assigned to either a self-affirmation group or control group. Participants were asked to spend 3-5 minutes describing some personal experience, in private. However, the specific instructions depended on which group the participant was in. In the self-affirmation group, they received the following instructions:

Those in the control group read the following:

Participants in both groups then spent time privately describing their experience. After completing the task, all individuals were thanked for their participation and compensated with a small gift (and were led to believe that the study was over).

When they left, they were approached by a different individual who asked them to please stop to discuss their potential eligibility for the EITC. If the individual stopped, they were also offered information about the EITC and free tax preparation services to take with them (shown below). The rates of stopping and accepting the information were compared with those in the self-affirmation (experimental) group versus control group.

The Results

The results of this study showed that, while individuals in the self-affirmation group were not more likely to stop to chat with the second experimenter, those that did were significantly more likely to take the potentially financially beneficial information with them (36% versus 79%!).

The simple experience of reflecting on a personal accomplishment seems to have been enough to protect the participants from their psychological threat or discomfort related to talking about their financial insecurity.

Implications and Next Steps

The findings suggest that a simple psychological intervention could be a practical and cost-effective tool for policy makers and advocates to increase beneficial actions taken by individuals living in poverty. In addition, the results of the affirmation study suggest that lack of participation in benefits programs by low-income individuals may not be driven by factors such as lack of understanding or disinterest. It can in fact be a result of a psychological threat induced by the fact that low-income individuals are aware of the negative stereotypes associated with their group. This awareness may cause individuals to disengage when they might identify with this group, especially in the presence of an outgroup member (in this case, providers of a product or service geared at low-income populations).

This tax season, I worked with researchers Mindy Hernandez, Jiaying Zhao and Eldar Shafir to test self-affirmation among low-income individuals with a measure of real-world choices. The original study looked at potential intentions to claim the EITC, and we wanted to design a study to look at choices that would presumably have a more immediate and direct impact. Working with the Greater Philadelphia Urban Affairs Coalition and participants at the free tax preparation sites they operate in the Philadelphia area, we conducted a study of choices made by individuals during their session with a tax preparer. The affirmation was very similar to the one used in the original study in Trenton, and the results will be available soon. We are looking at whether or not individual decisions to sign up for services that they have been pre-screened for (such as SCHIP, nutrition assistance) or the purchase of savings bonds are influenced by the self-affirmation intervention.

Overall, this work provides an additional set of strategies to consider when designing programs and policies aimed at the poor. By more effectively considering the world from the perspective of the poor and their self-image, policy makers and advocates for this group can be more effective in mobilizing collective resources used to aid this population. This study illustrates one example of how my research (and that of other behavioral researchers like me) is attempting to further both psychological theory and expand the notions and assumptions held by policymakers about this group.

Tags: Innovation, Behavioral Economics, Matched Savings

On Friday, CFED Innovator-in-Residence Mindy Hernandez posted an entry at her Applying Behavioral Sciences in the Real World blog from guest columnist Caitlyn Brazill. Caitlyn is the Director of Research and Policy for the New York City Department of Consumer Affairs’ Office of Financial Empowerment. The post focuses on an innovative savings program called $aveNYC.

To read the full text of the article, visit Nudging People to Save: The $aveNYC Account.

In the article, Caitlyn highlights some of the difficulties facing low- and moderate-income New Yorkers. There, many families would save if they had the capacity to do so, but often lack the means of facilitating savings. The Office of Financial Empowerment found that in many instances, low-income New Yorkers lack retirement accounts or direct deposit, tools that would allow them to save automatically, and that many of the banks and financial institutions charge their accountholders more money in maintenance fees than the accountholders earn from interest on savings. These factors are just a few that complicate the larger problem – according to Community Services Society, more than half of families in New York had less than $500 in savings.

In an effort to meet these challenges, Mayor Bloomberg launched the Office of Financial Empowerment, an initiative of his Center for Economic Opportunity. The Office was created to identify creative approaches to meeting some of the biggest challenges facing many New York families. Coupling what we know about behavioral economics with practical solutions led the Office to develop the $aveNYC program. I’ll leave it to you to learn the intricate details of the program by visiting the article, but $aveNYC matches savings to a certain amount for low- and moderate-income individuals and families who establish their savings accounts at tax time. The logic is simple and innovative – if you encourage people to save when they get a lump sum of money that they direct deposit and then supplement that amount with a match, that money will last much longer.

So far, $aveNYC has been wildly successful. In the first year of the program, 2,500 accounts were opened and the accountholders saved a combined total of over a half-million dollars. This is remarkable given that the average income for many of these accountholders was a mere $17,000; yet 80% of these individuals saved for the requisite 12-month period and were able to receive their match. Another interesting statistic: $aveNYC savers were four times more likely to still have some of their tax return six months after filing than were savers who filed at other VITA (Volunteer Income Tax Assistance) sites.

There are a number of other really interesting bits of information in Caitlyn’s post, so be sure to check it out by visiting Applying Behavioral Sciences in the Real World. I share some of this information with you because it is a perfect example of the innovation process – in NYC, the challenge was understanding how to incent earners to become savers. Realizing that tax filing was an important gateway to encouraging saving, Caitlyn and her colleagues identified an innovative approach that helped expand economic opportunity for thousands of New Yorkers!

Tags: Behavioral Economics

New York City Mayor Michael Bloomberg at a 2009 press conference announcing the launch of $aveNYC

Guest Blogger: Caitlyn Brazill, Director of Research and Policy, NYC Department of Consumer Affairs, Office of Financial Empowerment

We all know that saving money is a struggle. We know we should save more for retirement and emergencies, spend less on vacations, and avoid the (in)famous $4 cup of coffee. Many of us rely on our jobs and our financial institutions to help us: make automatic deductions into retirement accounts, automatic transfers from our checking to savings and even new handy programs that roll the change from our debit purchases into our savings accounts. All of these tools stem from a simple logic – if I can’t touch it, I can’t spend it.

But for families with very low incomes who live in highly expensive cities like New York, even putting pennies aside every month is a stretch. Our research in New York City found that many low wage workers don’t have access to retirement accounts or even direct deposit to facilitate automatic savings. And the average financial institutions pays less than 1% in interest, yet charges $3 a month to maintain a savings account with less than $500 in it. It seems that if you don’t have a lot of money to save, you have to pay the bank to hold your money, rather than the other way around.

As a result, a Community Services Society poll last year found that 56% of New York City low- and moderate- income households had less than $500 in savings. Lacking savings has a huge impact on household stability; OFE's research has found that in two low-income NYC neighborhoods, 30% of households were unable to pay rent at least once in the last year.

In 2006, Mayor Bloomberg launched the Department of Consumer Affairs’ Office of Financial Empowerment to meaningfully reduce poverty in NYC. The Office of Financial Empowerment (OFE, as we call it) is an initiative of the Mayor's Center for Economic Opportunity and our goal is to educate, empower and protect New Yorkers with low incomes in the financial services marketplace. One of our first priorities was to figure out how to help people with very little money avoid expensive credit options like pawn brokers or internet payday lenders by building savings they could use in emergencies.

With the help of a few behavioral economists and generous support from several foundations, we set out to create an account that would offer people with low incomes a strong financial incentive to save. With what we already know about behavioral economics, tax time seemed like the perfect time to help people save: you’re already thinking about money, you’re more likely to save a lump sum check than a little extra in your check, and, through the IRS’s split refund option, you have an opportunity to send the money right into savings without ever laying your hand on it. So, we created $aveNYC.

The $aveNYC program offers a 50% savings match to families who make less than $45,000 a year and single tax filers who make less than $20,000. The match was capped at $250 for the first two years, and we raised it to $500 in 2010. To receive a match participants must open accounts the day they are filing their taxes, direct deposit a portion of their tax return into their new $aveNYC account, and keep the funds in their account for a full year.

The accounts are held at several community development banks and credit unions and are offered exclusively at free tax sites run by a network of non-profit organizations throughout the city.

So far, the results have been extremely exciting. Since the initial test in 2008, over 2,500 accounts have been opened – and each year so many people have wanted to save that we've had more savers than available match money.

Overwhelmingly, tax-filers who decide to open the accounts are African-American or Latina mothers with an income that's (on average) only $17,000 a year. Despite low-income levels and tough economic times, 80% of participants saved for the full year and received their match. Over half a million dollars was saved ($544,725) in 2008 and 2009.

Our data shows that for most participants in the program, this is the first time they’ve successfully saved a portion of their tax return. More than 25% of people who open a $aveNYC account have no other checking or savings accounts when they start the program, and 27% reported to us that they had no savings when they opened the account.

Our research partner, the Center for Community Capital at UNC- Chapel Hill found that people who opened a $aveNYC Account were four times more likely to still have some of their tax return 6 months after they filed their taxes than a matched comparison group of people who filed their taxes at other VITA sites. We’ll know even more in the coming year, but it's clear that $aveNYC is helping people to become savers.

Each year, we’ve listened to program partners, financial institutions and tax-filers to improve our program. From the first year to the second, we formalized our partnerships with the tax sites, improved our marketing to focus on what people are saving for, increased staff and volunteer training and eliminated the requirement that participants be EITC filers (73% still are). As a result, our participation rate increased by 50%, which shows that designing a good product is only half the battle – helping people access it requires thoughtful, behaviorally informed, onramp design.

In 2010, we changed the contribution parameters, requiring tax filers to save at least $200 (instead of $100) and allowing savers to receive a match of up to $500 (instead of $250). Again, small changes had large effects on behavior, nearly doubling the average savings.

$aveNYC demonstrates what the impact of a new tax policy could be – a change that would create a refundable tax credit that rewards low wage workers for saving, the same way that taxpayers are currently rewarded for buying homes, putting away funds for retirement or investing in their own education or their children’s. Similar proposals are being discussed on Capitol Hill right now, and we hope our findings will help shape those proposals.

We will to continue to study the effects of $aveNYC and to report back on the impact of the account on New York families. So stay tuned for further lessons learned.

Tags: Innovation, Innovators, Behavioral Economics

Yesterday, Innovator-in-Residence Mindy Hernandez updated her Applying Behavioral Sciences in the Real World blog with the second installment of her article about using Google Trends to understand human behavior. Since the first part was so relevant to the work we do here at innovation@cfed, I decided to share a bit more.

To read the full text of Learning about Human Behavior from Google Trends: Part II, click here.

In the first installment, Mindy describes how Google Trends can help us draw conclusions about where people are spending their attention. Her telling example showed that more people had done Web searches for Paris Hilton than for Paris, France. We also learned that time matters. When applying Mindy’s points about Google Trends to a search for “innovation,” we learned that innovation is a more popular search term at the beginning of the year and that at the end of the year, searches for innovation drop dramatically. This suggests that something happens (perhaps due to the holidays in the US) that causes a decline in interest in innovation overall.

Part II of Mindy’s article also contains some exciting findings. First, Google Trends provides a rich data source that allows us to compare with other data sources. For example, Mindy did a search for “food stamps” and found that since the beginning of the recession, there has been a clear increase in the number of people looking into food stamps. However, comparing these numbers to those provided by the recent Government Accountability Office report is interesting – they find that there has been no relationship between the number of families receiving cash assistance in a given state and that state’s unemployment rate.

Another interesting way Google Trends can help reveal human behavior is by comparing how and when some trends rise and others fall. Mindy’s example examines searches for “blog” and “newspaper” and finds that around the midpoint of 2007, “blog” overtook “newspaper” as a more popular search term. This suggests that 2007 really was a pivotal moment in the evolution of our new media. In terms of innovation, this can be helpful because it can teach us how best to capture audiences. For example, what if I were to want to advertise a free financial literacy course? Would I use Facebook or Twitter? Even with Twitter’s growing popularity, the graph below indicates that far more people are searching for Facebook than they are for Twitter.

There are a slew of other interesting findings, as well as neat resources about human behavior and Google Trends. Check them out by visiting Mindy’s blog post here.

Have you used Google Trends? Tell us what it helped you learn about innovation by using the comments section below!

Tags: Innovation, Innovators, Behavioral Economics

CFED Innovator-in-Residence Mindy Hernandez wrote a fascinating post at her Applying Behavioral Sciences in the Real World blog the other day titled "(Almost) Everything I Wanted to Know about Human Behavior I Learned from Google Trends." In the article, Mindy makes a compelling argument for using Internet search trends to understand human behavior.

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

The article discusses Google Trends and Google Insights, tools that have been created to track where people are focusing their attention. The anecdote Mindy gives is telling – by comparing “Paris Hilton” and “Paris, France,” we can learn that people search for Paris Hilton at alarmingly higher rates.

Whereas the Paris example is meant to demonstrate a point, Mindy points out that Google Trends can be a useful tool for understanding human behavior. What are people concerned about? Is what people search on the Internet today the same as last week? What about last month? If not, what does this say about trends in human behavior? Mindy concludes in her article that timing matters – and that we can identify trends over periods of time to help improve the messages we send. In thinking about her argument, I wondered myself how we might use this important information to further what we know about innovation.

To start, I simply searched the term “innovation” and the results were fascinating. Most notably, interest in innovation declines dramatically at the end of each year. As the chart below suggests, over the past five years, there have been dips in the number of searches done for “innovation.” Furthermore, it looks like since 2004, the mean number of searches for “innovation” has decreased slightly. However, this is less disheartening when one considers that the number of occurrences of “innovation” in the news has increased at a seemingly faster rate. Additionally, attention to “innovation” is always highest at the beginning of the year. Apparently, no one cares about innovation during the holiday season, but then people have a reinvigorated perspective on innovation come the new year. In other words, were we to launch a campaign promoting social innovation, it would be best to do so in January or in the late summer when people appear most interested in innovation.

As another demonstration, I searched “economic opportunity” and “asset building,” two terms commonly heard around our offices here at CFED. Interestingly, “economic opportunity” wasn’t searched for regularly until the midpoint of 2007. Probably un-coincidentally, this was the same time the recession became imminent and around the time President Obama launched his campaign for the White House. Likewise, “asset building” is a relatively new term, at least in terms of the number of searches it receives. It wasn’t until the midpoint of 2009 that people started to search “asset building” regularly. This also suggests something about behavioral economics: the emergence of “asset building” as a popular search term suggests that people were talking about – and perhaps thinking about – economic opportunity in a different way than they had before.

These statistics are interesting and, thanks to Google, easy to use. More importantly, they suggest an important way we can harness the power of behavioral sciences. Understanding what people are searching for online can point us in the direction of comprehending human behavior, while this comprehension can direct the ways we approach innovation.

For a more in-depth discussion of these and other issues, check out Mindy’s post at Applying Behavioral Sciences. The post indicates that this post is only Part 1 of 2, so be sure to check back often for Part 2!

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Tags: Innovation, Behavioral Economics

Our latest lesson in what it means to be an innovator comes from the Applying Behavioral Sciences in the Real World blog, where Consumer Credit Counseling Service of the Delaware Valley (CCCSDV) expert Valerie Klein discusses some compelling research they’ve done in regard to incentives.

I last introduced Valerie to you when discussing her research about how changing a form meant individuals were more likely to keep their debt counseling appointments. Valerie’s new research explores the success of incentives, looking both at traditional incentives and pre-incentives, in an attempt to get feedback for some of the products and services offered by CCCSDV.

To read the full text of Valerie’s article, click here.

In short, the distinction between traditional incentives and pre-incentives is simple, yet important. Traditional incentives tell respondents that if they act in a certain way, they will receive the incentive, following an if-x-then-y format. Pre-incentives, on the other hand, offer the incentive prior to the feedback request with no strings attached. In other words, here’s-x-independent-of-y. Such a system seems dangerous, because if I’m interested in profit-maximizing, I’ll take the incentive but not any course of action.

Trying to better understand this notion in relation to other research, CCCSDV conducted a study examining whether or not pre-incentives were as effective as traditional incentives. Ultimately, they found that these incentives were astoundingly more successful than were traditional incentives and no incentives. In fact, individuals were nearly twice as likely to respond to the survey if they had already received the free gift that was meant to serve as an incentive.

It’s funny how innovation works – in this experiment, the new way of doing things cost exactly the same as the old way of doing things. In fact, the new way of doing things didn’t even require new steps – rather, switching the order of the steps in the process was enough to have a significant positive outcome. It seems to me that’s the point of innovation: creative approaches don’t require you to reinvent the wheel, just to rethink the way the wheel is used.

Are you following us on Twitter? Check us out @CFEDNews.

Tags: Behavioral Economics

Mindy Hernandez, Founder, One Decision

Sometimes the most interesting questions are most are the basic. What’s the best way to get people to respond to us? We all have questions we’d like to ask or feedback we’d like clients, customers and even friends to give us. But getting people to take time out of their commuting, basketball watching, behavioral eceonomics blog-reading lives and sit down to pay attention to our questions can be surprisingly difficult. I know that I almost never respond to organizations' or businesses’ pleas to “help us improve!” or “take this quick survey." I want to help, I just never seem to have the 5 minutes.

The Problem

Val Klein at Consumer Credit Counseling Service of the Delaware Valley, or CCCSDV (check out Val’s recent guest blog here), was struggling with this issue. CCCSDV offers debt management plans (DMP) (see Federal Trade Commision's Website for more information) where people struggling with debt can enroll in the program and CCCSDV will help them manage and pay-off their debt. Many people are offered the program, a few enroll, but many drop out. CCCSDV wanted to find out more about why some people never enroll, why others drop out and what they could do about it. They sent out hundreds of surveys but the response rate was low - about 10%.

The Intervention

There is very solid research on the power of “pre-incentives” on increasing responsiveness for things like surveys (see this very helpful meta analysis from the British Medical Journal).

What’s a “pre-incentive”? Well, a traditional incentive might work like this: You get a letter in the mail saying "complete this survey and we’ll send you a gift certificate for free doughnuts!" A pre-incentive is different. You open a letter and the gift is ALREADY inside. You don’t have to do anything - there’s a token there for the taking.

This is an obvious deviation from the traditional self-interested economic model that might say: if you want people to do X behavior you provide X subsidy, and a rational person will calculate whether his or her time is worth X subsidy and then act accordingly. By this logic you’d expect a pre-incentive to be a failure because, using strictly rational accounting, this is a great profit-maximizing opportunity: I can pocket the gift and do zero work. But this is actually the exact opposite of what the previous studies tell us and, happily, what Val and I found.

The behavioral idea is that our motivational engine is not always greed. Actually, we are wired to be extremely sensitive to ideas of fairness and reciprocity. When someone does something nice for us we feel a strong urge to reciprocate. And it can feel very uncomfortable to take a “gift” and give nothing in return.

So CCCSDV sent out almost 1,000 surveys to people who had enrolled, dropped out or rejected the DMP program in three conditions:

1.     A survey asking people to respond - no incentive is given. (Click here to see a sample of this letter.)

2.     A survey asking people to respond and promising a gift (a $5 Dunkin’ Donuts gift card) upon completion.

3.     A survey with a “pre-incentive” included (a $5 Dunkin’ Donuts gift card), thanking people in advance for helping. (Click here to see a sample of this letter).

The Findings

Among those enrolled or who declined DMP, the pre-incentive letter increased the response rate by 30 percentage points, basically more than tripling the response rate over the standard (non-incentive) letter. In addition, the pre-incentive letter increased response rates for those who enrolled in the DMP program as well as those who declined DMP - this second group had proven especially difficult to reach.

Survey Response Rates (Percentage of people who returned completed surveys) N=968

For future study: If the power in changing behavior in this case was about appealing to people's ideas of reciprocity and fairness, how much difference did the actual amount of the gift certificate make? This is not just an academic question; in the real world there are of course real costs and budget constraints to consider. So how might response rates change if the pre-incentive was a free bus pass or a Hershey's kiss? (Previous research tells us that pre-incentives that represent actual cash are more effective than small gifts like chocolate, but we don't know the actual impact for this population in this context.) What if the gift certificate was only for $2 or even $1? In both cases, my hunch is that response rates would dip, but not by much; but there's only one way to find out...

Tags: Behavioral Economics

Mindy Hernandez, Founder, One Decision

I’m not a sports fan (at all) but I have a strange fascination with the NCAA college championships. Each year around March, I turn into a person I barely recognize as I search out sports blogs and says things like, “that was a beautiful crosscourt pass!” with total sincerity.

But you don’t have to love college basketball to appreciate the beauty of huge upsets- watching the joy of underdogs becoming champions. From a behavioral perspective, it’s fascinating to watch people who knew they were being perceived as “losers” turn into “winners” in just a few hours- or, in the case of Murray State, within a few seconds. (You can actually hear the announcer say: “heroes are born in March!”). This is what happened Thursday night when 13th seeded Murray State defeated 4th seated Vanderbilt with seconds left in the game. Of course, the corollary is that you see the faces of those whose identity was clearly of a “winner" (Vanderbilt) become stunned and sometimes just crumble when that their perceived identity changes suddenly.

Every year there are a few upsets and a few- though not many- people had picked Murray State to beat Vanderbilt. Now, President Obama is getting a lot of attention for getting the health care bill passed. But he deserves our attention and applause for a different, less celebrated achievement: Obama was one of the few who made the unlikely prediction that Murray State would win this game. And he did this in a very public way on ESPN. You can see it in the first few seconds of the first video above.

His predictions were widely publicized and it’s reasonable to assume that many Murray State players knew the President viewed them as “winners”. There is a fair amount of compelling research on the impact of stereotypes and identity on cognitive and academic performance. When we relate to an identity associated with success on a certain task, we are likely to perform better on that task. Of course, this works in both directions. A lovely example comes from a 1999 study by Shih, Pittinsky, and Ambady. When Asian women were implicitly reminded (or primed to think about) their identity as women they scored lower on a math test than when they were reminded of their identity as Asian.

President Obama has been linked with this effect in the past.  A 2009 Vanderbilt study found what the authors called an “Obama Effect” showing that a performance gap between African-Americans and whites on a 20-question test administered before Mr. Obama’s nomination all but disappeared when the exam was administered after his acceptance speech and again after the presidential election.

Much less is known about stereotype threat and athletic performance. So the open question is, can “winner” be a salient identity that can be primed and impact athletic performance? Specifically, if Murray State knew Obama had associated them as “winners” could this have primed their identity as winners and impacted their performance? What additional impact might it have had to have an African-American President make a prediction about a largely African-American starting team?

If you'd like to read more about psychology and the NCAA tournament, check out this interesting article on how unconscious bias is unfairly impacting the seeding of NCAA teams.

Tags: Innovation, Innovators, Behavioral Economics

Certainly, one of the biggest challenges we face in the Assets field is finding innovative approaches to encourage saving in a way that isn't burdensome for the saver. The New America Foundation has been working with Innovator-in-Residence Mindy Hernandez. Mindy and Alejandra Lopez-Fernandini sat down together to discuss AutoSave.

Mindy and Alejandra's conversation details how AutoSave works. To read the full article, check out Applying Behavioral Sciences in the Real World.

According to Alejandra, AutoSave is “a low cost, potentially scale-able model for increasing personal savings.” Employees who sign up for direct deposit through their employer and opt in to AutoSave system automatically see a portion of their paychecks diverted into a savings account. For most sites, the recommended amount is $25, so employees paid on a bi-weekly schedule save about $50 per month. What is really exciting is that most individuals who enrolled in the program chose to maintain that amount, rather than save a smaller amount. In some cases, people saved up to 25% of their paychecks! Perhaps even more promising: users who traditionally did not save portions of their paychecks did so for reasons that the AutoSave system allowed them to overcome.

There are many more exciting findings associated with this program and I’ll be checking back to see how AutoSave continues to grow.

Do you have a burning question you'd like to ask a behavioral scientist? Click here to submit your question today!

Tags: Innovation, Behavioral Economics, Innovators

innovation@cfed

In the past couple weeks, I’ve posted a couple of entries to the innovation@cfed blog from Mindy Hernandez’s site, Applying Behavioral Sciences in the Real World. Mindy and her colleagues are doing some exciting work, and I wanted to follow up on what I posted last week for those of you seeking more information.

Specifically, I wanted to share with blog readers one of the features of Mindy’s site, the “Ask a Behavioral Scientist” feature. By clicking here, the site will generate a link to email a behavioral scientist. Fill out the requested information and your questions will be forwarded along to a behavioral scientist who is an expert on the topic about which you ask. Various behavioral scientists will field your questions and the discussion YOU start could be featured as part of a Behavioral Economics blog post!

Filling out the email is quick and easy and is the best way to ensure your questions get answered! Of course, if you just have a comment you want to share, you can do so here and at the Behavioral Economics blog. I'm sure Mindy and her colleagues appreciate any feedback you have!

Tags: Innovation, Behavioral Economics

Everyone knows the old adage, “it’s not what you say, but how you say it.” Today’s must-read proves that sometimes, it is indeed what you say that matters. I came across this interesting article at the Behavioral Economics blog from Dale Carlson-Bebout, Director of Step Up Savannah.

In the blog post, Dale writes about how Step Up Savannah, an organization that works with employers all along the Coastal Empire to provide public work supports, was facing difficulties getting employees to follow through with applications. They found that a large number of individuals would begin to fill out applications for supports such as food stamps, but they wouldn’t complete those applications. To solve this problem, they thought about adding one simple phrase as a closing statement at the end of their client interviews.

To read their exciting results, check out Applying Behavioral Sciences in the Real World.

Not only did adding a simple phrase increase the number of individuals who completed their food stamp applications, doing so meant that more people who were already eligible for food stamps could actually access those services to expand their budgets.

At innovation@cfed, we love reading these types of stories – individuals and organizations find innovative, yet simple ways to expand economic opportunity for low-income Americans. Step Up Savannah shows just how impactful the innovation process can be.

Dale’s blog post is just one of the many exciting features found at Applying Behavioral Sciences in the Real World. Check out their site (brought to you by CFED Innovator-in-Residence Mindy Hernandez) and when you have a moment, share with us on the comments section what experiences you’ve had that remind you of the success Dale and Step Up Savannah enjoyed!

Tags: Innovation, Innovators, Behavioral Economics

As many of you know, Innovator-in-Residence Mindy Hernandez maintains a blog as part of her Behavioral Economics project, Applying Behavioral Sciences in the Real World. In the past few months Mindy has connected with many practitioners and researchers and worked on variety of projects to connect behavioral economics research with practice and rigorous evaluation.

One intriguing new post on Mindy’s blog comes from Valerie Klein of CCCSDV, Consumer Credit Counseling Services of the Delaware Valley, who guest blogged about her experiences in helping individuals keep their debt counseling appointments. Through instituting behavioral concepts in the registration process, CCSDV was able to increase the retention rate of individuals that signed up for debt counseling appointments.

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

Changes in Show Rates for Debt Counseling CCCDSV

Valerie noticed that her organization had a slew of folks calling their offices to set up appointments for credit counseling, but then a whopping 60% of these clients would either cancel their appointments or simply not show up. Valerie and her organization identified that one of the reasons was because of the appointment packet they were sending out. They found that once they changed the form, both its scope and its tone, no-show and cancellation rates significantly decreased.

This article spoke to me for a couple reasons and I think makes for an interesting thinking piece for our readers. First, it really highlights the nature of innovation. Valerie and her team didn’t need to reinvent the entire way that debt and credit counseling happens – even a “small” change like revising a form made a difference. People who otherwise wouldn’t have received counseling services now could because they didn’t feel alienated by a document designed to do the opposite. Second, it demonstrates the importance of communications and marketing in the innovation process. Certainly, a major part of innovating is having the vision to build an idea from the ground-up and being able to see that vision into fruition. But innovation also requires developing the right communications tools to get your idea to the right audience. For CCCSDV, their central communications tool for debt counseling was their appointment packet, but without figuring out how to re-language it to the audience who needed it the most, they wouldn’t have been able to innovate their debt counseling process.

So, when you get a moment, check out the Applying Behavioral Sciences in the Real World blog. Valerie’s post is just one of the many cool features they have there that contribute well to innovation!

Tags: Behavioral Economics

Guest blogger: Valerie Klein, Consumer Credit Services of the Delaware Valley (CCCSDV)

We wanted to find out why people were canceling at such a high rate and see what could be done.  But like most non-profits, we had constraints. We didn't have a lot of time or funding to put into an in-depth program overhaul. Over the summer and fall of 2009, we worked with a consultant funded through Annie E. Casey, to use behavioral economics concepts to find an effective change that we could implement easily.

The first thing we needed to do was to look at our current processes and ask what barriers and hassles we might be unintentionally forcing on clients. We looked at the appointment packet that we send to everyone who calls interested in debt counseling and realized that its tone and length might be intimidating and seem like a hassle to complete. Without realizing it, we had created unnecessary barriers for clients.  The tone was severe, stressed the fee charged, indicated that "cash payments must be exact change", told people they must arrive 15 minutes early, and was 8 pages long, including a blank budget and asset and liabilities forms we told people they must complete before their appointment. After speaking with our counselors, we learned clients commonly did not fill out these forms and the counselors were happy to help clients fill out the forms during the session.

Our old letter looked like this:

We set out to redesign the letter by taking out any barriers we might be creating--in terms of paperwork and intimidation by 1) removing all unnecessary information and forms to create a simple, straight-forward letter and 2) creating a tone that was friendly and affirming. We wanted the client to feel as though they had already done the hard work by calling and making the appointment; they had already invested in the process and had taken the first steps to gaining control of their financial future. We removed all the worksheet pages and slimmed down the packet dramatically.  

The redesigned letters look like this:

Click here for full size version of the new letter.

Results

Note: These are initial results based on a modest sample. We are doing more work to expand the study to include additional clients.

Our intentions were to increase the show rate, decrease the no-show rate, and increase the Cancelled rate. We felt it was useful to examine the 3 months prior to implementation as a comparison group. We can see that in the first three months of implementation, we saw that the Counseled Rate increased 5% and the No-Show Rate decreased 1%, while the Cancelled Rate decreased 4%. We were pleased with these initial results and have begun redesigning the narrative and format of our other appointment letters.

This project was made possible through the support of the Annie E. Casey Foundation.