In Dan Ariely’s world, small changes can have a very big impact.
The behavioral economics expert and professor at Duke University’s Fuqua School of Business is the maestro of the behavioral tweak. His skills, and those of other researchers and experts in fields ranging from public policy to product design, are put to practical use at his year-old Common Cents Lab. The financial decision-making research lab defines its mission as “Hacking human behavior, for good.”
The lab’s first annual report tells the stories of collaborations with financial technology firms such as savings apps Digit and Qapital and data access company Plaid, with credit unions in Alaska, and with nonprofits such as lending platform Kiva U.S. The goal is to use behavioral insights to improve the financial well-being of low- to moderate-income Americans. But many behaviors the lab targets, and the solutions it finds, apply to Americans in all income brackets. “The temptation industry is getting better and better,” Ariely said in an interview. “Technology fights with us because it’s so much easier to tempt us to do things by our emotion than our reason.” His lab designs ways to subtly intervene in financial transactions to give reason a fighting chance.
Texts + tax refunds = savings
Filing income taxes is described by many consumer advocates as “the golden moment for saving.” It may be the sole time of year that people focus in a holistic way on their financial lives. Also, tax refunds represent the biggest check many families see over the year, with the average refund totaling about $3,000.
Ariely’s team ran an experiment on increasing the amount of tax refund savings for users of Digit, which communicates with users largely by text. Users link their checking accounts with Digit, and its algorithm analyzes spending and saving patterns. That lets it judge when to whisk small amounts of money from checking to savings when a user won’t miss it.
In one experiment, a control group of users was sent a simple text after a refund showed up in checking. It asked what percentage of the refund they’d like to save. The answer: an average of 10%. The experimental group was messaged before getting any refund check. Its text said that members might get a tax refund and asked what percentage of it they’d want to save. They answered 15%.
Digit automatically moved the amounts into savings when refunds showed up in accounts. Among those who responded to either text and opted to save, the savings rate for the experimental group was 22%. That was close to double the control group’s 12%.
“Pre-commitment is a tool to help people follow through on decisions,” Kristen Berman, who runs the lab’s San Francisco team, has written (PDF). “Instead of relying on ourselves to be great people, we make it harder for our future self to mess up.”
Automated savings programs remove some temptation. “We all look at our checking balance, and if we have a lot of money in it, we feel rich and we overspend,” Ariely said. “If the amount looks small, we spend less.”
One way to counteract that is to set up different kinds of automated payments. If you make a mortgage payment every month, and it’s due a few weeks after you get paid, Ariely suggests setting up another account just for that payment. Have the payment automatically moved to the new account when your paycheck comes in, even if it isn’t due for a few weeks.
A 401(k) plan is a pre-commitment device. “Imagine a world in which you didn’t have 401(k)s and every month you decided how much to save,” Ariely said. “It would be a terrible world, from a savings perspective.” Even better are automated programs that bump up contributions into 401(k)s. Fidelity Investments did some math on that. They used the example of a 25-year-old employee making $40,000 and getting annual raises of 1.5% after inflation. If she bumped up the percent of salary going into a 401(k) plan by 1% every year for 12 years, she’d have $1,930 more (PDF) in monthly retirement income.
Earning = mc ²