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Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving

Thaler R, Benartzi S

Journal of Political Economy 112(2004): S164-S187.

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As firms switch from defined‐benefit plans to defined‐contribution plans, employees bear more responsibility for making decisions about how much to save. The employees who fail to join the plan or who participate at a very low level appear to be saving at less than the predicted life cycle savings rates. Behavioral explanations for this behavior stress bounded rationality and self‐control and suggest that at least some of the low‐saving households are making a mistake and would welcome aid in making decisions about their saving. In this paper, we propose such a prescriptive savings program, called Save More Tomorrow™ (hereafter, the SMarT program). The essence of the program is straightforward: people commit in advance to allocating a portion of their future salary increases toward retirement savings. We report evidence on the first three implementations of the SMarT program. Our key findings, from the first implementation, which has been in place for four annual raises, are as follows: (1) a high proportion (78 percent) of those offered the plan joined, (2) the vast majority of those enrolled in the SMarT plan (80 percent) remained in it through the fourth pay raise, and (3) the average saving rates for SMarT program participants increased from 3.5 percent to 13.6 percent over the course of 40 months. The results suggest that behavioral economics can be used to design effective prescriptive programs for important economic decisions.

 


Mobile-izing Savings with Automatic Contributions: Experimental Evidence on Dynamic Inconsistency and the Default Effect in Afghanistan

Blumenstock J, Callen M, Ghani T

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Through a field experiment in Afghanistan, we show that default enrollment in payroll deductions increases rates of savings by 40 percentage points, and that this increase is driven by present-biased preferences. Working with Afghanistan’s primary mobile phone operator, we designed and deployed a new mobile phone-based automatic payroll deduction system. Each of 967 employees at the country’s largest firm was randomly assigned a default contribution rate (either 0% or 5%) as well as a matching incentive rate (0%, 25%, or 50%). We find that employees initially assigned a default contribution rate of 5% are 40 percentage points more likely to contribute to the account 6months later than individuals assigned to a default contribution rate of zero; to achieve this effect through financial incentives alone would require a 50% match from the employer. We also find evidence of habit formation: default enrollment increases the likelihood that employees continue to save after the trial ended, and increases employees’ self-reported interest in saving and sense of financial security. To understand why default enrollment increases participation, we conducted several interventions designed to induce employees to make a non-default election, and separately measured employee time preferences. Ruling out several competing explanations, we find evidence that the default effect is driven largely by present-biased preferences that cause the employee to procrastinate in making a non-default election.

 


The Personal Side of Relationship Banking

Schoar A

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This paper documents a widely overlooked dimension of relationship lending: the personal interaction between the borrower and the lender reduces the willingness of the borrower to engage in moral hazard and default on the loan officer. We conduct a randomized experiment with small business borrowers of the largest commercial bank in India to test the impact of three different levels of interactions between the borrower and the bank. Borrowers who are regularly called either by a single assigned relationship manager or by one manager randomly selected from a small team of managers show much better repayment behavior and greater satisfaction with the bank services than borrowers who either receive no follow up or only receive follow up calls from the bank when they are delinquent. The results are economically and statistically significant: borrowers who receive the more intensive treatment see a large reduction in the number of late payment spells and delinquencies.

 


Member Centered Credit Union Banking: How behavioral insights can help credit unions better serve members

ideas42

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A loan application should collect necessary information while providing a painless, easy, and engaging experience for members and potential new members. Our recommendations for improving the loan application process were driven by three behavioral principles essential to the design of any human process: (1) reducing perceived hassles and uncer-tainty wherever possible; (2) avoiding jargon; and (3) designing with potential user error in mind. Our recommen-dations for Alliant included a new process timeline to more accurately set applicant expectations and reflected progress through the application; reframing key decision points to ensure users do not accidentally cancel their applications; and revising language that may be unfamiliar to some applicants, such as “collateral,” “debt-to-income,” and “co-borrower.” These principles and recommendations may seem simple, but through our work we have seen how even small changes can have big impacts on client behaviors. Moreover, as service designers, intimately aware of the loan process, it can be difficult for financial experts to design financial products and services that feel intuitive and easy to understand to new users. Alliant has incorporated the majority of our design recommendations into the new loan application process.

 


Keeping It Simple: Financial Literacy and Rules of Thumb

Drexler A, Fischer G, Schoar A

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Micro-entrepreneurs often lack the financial literacy required to make important financial decisions. We conducted a randomized evaluation with a bank in the Dominican Republic to compare the impact of two distinct programs: standard accounting training versus a simplified, rule-of-thumb training that taught basic financial heuristics. The rule-of-thumb training significantly improved firms' financial practices, objective reporting quality, and revenues. For micro-entrepreneurs with lower skills or poor initial financial practices, the impact of the rule-of-thumb training was significantly larger than that of the standard accounting training, suggesting that simplifying training programs might improve their effectiveness for less sophisticated individuals.

 


Delivering information about retirement saving among Hispanic women: two Facebook experiments

Blanco L, Rodriguez L

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We conducted two Facebook experiments (the first one during July 21–25, 2016, and the second during April 22–25, 2018) to determine what type of message related to injunctive norms is more effective in getting Hispanic women interested in learning about financial planning for retirement. We also explore how social media tools could be used in future interventions to promote retirement saving among Hispanic women. In both experiments, we found that a message centered on peer influence may be more successful than a message centered on familism in getting Hispanic women interested in learning more about financial planning for retirement. When we disaggregate our data by age and state, we find that click-through rates were higher among Hispanic women between 45 and 55 years old, and the largest numbers of impressions were among Hispanic women in California and Texas. When we disaggregate our data by device, we find that most study participants were reached through an Android smartphone.

 


Increasing Engagement with Mobile Banking in Nigeria

ideas42

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In 2014, only 48.6% of Nigeria's adult population had access to, and used, formal financial products.To make these products more accessible to people of all incomes, a major bank and a telecommunications company in Nigeria jointly launched a mobile bank account.

 


Reminders, Raffles and Rent Payments

ideas42

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there was a mismatch between the actual rent due date (the first of the month) and when renters perceived rent to be due (the 10 th of the month, when penalties kicked in).

 


Small Cues Change Savings Choices

Choi J

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The researchers used a randomized control trial to test the effects of different types of messaging on employee 401(k) contributions. They found that among the employees who contributed the least to their 401(k) plans, those who received the $16,500 cue contributed higher proportions of income on average than those who received the $3,000 cue.

 


Account Opening Process to Increase Intentional Savings

Fiorello, Potok, Wright

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ideas42 redesigned four aspects of the CARD Bank system to increase savings: a new account opening form, a printed savings plan, reminders to make savings deposits, and a new savings calendar.

 


Information Disclosure, Cognitive Biases, and Payday Borrowing

Bertrand M, Morse A

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A randomized evaluation showed that envelopes printed with dollar costs over time reduced borrowing from the payday lender in later pay cycles by about 11%.The other information types did not significantly reduce the likelihood of borrowing in a post-intervention pay cycle.

 


Female Empowerment: Impact of a Commitment Savings Product in the Philippines

Ashraf N

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A randomized evaluation found that clients who were offered commitment savings accounts saved an extra 235 pesos over the first six months of the program, and an extra 411 pesos during the first year.

 


Earmarking and Partitioning: Increasing Saving by Low-Income Households

Soman D, Cheema A

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A randomized evaluation found that workers who received their earmarked savings in two envelopes saved an average of 414 rupees, or 72% more than the 241 rupees saved by workers who received their savings in one envelope.

 


What's advertising content worth? Evidence from aconsumer credit marketing field experiment

Bertrand M

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While the average take-up rate for all loan offers was 8.5%, this randomized evaluation found that extending the deadline to apply by two weeks (from 2 weeks to 4 weeks, or from 4 weeks to 6 weeks) increased the probability of applying by 3 percentage points, roughly equivalent to the increase achieved by reducing the interest rate 10 percentage points.

 


Getting to the Top of Mind: How Reminders Increase Saving

Karlan D, McConnell M, Mullainathan S, Zinman J

Management Science, Volume 62 No. 12 pp. 3393-3411

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Randomized evaluations in each country found that clients who were sent reminders had saved more and were more likely to have reached their savings goals by the commitment end dates (around a year after opening accounts) than clients who did not receive the messages.

 


Stimulating interest: Reminding savers to act when rates decrease

Adams P, Hunt S, Vale, Zaliauskas

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The FCA used a randomized evaluation to test the effect of the reminders in motivating consumers to switch their savings account. The study found that reminders increased the percentage of customers taking some action following the rate decrease, whether switching their account internally, or closing the account and moving to another institution, by between 5.4 and 7.9 percentage points.

 


Plan-Making Reminders Improve Timely Loan Payments

ideas42

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A randomized evaluation found that on average, borrowers who were sent redesigned monthly statements and strategically timed reminders received 23% fewer penalties for having insufficient funds in their loan repayment

 


A Personal Touch: Text Messaging for Loan Repayment

Karlan, Morten, Zinman

Behavioral Science & Policy, Volume 2, Issue 2, 2016

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A randomized evaluation found that most of the messages failed to achieve any significant result on loan repayment. The only message that increased repayment rates was a positive framing and the inclusion of the account officer's name.

 


Loose Knots: Strong versus Weak Commitments to Save for Education in Uganda

Karlan D, Linden L

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A randomized evaluation found that some versions of the Super Savers program had a positive impact on savings and educational outcomes. Students saved more when they were offered the less restrictive cash payout which returned their savings in cash compared to the more restrictive voucher payout (see Figure 1).

 


Underinvestment in a Profitable Technology: The Case of Seasonal Migration in Bangladesh

Bryan GC, Shyamal Mobarak A

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Hunger during pre-harvest lean seasons is widespread in the agrarian areas of Asia and Sub-Saharan Africa. We randomly assign an $8.50 incentive to households in rural Bangladesh to temporarily out-migrate during the lean season. The incentive induces 22% of households to send a seasonal migrant, their consumption at the origin increases significantly, and treated households are 8–10 percentage points more likely to re-migrate 1 and 3 years after the incentive is removed. These facts can be explained qualitatively by a model in which migration is risky, mitigating risk requires individual-specific learning, and some migrants are sufficiently close to subsistence that failed migration is very costly. We document evidence consistent with this model using heterogeneity analysis and additional experimental variation, but calibrations with forward-looking households that can save up to migrate suggest that it is difficult for the model to quantitatively match the data. We conclude with extensions to the model that could provide a better quantitative accounting of the behavior.