Editor’s Note: The following article was originally published by Next Billion‘s James Militzer.
Why do so many people – in all countries and at all levels of society – struggle to make sound financial decisions? Answering that question is one of the missions of ideas42, a non-profit “behavior design lab” that specializes in behavioral economics, the study of how market decisions are made and the mechanisms that drive people’s choices.
Their goal is to generate insights into people’s economic behavior, focusing on problems like consumer finance, energy efficiency, education, the uptake of social programs, economic mobility and health, both within the United States and in developing countries.
We’re pleased to have them as a content partner on NextBillion Financial Innovation, and to introduce them to our readers, we spoke with Alexandra Fiorillo, a vice president at ideas42. In part 1 of our interview, she gave an overview of the principles of behavioral economics. In part 2, she describes how it can be used to design better financial products and promote healthier decisions.
James Militzer: How would a financial institution’s products or policies look different if they took behavioral economics into account when designing them?
Alexandra Fiorillo: I think about that every day. Behavioral economics can have a potentially profound impact on how financial institutions think about their own consumers, and how they design products to better meet their needs.
For example, we did a project in the Philippines with the Grameen Foundation and Card Bank. At the beginning of our engagement, Card Bank presented a problem with getting people to open savings accounts; they thought they were suffering from an uptake or adoption issue. But we looked at the data, and it was very clear to us almost immediately that they didn’t really have an uptake issue – actually it seemed they were quite successful at getting clients to open savings accounts with minimum balances.
The problem was actually in the usage of those accounts. What we saw was that 58 percent of clients who opened an ATM account at Card Bank never saved another peso into that account after they opened it – 58 percent. I mean, that’s surprising. So we sat back and thought, let’s assume these clients have the intention to save money, because they’ve opened the account with a minimum balance. What’s the failure to act? What explains the intention-action gap?
Is the problem with how people are managing their own finances? Or maybe it’s a problem with how they perceive or understand the account? Maybe it’s the design of the account, or maybe there’s an operational challenge? Could it be that these clients don’t have money to save? But once you start to put yourself in the shoes of the clients and think about what their daily financial behavior looks like – what choices are they forced to make, what are the trade-offs that they’re facing in their financial lives, how are they using and saving money in their homes, what do those habits look like – you can start translating those existing behaviors into product design. And you can design a product that is much more suitable to the existing behavior of the client.
So you’re flipping the entire design process on its head, and saying “Let’s not necessarily change people’s behavior, but let’s try and design a product that fits the way people are already behaving,” which will lead to a change in behavior but in a nuanced way. Now there are obviously some cases where you need some behavior change at the client level, but I think a lot of it can be done at the institutional level. Think about how people are already thinking and acting, and the choices that they make, and force your products to fit into those lifestyles and those behaviors, rather than forcing individuals to change and meet your products.
JM: What’s an example of a financial product designed around people’s lifestyle?
AF: One profound example in the States is the 401-K (retirement plan). Did you opt into your savings or retirement plan? Or were you defaulted into it?
JM: I was defaulted into it.
AF: That’s great – whoever you work for is very smart. At ideas42 we default all of our staff into a 401-K. But in most companies around the world, it’s an opt-in decision. And research indicates that it is not that people don’t want to save for retirement; it’s that when people get those 40 pages of application/account opening you have to fill out and figure out your information, inertia takes over and people say “You know what, it’s not worth it and I’m not even going to bother.” I’m over-simplifying, but there is a “failure to act” or follow through.
But if the benefit is presented as an opt-out product, people often stay in. The important thing to note here is that they don’t opt out because they had the original intent to save for retirement. If they didn’t have that original intention, it might not work out the same way.
These seemingly small choice architecture opportunities have profound implications for social impact and how society is able to benefit. It’s not about trying to force people to make decisions that we want, it’s about helping people follow through with the intentions that they set for themselves.
JM: When designing products that encourage savings, do you feel you’re up against both human nature and product marketing that’s geared toward consumption?
AF: When I think about my personal life, absolutely. Even as someone who knows all of this information, I make terrible decisions myself – I mean, some doctors smoke, right? In the social impact space, globally, I feel less so, because there are so many institutions that really do have social missions – but perhaps that is wishful thinking. I feel that at ideas42 we have the ability to align ourselves with those institutions and organizations. And I would say the power of positive intention is probably going to trump that consumerism long-term. In fact, I think we’re starting to see a powerful movement to leverage “consumption” institutions for social good.
One example I think of is the organization ColaLife, a non-profit that leverages the distribution channels of Coca Cola to deliver simple health solutions such as rehydration salts to remote communities in developing countries. More and more organizations and companies are thinking about ways to innovate, and I think we’ll start to see more and more private-social partnerships. Though there might be bumps in the road, just the sheer number of partners, funders and donors that work with us and support the sector is a testament to how many people out there really want to help improve lives at the bottom of the pyramid. We wouldn’t be doing this work if we didn’t think there was a bright light at the end of the tunnel.
JM: It seems like some banks – at least in the US – might actually want customers to make poor financial decisions, for example, because they’re using overdraft fees or other penalties as a revenue stream. Is that a fair assessment, and is that something you have to watch for in helping banks design products for lower-income people?
AF: It does seem like there is a tension between bottom line and social mission, whether it’s a bank or not, doesn’t it? I think there are a lot of financial institutions in the US that are doing some innovative and client-centered work but most of the innovation I have observed actually comes from the developing world. It would be great if banks in the US drew lessons and innovations from some of the really exciting stuff happening abroad.
Our hope is that through our global financial education program, we’re really giving consumers the tools and resources they need to make better decisions for themselves. And again, we’re not passing judgment on these decisions, but making sure resources are available. We’re taking these financial heuristics, this financial rule of thumb program, and trying to scale it up in the developing world, but we’re also looking for ways to apply it to the underserved and the underbanked in the U.S., the U.K and some other markets – because there are underbanked and underserved everywhere, not just in developing countries.