july 26, 2013 ford financial products innovation fund working group meeting behavioral design 101...
TRANSCRIPT
July 26, 2013Ford Financial Products Innovation Fund
Working Group Meeting
Behavioral Design 101
Jonathan ZinmanDartmouth College and
IPA’s U.S. Household Finance Initiative
• Symptoms (focus on household finance)
• Diagnoses: what can go wrong (“behavioral factors”)
• Treatments
• Design principles for treatments
Outline
• Lots of borrowing (overborrowing?)
– Credit card debt per household ~= $10,000
– Student loan debt per household ~= $10,000
– Mortgages, auto loans
– Share of consumers with subprime credit: 56.4% 1
• Many without savings (undersaving?)
– Households with insufficient liquid assets to subsist for three months at the poverty line in absence of income: 43.9% 2
– Households that reported no saving in the previous year: 48% 3
• Many pay premia for financial services (overpaying?) 4
– Assets
– Loans
– Advice
Symptoms
Diagnosis: Struggles in Managing Desires
• Factor: Self-Control problems (carpe diem!)– Treatments: commitment, support, on-ramping
• Factor: Loss-aversion– Treatments: pre-commitment, change the frame
• Factor: Projection bias– Treatment: help people visualize the future
Diagnosis: Bandwidth Constraints
• Factor: “limited attention”
- Failing to consider contingencies
- Tuning out/not engaging
- Forgetting
• Treatments:
- Default options
- Pre-commitment
- Automation
- Reminders
Diagnosis: Biased Forecasting
• Many types:
- Factor: Belief in Law of Small Numbers
- Factor: Non-belief in Law of Large Numbers
- Factor: *Excessive optimism
• Treatment:
- Information/debiasing?
• Factor: Exponential Growth Bias- People underestimate growth and decline when interest compounds
Þ Saving appears less renumerative
Þ “Low monthly payments” appear deceptively cheap
• Treatments:- Saving: Show future values
- Borrowing: APRs and other apples-to-apples comparisons
• Factor: Low Numeracy
• Treatments: - Simple, intuitive information?
Diagnosis: Getting the math wrong (even whenthere’s little uncertainty)
• Factor: Low Financial literacy- Lack of basic knowledge
Of key concepts: diversification, inflation
Of how products work: e.g., ARMs, term vs. whole life
• Treatments: - Default options
- Simple/intuitive disclosures
Diagnosis: Getting the facts wrong
About finance, about oneself. Why?1. Limited opportunities
• On high-stakes decisions (mortgage, job, auto financing)• Even high-frequency decisions can have uncertain long-run
implications- Credit card use (what’s right debt load for me/my family)?
• Changing life circumstances creates moving targets2. Difficult subject matter3. Sensitive subject matter and motivated ignorance• Factor: Confirmation bias and other asymmetric learning
Diagnosis: limited learning
Delegation: works pretty well in medicine, auto repair, etc.
• But financial advice markets are a mess
- Questionable quality: Lots of biased, even fraudulent advice
- Limited scope: Who covers the household balance sheet?
- Limited coverage: mass market?
Competition: often brings prices down, but does not seem sufficient to eliminate yield-spread premia, $39 overdraft fees, etc.
Diagnosis: “Killer Apps” don’t work as well as in other markets
• Simplify
• Streamline (on-ramping)
• Just-in-time (reach people at decision point)
• Meet people where they’re at
– Facilitating, nudging much more effective than felt-change
• Diagnose and treat
• Be humble: we still have a lot to learn
– Mixed and limited evidence, especially outside the lab
– A premise of behavioral social science is that context matters
Developing Treatments:Design Principles
Jonathan Zinman
US Household Finance Initiative
Innovations for Poverty Action
www.poverty-action.org/ushouseholdfinance
www.dartmouth.edu/~jzinman/
Thank You!
Taxonomy of Behavioral Factors (see DellaVigna JEL)
DECISION
DECISION
Biases in preferences• Time-inconsistency• Loss aversion
Biases in expectations• Overconfidence• Over-optimism
Biases in price perceptions/valuation• Exponential growth bias• Anchoring
“Cross-cutting” biases/heuristics/ limitations:
Anchoring, Limited attention, Innumeracy
DECISIONPreferences
Biases/limitations in cognition that affect perceptions about how to maximize utility
subject to constraints(Affect other key parameters we might model:
expectations, prices, transaction costs…)
Alternate Taxonomy