Getting from “R” to “D”: Cutting Edge Research for Product & Market Development
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Transcript of Getting from “R” to “D”: Cutting Edge Research for Product & Market Development
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Getting from “R” to “D”:Cutting Edge Research for
Product & Market Development
Jonathan ZinmanDepartment of Economics
Dartmouth CollegeSeptember 20, 2007
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Where’s the “I”Going to Come From?
• Academic research as source of inspiration– Substantive innovation
• Academic research as a discipline– Process innovation
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My Perspective/Approach
“R”: scientific standard
• Robust
• General
• Learn something about the “whys” of consumer behavior
“D”: double bottom line standard
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My Perspective/Approach
• Economic research at the intersection of economics/psychology/decision sciences
• Beyond Ec 101– Not homo economicus– More like homo anomalous– But basic models still powerful
• Challenge is to integrate the right sort of realism with the general– Economic methods still powerful
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Plan for Today
I. Innovation from research • Lessons from “behavioral retail finance”, and
how they’ve been applied. • Examples of taking R to D• Stuff you can grab off-the-shelf
II. Innovation through research• GYO: organic innovation• Done strategically, systematically,
scientifically
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Big Substantive Takeaway
• Design matters for consumer decision making
• There is no “neutral” architecture– Baggage carousel example– Think about analogies in your customer
environment
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Design Matters
• The environment, context you create (or neglect) is going to affect (potential) member decisions– Shaping/nudging vs. teaching– “Libertarian Paternalism” (Sunstein & Thaler)
• Must engage design: no benign neglect
• Academic research is a source of inspiration/guidance
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Design Matters:Product Presentation Example #1
• “R”: defaults have huge effects on behavior– 401k: Are you opted out or opted in?– Opting in has huge effects on participation– Default portfolio “sticks”
• “D”– Firms that want to increase participation
change default to opt-in– Policy changes now too
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New “D” on Defaults
• How do I change the default?– To promote saving?– To encourage enrollment?– To encourage financial planning?
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Design Matters:Product Presentation Example #2
• “R”: Advertising content can have huge effects– Large relative to price in our work– No “neutral” direct mailer– But hard to predict ex-ante what types of
content spur demand
• “D”: theorize, test, refine, retest– Direct mail discipline– What the leading FIs do
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Design Matters:Product Presentation Example #3
• “R”: choice overload– Not just about target marketing– Also that too much choice demotivates
• “D”: tailor menus, limit choices– How strike the right balance? Test.– But err on side of few choices
• E.g., in our research 1 did much better than 4
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2 more speculative examples
• “R” is there
• Just starting to test some “D’s”
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Design Matters:Product Presentation Example #4
• “R”: people systematically underestimate the cost of intertemporal tradeoffs– These are biases in perceptions of costs and
benefits, not biases in preferences or expectations
– People underestimate interest rate on short-term installment debt when shown monthly payments
– People underestimate future values from saving (compounding problem)
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Design Matters:Biased Cost/Benefit Perceptions
• “D”?? (speculative here)– Make future values vivid (don’t lean on annual
yields, particularly for long-term products)– Credit disclosures matter
• Steal customers by “debiasing” those duped by competing lenders
– Your new savings customers might be borrowing now
• With the right pitch, will they switch?
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Design Matters:Product Presentation Example #5
• “R”: people are inattentive, procrastinate, impulsive– They end up regretting their financial
decisions and worrying they don’t save enough
• “D”: make it easy– Impulse saving?– Fine line with product development…– Other ways of changing front end…
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Design Matters:Product Development Example #1
• “R”: limited attention to saving
• “D”: make it easy– “Keep the change”– Mortgage saving
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Design Matters:Product Development Example #2
• “R”: saving requires commitment that’s in short supply.– Easier to spend/borrow than save
• “D”: provide products with commitment– SMART– SEED– Customized spending/borrowing limits
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Design Matters:Product Development Example #3
• “R”: commitment/self-control problems more generally:– Weight– Exercise– Smoking– Calling grandma
• “D”: commitment contracts– Templates designed & enforced by 3rd-party– “Bet on yourself”
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Recap
So far:
I. Research (and applications) you can grab off the shelf
Now:
II. Doing your own “R”. Real research you can bank.
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What is “R”?
• Systematic experimentation• Identify something you think will work based on
theory, practice, market research• Test it
– Can build in features that will reveal why it works (or doesn’t)
• Gold-standard testing: Randomized-control trials– Think “treatment” & “placebo” for financial decision-
making• Refine it• Retest
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That Sounds Like a Lot of Work
• Actually not in direct mail especially; other direct marketing
• But yes in other spaces:– Product presentation in-branch– Product development
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Should I Do It?
• Payoffs over years, not quarters
• Benefits to learning why things work and don’t are even longer-term– Doing right by your customers may only pay
off over long haul– Is doing right by my customers a source of
comparative advantage
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Is R to D for me?
Key question:
Does R to D create comparative advantage?
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Is R to D a Sourceof Comparative Advantage?
• My half-baked assessment is that answer is “yes” for many CUs
• Large CUs vs. other large FIs– Longer horizon (less quarterly pressure)?– More of a double bottom line?– If yes then testing whether and why
innovations work should pay off
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R to D andComparative Advantage
• Small/mid CUs vs. community banks– Scale matters for this type of process (the
tyranny of sample size)– CUs better at cooperating to reach scale?
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Why Not Just GrabOff the Shelf?
• First-mover advantage
• Context can matter– What works over there might not work over
here– “R” just starting to get a handle on when and
why context is critical
• Process and productivity transformation…
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Experimentation is its Own Reward
• It’s a process innovation
• Use to cultivate a learning organization– Lever for leveraging better use of existing
information, resources– Increase productivity, morale– Discovery is fun and rewarding