Gould Scholastic Award - Julian Fung, Lasse Fuss

DST Robert L. Gould Scholastic Award 2015 - 2016

Solving the Millennials’ Savings Crisis with Integrated

Financial Technology

Julian Fung, [email protected], (872) 203-4854

Lasse Fuss, [email protected], (816) 872-0016

Truman State University

Charles Boughton

[email protected], (660) 785-4521

mailto:[email protected]




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Executive Summary

The mobile platform is emerging rapidly as a new distribution channel for information, as over

86% of Millennials today own a smartphone.1 Among recent college graduates, which represent 80

million people of the U.S. population, many are overspending and failing to save and invest. According

to EBRI, roughly 34% of Millennials have less than $1,000 in any type of savings. Wells Fargo surveyed

that only 55% of Millennials save for retirement, and they only set aside about 1% to 5% of their

income.2 These statistics are alarming and suggest that many Millennials are financially illiterate and fail

to save enough for retirement. Moreover, the Millennial market has proven difficult to reach, as many

Millennials are not financially educated and thus are not interested in wealth management. In addition,

wealth managers tend to focus on customers who have accumulated substantially more wealth than

Millennials to gain higher profits and thus overlook the Millennial market.

To tackle these two problems, we are developing an integrated financial advising app to solve

the Millennials’ saving crisis. Using a variety of latest technologies and behavioral science concepts, we

aim to (1) build financial literacy among recent graduates, (2) create long-term saving habits, and (3)

initially offer simple investments and financial planning through a robot-advising tool. Finally, (4) after

investors have accumulated sufficient financial resources and need more comprehensive financial

advice, they advance to a personal financial advisor. The solution will primarily target the mobile

segment due to its proliferation and ubiquity but also offer a web interface. This app will mainly be

marketed and distributed by wealth management firms. As the app gains traction, wealth management

firms will be able to acquire potentially wealthy long-term customers early on and save tremendously on

client acquisition costs in the future. Overall, our solution will provide a “seamless investment journey”

for Millennials, from making their first investment all the way to advancing to a personal financial

advisor to manage their increasingly complex financial affairs.

Besides benefitting Millennials, wealth management firms will also benefit from our revenue

model. First, wealth management firms gain operating profits from a percentage fee charged to

consumers, and second, from locking Millennials in early on, generating lucrative future payoffs once

they transition to personal advisors. Saving costs on customer acquisition and tapping into an

underserved segment will provide wealth management firms with great returns. This is a win-win

solution for both Millennials and wealth management firms.

1 “Mobile Millennials: Over 85% of Generation Y Owns Smartphones.” Nielsen.9Sep. 2014.Web. 4 Nov. 2015. 2 Elliot, Megan. “7 Retirement Facts All Young People Need to Know.” Retirement Cheatsheet.10 May 2015. Web. 4 Nov. 2015.


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The Problem: Millennials fail to save and invest

Many recent graduates are overspending and failing to save and invest. Retirement planning

does not even cross their minds. They have relatively high wages and disposable income but do not

know what to do with it. This is concerning as recent graduates represent the 80 million Millennial

generation, which is a quarter of the United States population. Millennials are currently the only

generation that has a negative savings rate of 2%, while older age groups have significantly higher,

positive savings rates ranging from 3% to 13%.3 Millennials are not only failing to save, they are burning

through their assets and going into debt quickly. Recently, a study by the American Institute of CPAs

showed that more than a quarter of Millennials had missed a bill or been contacted by creditors due to

late payment.4 These statistics reveal that many Millennials do not understand simple financial concepts

such as the time value of money and compounding interest, and thus do not start investing early.

On the other hand, wealth management firms are having trouble tapping into this potentially

lucrative market. George Tamer, director of strategic advisor relationship for TD Ameritrade, said

“advisors tend to go where the money already is.” However, recent graduates tend to become lucrative

clients in the near future. Douglas Boneparth, COO of Life and Wealth Planning, says that “a lot of the

[recent graduates] I work with are going to be superstars. It’s not about their assets today; that will

come with time, but they need help now.”5 Additionally, of the potentially wealthy Millennials – those

who have less than $500,000 to invest but earn over $150,000, only 33% have a financial advisor. This

shows the tremendous potential in this market, but wealth management firms have trouble reaching it.

In short, the problem is two-fold: Millennials are not saving enough for retirement, and wealth

management firms are having trouble providing services to Millennials. Therefore, our app attempts to

bridge the inaccessibility of financial advising among Millennials and provide effective means for

financial advisors to tap into this lucrative market.

The solution: an integrated financial advising app

To solve the Millennials’ savings crisis, we are developing an integrated financial advising app

targeted at Millennials, in particular at recent college graduates. The app leverages latest technologies

3Zumbrun, Josh. “Younger Generation Faces a Savings Deficit.” Wall Street Journal.9 Nov. 2014. Web. 26 Oct. 2015. 4 Farrington, Robert. “Failure to Follow Up: The Sad Truth About Millennial Financial Literacy.” Forbes. 8 Jan. 2015. Web. 26 Oct. 2015. 5O’Brien, Sarah. “Millennial millionaires-to-be neglected by advisors:Study.” CNBC. 29 Jan. 2015. Web. 26 Oct. 2015.


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and advances in behavioral science to offer a “seamless investment journey” that: (1) builds financial

literacy, (2) creates long-term saving habits, and (3) initially offers simple investments and financial

planning through a robot-advising tool. Finally, (4) once investors have accumulated sufficient financial

resources and need more comprehensive financial advice, they advance to a personal financial advisor.

Overall, our app provides a smooth and integrated investment journey, leading recent graduates from

their first investments to a personal advisor. The app will be branded by individual wealth management

firms that desire to tap into the Millennial market; these firms are our clients and will also be

responsible for promoting and distributing the app.

Building financial literacy

One of the precipitating factors in the Millennials’ saving crisis is their lack of financial literacy.6

Besides economics and business majors, few graduates know about important financial principles that

apply to everyday life, including present and future value of money, compound interest, and budgeting.

Thus, we aim to educate Millennials about these principles and the importance of investing early on.

Our app will be primarily designed for mobile devices following the growing effectiveness and

popularity of mobile learning. A report by the Nielson Company in Q2 2014 stated that 85% of

Millennials aged 18-24 and 86% aged 25-34 own mobile devices, respectively.7 Research by Michaels &

Associated Learning Solutions showed that “99% of mobile learners believed the format and

presentation enhanced their learning [and] 75% of mobile learners praised [its] convenience and time

management benefits.”8

Financial literacy apps are not a novel concept; however, our review of such apps revealed that

they are typically offered as standalone products and thus fail to be integrated into a holistic investment

journey. In addition, many apps only affect consumer behavior in the short term without lasting effects.

For example, Bank of America’s online app titled “Making Better Money Habits” offers a collection of 5

minute videos that provides useful information but fails to engage users over a longer time period. For

this reason, our app uses (1) best practices from mobile learning, (2) proven gamification concepts, and

(3) an intuitive user interface (UI) and engaging user experience (UX) informed by behavioral science to

offer an effective and lasting learning experience.

6McGee, Suzanne. A warning to millennials: it's already time to start saving for retirement. The Guardian, 10 Sep. 2015. Web. 21 Oct 2015. 7Mobile Millennials: Over 85% of generation Y owns Smartphones. The Nielsen Company. 5 Sep. 2014. Web. 15 Oct.

2015. 8Why Consider M-Learning. Michaels & Associated Learning Solutions. n.d. Web. 14 Oct. 2015.


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Best practices in mobile learning

Mobile learning capitalizes on one of the most important learning techniques: spaced learning.

Research has shown that studying a concept over multiple time periods is more effective than studying

repeatedly at one time, especially when it comes to long term retention.9 As shown in Appendix A,

spaced learning interrupts the ‘forgetting curve’ by constantly refreshing materials and thus decreasing

the aggregate slope of the curve.10 Spaced learning does not only apply to mobile learning but is

particularly suitable for mobile devices due to the ubiquity of smartphones which allows users to study

whenever they have free time.

The mobile learning section of the app also incorporates best educational practices as identified

by the University of North Carolina at Charlotte.11 For example, our app will include investment and

budgeting simulations that are momentarily real and help Millennials practice coping with stressful and

complex situations. Another highly effective learning technique is story telling – stories are intuitive,

interesting, and most importantly, memorable. Thus, our app will include videos and narrated stories

with examples of crucial financial concepts. Lastly, immediate mastery quizzes will also be added as they

test users’ progress and identify specific areas that need improvement.

Gamification of financial literacy

Gamification refers to “applying game mechanics and game design techniques to engage and

motivate people to achieve their goals.”12 Gamification appeals to the basic human desires of status,

achievement, and recognition, which is accomplished through earning badges or points, progressing to

the next level, and seeing oneself on the leaderboard. Many companies, such as Starbucks and Deloitte,

capitalize on this concept to incentivize and reward customer loyalty and increase engagement in their

training programs, respectively. Overall, gamification is a highly effective method to engage users and

thereby increase learning and retention. For these reasons, our app will be staged into several levels and

allow investors to collect points during mastery quizzes and games as explained in Appendix B.

UX and UI informed by behavioral science

9Peterson, L. R., Wampler, R., Kirkpatrick, M., & Saltzman, D. “Effect of spacing presentations on retention of a paired associate over short intervals.” Journal of Experimental Psychology. 66.2 (1963): 206-209. 10Branwen, Gwern. Spaced Repetition.gwern.net 24 Aug. 2015. Web. 24 Oct. 2015. 11Drummond, Tom. A Brief Summary of the Best Practices in College Teaching. UNC Charlotte.n.d. Web. 15 Oct 2015. 12 Burke, Brian. Gartner Redefines Gamification. Gartner. 4 Apr. 2014. Web. 24 Oct. 2015.


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An enjoyable user experience (UX) and intuitive user interface (UI) are crucial for the entire app,

but applies in particular to the financial literacy section. If people are bored or frustrated, they are

unlikely to continue the investment journey and may stop using the app. Since behavioral science helps

understand human decision-making and communication strategies, we are applying proven behavioral

science concepts to deliver an engaging UX and UI.

Screen real estate on mobile devices is precious since smartphones have much smaller displays

than desktop computers. This may tempt developers to pack the screen with information – which is not

advisable. A 2013 Bloomberg report states that, "gone are the days where function heavily outweighed

form."13 Today, people suffer from information overload, and deciding how to present information

requires careful consideration. Over the last 10 years, our attention spans have decreased from 12

minutes to 5 minutes. With that, our ability and desire to read lengthy explanations also decreased.14

Behavioral scientists identified cognitive ease and salience as remedies to information overload.

Cognitive ease refers to decreasing the amount of mental energy we have to expense by using an

intuitive, easy to understand, and simple design. Salience refers to the condition of being prominent and

standing out compared to the surrounding which ensures key information does not get lost. Thus, our UI

is built around cognitive ease and salience as further explained in Appendix C and D.15

Another equally important behavioral science concept is chunking which refers to breaking up

lengthy tasks into sub-goals. This dramatically increases motivation and completion rates.16Thus, the

educational, saving, and investing section of the app are chunked into clear stages. At the same time,

users need feedback on their progress. Feedback follows chunking, as accomplishing sub-goals boosts

motivation. Often, simple features such as progress bars accomplish this. Further evidence on the power

of chunking and feedback is explained in Appendix E. Our app will apply these findings from behavioral

science to deliver a simple and intuitive UI and enjoyable UX that encourages Millennials to start and

continue their investment journey.

Building saving habits with behavioral science

Many initiatives focus on building saving habits but often with mixed success. Lloyds Bank,

England’s 4th largest financial institution, started a program called ‘Save the Change’ in which debit card

13The UX Factor. Bloomberg. Feb. 2013. PDF file. 11 Oct. 2015. 14Hooton, Christopher. Our attention span is now less than that of a goldfish, Microsoft study finds. The Independent. 13 May 2015. Web. 21 Oct. 2015. 15Presentation of risk and return to consumers. Association of British Insurers. 2013. PDF file. 20 Sep. 2015. 16Bandura, Albert and Schunk, Dale H. "Cultivating competence, self-efficacy, and intrinsic interest through proximal self-motivation." Journal of Personality and Social Psychology, 41.3, 1981. 586-598.


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transactions are rounded up to nearest pound and the change is deposited in a dedicated savings

account.17 Similarly, the Acorn iPhone app links itself to credit or debit cards and rounds up everyday

purchases to the nearest dollar.18

Although such programs are beneficial, they deal with the symptoms of the Millennials’ saving

crisis and do not tap the roots of the problem. In order to change saving behavior, Millennials must (1)

understand the importance of saving and (2) actively decide to do so. Step one is accomplished through

the financial literacy section of this app while step two is cultivated naturally immediately after in the

investment journey. Users link the app to their bank accounts and credit cards while also receiving a

new savings and brokerage account with their dedicated wealth management firm, sponsoring the app.

The app then analyzes spending behavior and identifies credit card debt that has to be paid off – this is

the top priority.

In addition, the app urges users to make a commitment to pay off any debt and start saving

money for later stages in their lives. The first step of doing so is signing a commitment contract to save a

certain amount per month. Once people commit to an action, they feel obligated to stick to it since our

society ingrains in us that consistency and living up to commitments are essential personality traits.

Behavioral scientists refer to this as commitment bias – a powerful tool in behavior change as described

in Appendix E. The commitment bias is amplified by making a public commitment. Thus, our

commitment contract to save must be printed out and signed by two friends or family members.

Next, investors automate their saving by allowing the app to automatically transfer a certain

amount of money each month into the newly set-up high-interest savings account. By agreeing to save

automatically, investors only make a one-time decision instead of deciding each month how much to

save. Saving money becomes the new default behavior. Investors will also be asked to commit to

automatically increasing their payments after each pay raise. Programs like these have been shown to

be highly successful since they combat loss aversion.19 Behavioral finance reveals that people feel the

pain of losses much heavier than the pleasure of equivalent gains.20 However, since the increase in

savings rate is only a proportion of the pay raise, there is no decrease in discretionary income.

Moreover, the app also provides social comparisons to the investor’s peer group based on

location, age, job, and other variables. Seeing how much one saves in comparison to others motivates

17Save the Change®.Llyods Bank.n.d. Web. 16 Aug. 2015. 18Kadlec, Dan. This App May Let You Retire on Your Spare Change. TIME. 29. Aug. 2014. Web. 16. Sep. 2015. 19Benartzi, Shlomo, and Richard H. Thaler."Behavioral Economics and the Retirement Savings Crisis." Science 339 (2013): 1152-153. Web. 14 Oct. 2015. 20Longo, John M., and MiachelM.Pompian.The Future of Wealth Management: Incorporating Behavioral Finance into Your Practice. Dartmouth University, n.d. PDF file. 26 Sept. 2015.


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people to, first of all, follow social norms and, secondly, save more than others. This behavior is driven

by our innate desire to conform to social groups while still being individualists and ‘better’ than others.21

Chunking and feedback also help develop saving habits. Investors set specific saving goals and

break these goals into sub-goals. Writing down a goal by itself increases people’s motivation of following

through and creating sub-goals drives people even more.22 Investors will receive bi-weekly or monthly

feedback on their saving goals.

Lastly, the app leverages other behavioral science concepts including framing and visualization.

Based on research by UCLA behavioral scientist Hal Hershfield, our app shows investors computer-

generated images of how they would physically look at age 65, using the phones’ camera feature to

create a face marked by old age.23Seeing such an image leads people to visualize and worry about their

future self and thus significantly increases contributions to saving plans. In addition, Shane Frederik,

Professor of Marketing at Yale, has revealed that how we frame key information impacts our willingness

to save.24He found when changing the phrasing “in 17 years” to “when you are 52”, people were much

more willing to forgo money now for a higher future income. Thus, we pay close attention to how we

present information, using split testing to determine the best possible phrasing that builds sustainable

saving habits. Once users have made their first savings, they are ready to start investing.

Initial investments through robo-advisors

Due to the power of compound interest, it is crucial to start investing early on. However, most

recent graduates do not consider contacting a financial advisor. This is where robo-advising steps in to

play a major role. Over the past years, the robo-advising industry has grown tremendously because the

younger generations value its convenience and low cost.25 Thus, robo-advising can serve as a bridge for

recent graduates, allowing them to put their money to work inexpensively and with minimum effort

before they are ready for a personal financial advisor.

Our integrated financial advising app provides robo-advising. This service is similar to other

robo-advisors and offers passive index-tracking equity and fixed income exchange-traded funds (ETFs)

using portfolio optimization techniques based on Modern Portfolio Theory, the Black-Litterman model,

21Cialdini, Robert. Influence: Science and Practice, 5th ed. Boston: Pearson. 2008. 22Bandura, Albert and Schunk, Dale H. "Cultivating competence, self-efficacy, and intrinsic interest through proximal self-motivation." Journal of Personality and Social Psychology, 41.3, 1981. 586-598. 23Benartzi, Shlomo. Behavioral Finance in Action. Allianz Global Investors, Mar. 2011. PDF file. 26 October 2015. 24 Frederik, Shane. “Temporal References and Temporal Preferences” RAND Behavioral Finance Forum 2011. 25 Vincent, Gauthier. Robo-Advisors: Capitalizing on a growing opportunity. Deloitte. 2015. PDF file. 14 Oct. 2015.


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and Behavioral Asset Management.26 The software also automatically rebalances accounts using cash

inflows and dividends. At the same time, our robo-advisor helps investors create a simple financial plan.

Even though this plan is limited in scope, it allows for further development and encourages recent

graduates to think about their financial future.

However, our robo-advisor differs substantially from other services in terms of risk assessment.

Many robo-advisors solely rely on a few simple questions to gauge risk, which we consider

inappropriate. Risk tolerance is not fixed but malleable and is heavily influenced by our emotions,

environment, and mental biases. In the 2015 report on consumer understanding of financial

information, the Italian Securities and Exchange Commission stated that “risk perception is context-

dependent and mainly determined by the way financial information is disclosed.“27 Furthermore, many

people do not know how much risk they are comfortable with. Paul Slovic, psychologist at the University

of Oregon states, “no-one really has a fixed tolerance for risk.”28

Our app aims to overcome these limitations by adapting a “what-if” risk assessment strategy

similar to the start-up Riskalyze. Its founder Aaron Klein describes Riskalyze’s method of determining risk

tolerance: “Rather than ask[ing] you 50 questions about your income, your age, your kids, we ask you to

make 12 simple investing decisions using an amount of money that's meaningful to you. You're teaching

our algorithms when you're going to trade certainty for risk.”29 These questions prompt investors to

visualize how they will feel if certain events take place and then use their feelings about each scenario as

a determinant of risk tolerance. This follows Loewenstein et al.’s conclusion that risk may in fact be a

feeling and that the decision making process under uncertainty is not only based on a ‘rational’

assessment of the risk but also on the affective response.30 Thus, using a holistic consideration of risk

allows our robo-advisor to make portfolio allocation investors are most comfortable with.

Advancing to a personal advisor

Robo-advising is a simple and cost effective tool to get started with investing and making

rudimentary financial plans. It is particularly suitable when investors, such as recent graduates, have

little disposable money to invest. However, it is important to recognize the limitations of robo-advising.

26What Is a Robo-Advisor? FutureAdvisor. 23 Mar. 2015. Web. 21 Oct. 2015. 27Linciano, Nadia, et al. Financial disclosure, risk perception and investment choice. Evidence from consumer exercise.Italian Securities and Exchange Commission. May 2015. PDF file. 19 Sep. 2015. 28 Zweig, Jason. Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich.New York City: Simon & Schuster. 2008. Online. 29Vigeland, Tess. 'Riskalyze' before you invest. Marketplace. 6 Jan. 2012. Web. 11 Oct. 2015. 30 Lowenstein, George F., et al."Risk as Feelings." Psychological Bulletin.127.2 (2001). 267-286.


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Peoples’ lives become more complex and so do their financial plans that involve buying a house,

purchasing insurance, and saving for their kids’ education. Thus, after establishing long-term saving

habits and making first investments, young investors are encouraged to leave the app and advance to a

personal financial advisor to develop a more comprehensive financial plan and find optimal portfolio

allocations. This may happen after one to five years, depending on the individual’s financial aspirations.

Thanks to our app, wealth management firms can now easily tap into the Millennial market and

cater to their needs early on. At the same time, Millennials can start building saving and investing habits

earlier and capitalize on compound interest; a win-win scenario for wealth managers and Millennials.

Revenue Model

There are two sources of revenue: actual revenue from annual percentage fees charged to

customers quarterly and also ease of access to Millennials – a valuable and underserved market

segment with lucrative future wealth management needs. Our main revenue stream is the benefit of

locking Millennials in at an early stage, generating future payoffs once real financial advisors start

managing their portfolios and developing financial plans. The secondary revenue stream is an annual

percentage fee from 0.15% to 0.35% of the customers’ total assets based on several factors such as the

customers’ portfolios size, risk tolerance, and more.

The fixed costs for this solution are costs associated with algorithm development, behavioral

science and UX research, and operating expenses. With economies of scale, marginal costs are close to

zero as they only relate to data storage, CPU processing, and portfolio rebalancing. Essentially, our

solution enables wealth management firms to acquire potentially wealthy Millennials and familiarize

them with wealth management and financial planning early on. This acquisition strategy would be much

preferred to waiting for customers to come “of age” and reach certain financial stability and income

levels. Our projected income statement for 2020 is shown in Appendix G.

What is needed for this solution to become reality

The most important key to success are wealth management firms and their financial advisors.

Our product will be promoted and sold by wealth management firms that are interested in tapping into

the Millennial market. These firms are then responsible for marketing and distributing the product to

customers. Thus, the cooperation and efforts of wealth management firms are crucial in penetrating the

Millennial market and making this solution become reality. Second, we need software developers to


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develop the app and write efficient and effective robo-advising algorithms. Third, we need an

experienced financial analyst to advise the developer on the financial technicalities in building a

powerful robo-advisor. Lastly, we would need a behavioral scientist to optimize UX and UI, run split tests

on how to build savings habits, and gain a deeper understanding of Millennials’ behavior.

The biggest potential regulatory issue is the use of a robo-advisor. The SEC and FINRA

questioned the reliability of a robo-advisor and its limited capabilities compared to a personal advisor.31

However, our solution is a hybrid model with both personal and robo-advising features, and robo-

advising only plays a limited role in our solution, exposing new customers to investments and building a

habit to invest saved money. Thus, we currently do not foresee any major regulatory issues that

interfere with the implementation of the app.

Conclusion: A unique solution to two major problems

The problem that exists is two-fold. Millennials fail to save and invest for retirement and future

expenditures, often due to a lack of financially literacy. At the same, financial advisors struggle to

provide their services to the Millennial market. Our proposal is unique as it enables Millennials to

improve financial literacy and develop healthy saving and investing habits to achieve financially secure

retirements. In addition, our app allows financial advisors to reach a segment that was previously

difficult to serve and lock into potentially wealthy Millennials early on.

Fintech startups are widespread. Wealthfront provides robo-advising, LearnVest provides

customized financial plans and online classes, Mint provides alerts to payment deadlines, and Acorn

attempts to nurture saving habits. Although these firms provide solutions to problems Millennials have,

they are seemingly incomplete and detached from the larger goal of building a secure financial future

for Millennials. The thought of having to use five to six major services for financial planning and

investing is cumbersome. This proposal differentiates itself from existing technologies by (1) building

financial literacy, (2) creating long-term saving habits, (3) providing simple robo-advising services, and

(4) allowing young investors to advance to a personal financial advisor. Moreover, this proposal

leverages innovative and proven concepts from behavioral science, mobile compatibility, gamification,

best learning practices, and successful UX and UI models. In conclusion, our solution enables wealth

management firms to overcome the Millennials’ savings crisis and reach the lucrative Millennial market.

31 Waddell, Melanie. “SEC, FINRA Issues Robo-Advising Warning.” ThinkAdvisor. 11 May 2015. Web. 4 Nov. 2015.


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Attachments

Appendix A: Spaced learning and the ‘forgetting curve’32

Spaced learning interrupts the’ forgetting curve’ by constantly refreshing materials, thus decreasing the

aggregate slope of the curve.

Appendix B: Gamification

Our app can include an actual game such as ‘Bite club’, a simulation recommended by Brian

Page, Money magazine’s2011 "Money Hero". Players manage a day club for vampires and are

challenged by servicing debt, spending money, and saving money for the future as vampires live

forever.33Such a game allows users to earn points and compare themselves to others, which manifests

prior lessons on financial literacy.

32Branwen, Gwern. Spaced Repetition.gwern.net 24 Aug. 2015. Web. 24 Oct. 2015 33 Miller, Andrew. Games to Teach Financial Literacy. Edutopia. 12 Mar. 2013. Web. 29 Sep. 2015.


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Appendix C: Cognitive ease explained

Cognitive is often referred to as mental fluency, describing the ease with which people are able

to retrieve, process, and store information. A state of cognitive ease is associate with automatically and

intuitively processing information. An important and pioneering study on this concept was conducted by

psychologists Adam Alter and Daniel Oppenheimer, investing whether the degree of cognitive in

company names affected the likelihood of people investing in these stocks.34

The study consisted of three separate experiments and revealed that:

1) Potential investors expected stocks with easy to pronounce names have slightly higher

returns than stocks with more complex names.

2) IPOs with complex names had initially lower returns on the NYSE Stocks over the first days

of trading.

3) The complexity and pronunciation of ticker codes of affected returns on major US stock

exchanges. In the short term, pronounceable ticker codes (e.g. PEP) significantly

outperformed stocks with unpronounceable ticker codes (ESRX) with a return of 13.45%

compared to 9.67%.

The concept of cognitive ease and processing fluency is supported by numerous other studies.

Moreover, the Association of British Insurers commissioned a study on disclosing financial information

since a majority of people misunderstand the risk associated with financial assets.35 The study found

that clear and unambiguous language with immediate and clear layman’s explanations of any

unavoidable technical terminology promotes cognitive ease and helps people understand the associated

risk. Cognitive ease can also be accomplished by providing intuitive reading directions, introducing

navigational tools, and using visuals to break up the text and figures.

Both studies highlight the importance of considering cognitive ease when developing an

integrated investment application. Cognitive ease has a small, yet significant, impact on behavior and

can help create an intuitive user interface (UI) and engaging user experience (UX). For that reason, also

34Alter, A. L., and Oppenheimer, D. M. “Predicting short-term stock fluctuations by using processing fluency.”

Proceedings of the National Academy of Sciences, 103.24, 2006. 9369-72.

35Research into presentation of risk and return to consumers. Association of British Insurers. 2013. PDF file. 20 Sep. 2015.


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Blackboard, one of the major educational software developers, recommends keeping mobile learning

content short and concise, and quizzes simple.36

Appendix D: Salience explained

Laurent Itti, professor of computer science, psychology and neuroscience at the University of

Southern California, explains that “saliency typically arises from contrasts between items and their

neighborhood, such as a red dot surrounded by white dots, a flickering message indicator of an

answering machine, or a loud noise in an otherwise quiet environment.”37 As shown in the image below,

the red dot is more noticeable.38 Applied to our application, this means including attractive and relevant

visuals and having a clear contrast between text and background, which in turn reduces mental barriers:

salient messages receive our attention and are processed automatically and quickly.

Appendix E: Chunking and feedback explained

Chunking refers to breaking down daunting tasks into several smaller, more attainable chunks.

By creating such sub-goals, people are more motivated to complete the task. At the same time,

36Wilson, Emily. Best Practices for Mobile-Friendly Courses. 2011. Blackboard. PDF file. 10 Oct. 2015. 37Itti, Laurent. Visual saliency. Scholarpedia, 2007.Web. 23 Oct. 2015. 38Saliency, visual and otherwise. N.d. Web. 23. Oct. 2015.


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receiving feedback on these sub-goals encourages people to complete the task as they notice their

progress.

Early research on the importance of sub-goals was conducted by Stanford psychologist Albert

Bandura.39 In his experiment, some students were asked to set subgoals by completing at least 6 pages

of math problems in each session whereas another group was told to focus on the overall goal of

completing 42 pages by the end of 7 sessions. Those students who had set short-term sub goals

performed significantly better in a subsequent math exam with greater improvements between the pre

and post-test. This study supports that short-term sub goals provide immediate guides and incentives

for performance, act as instant progress markers, increase persistence, and harness the motivational of

power of goal setting.

Many other studies on goal attainment and self-regulation also provide evidence for chunking

and the power of feedback. Thus, we are applying these concepts to develop saving habits among

Millennials. Users will chunk their saving and investment goals while receiving frequent updates on their

progress.

Appendix F: Evidence on commitment bias

Commitment bias refers to people’s desire and tendency to be consistent with their previous

claims and actions.40 For this reason, commitment bias can be used in behavior change campaigns by

using commitment devices or commitment contracts with which people bind themselves to their goal

and facilitate its achievement.

Behavioral scientist and White House advisor Dean Karlan explains that commitment contracts

are "an arrangement entered into by an individual with the aim of helping fulfill a plan for future

behavior that would otherwise be difficult due to intra-personal conflict stemming, for example, from a

lack of self-control."41 Similarly, the commitment contract in our app helps Millennials invest their

money without falling for temptations to spend it.

One study exemplified the power of commitment bias by asking Iowa households to decrease

energy consumptions. Homeowners who made a public commitment to reduce energy by agreeing to

have their name published as “public-spirited, energy-conserving” citizen in a local newspaper felt

39Bandura, Albert and Schunk, Dale H. "Cultivating competence, self-efficacy, and intrinsic interest through proximal self-motivation." Journal of Personality and Social Psychology, 41.3, 1981. 586-598. 40Hollingworth, Crawford. Bias in the spotlight: commitment bias. Research life. 22 Sep. 2015. Web. 21 Oct. 2015. 41Ibid.


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driven to fulfill the commitment. These homeowners decreased their energy consumption by an average

of 12.2% after one month. In contrast, the control group which received simple tips to use less energy

did not reduce energy consumption.42

Appendix G: Income statement projections for 2020(only)

This appendix shows an income statement for solely the year 2020. At this point, we will have

been operating for a few years already. Startup costs such as algorithm development and research and

development would have been incurred and paid off over the previous years.

We make several conservative and reasonable assumptions, such as the total clients, revenue

solely from percentage fees, and costs. For total clients, we assume to have reached 1% of the Millennial

market by 2020. In addition, we assume that the average investment of a robo-advisor client is $7,000

and the average investment of a personal advisor client is $150,000. Fixed costs per annum is estimated

to be about $3 million, and variable costs are estimated to be around $20 for a robo-advisor client and

$50 and a fraction of the financial advisor’s salary for a personal advisor client. We estimated a financial

advisor to have an annual income of $70,000 and an average of 100 clients.

Our forecasted net income is $37.5 mil, which is extremely lucrative. Furthermore, this net

income forecast does not take into account the saved costs and value gained from reduced acquisition

costs, as this is very discretionary and hard to value.

Formula Calculations

Clients:

# TOTAL CLIENTS Est. 1% of 80 million Millennials(by 2020) 8mil(.1) = 800k

# Robo-advisor clients Est. 95% of # total clients 800k(.95) = 760k

# Personal advisor clients Est. 5% of # total clients 800k(.05) = 40k

Revenue:

Revenue: Robo-clients (# Robo-advisor clients)(Est. avg. investment of 7k/client)(0.3% fee)

760k($7k)(.003) = $15.96mil

Revenue: Personal-advisor clients

(# Personal-advisor clients)(Est. avg. investment of 100k/client)(1.5% fee)

40k($150k)(.015) = $90mil

Total Revenue Robo-clients + Personal-clients revenue $15.96mil + $90mil = $105.96mil

Costs:

42Pallak, M.S. et Al. "Commitment and Energy Conservation." Applied Social Psychology Annual. 1980. 235-253.


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Fixed costs Algorithm maintenance & updates + marketing expenses

$1mil + $2mil = $3mil

Variable costs(robo-clients) (# robo-clients)(rebalancing + data storage + CPU processing + distribution)

760k($20) = $15.2mil

Variable costs(personal advisor clients)

(# personal advisor clients)[(Avg advisor salary/est. # clients per advisor) + data storage + CPU processing + distribution]

40K[($70K/100) + $50) = $30mil

Total Costs Fixed costs + Variable costs A + Variable costs B

$3mil + $15.2mil + $30mil = 48.2mil

Income statement 2020 (in millions): Revenue $ 105.960 Costs $ 48.200

EBT $ 57.760 Tax(est. 35%) $ 20.216

Net Income $ 37.544


17

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