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
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