2018 Conference

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Cultural Change: Leveraging Behavioral Economics to Make Your Bank More Successful

Presented By:

Kristen Berman – Common Cents Lab & Irrational Labs

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Have you ever wondered why your coworker made that completely irrational choice? Turns out, a lot of human behavior isn’t as rational as we tend to believe.

In this session, Kristen Berman, Co-founder of Common Cents Lab and Irrational Labs, shares why we act irrationally and how your bank can use insights from human behavior to improve its business. She'll bring real life examples from a variety of companies who’ve used behavioral economics in an innovative way and you’ll walk away with information you can use at your bank AND in your personal life.


Kristen Berman:    I hope today we're going to talk about … we're going to talk about some insights on human behavior. That goal is that you not only learn about these for your customers, but also get to take something home and learn about it for your personal life. But before we do this … There we go. We're going to talk about me. When I got into … or after college … I went to University of Wisconsin-Madison. Any badgers out there? There's nobody from the Midwest here. Great. Okay. So … thank you.

So after college, you have this massive decision on your hand of what do you do? It's a big decision. Probably the biggest one you can make in your career as kind of a young undergraduate is what you do afterwards. And so I had an offer from a consulting group in Chicago. And I had a competing offer from Intuit. And this was … I'm pointing to Catherine. Catherine and I worked together at Intuit. And actually, I just gave away the story. Thank you, Catherine.

But let's talk about how one would make this decision. And so how would you make a decision about where you work after school? What goes into a decision like this? And this is going to, by the way, be participatory, so I'm just going to be awkward and let the silence go, and we'll practice.

Speaker 1:    Pay

Kristen Berman:    Pay. Okay, great. Anything else?

Speaker 2:    Is it cool?

Kristen Berman:    It is cool? Wonderful. 

Speaker 3:    Location.

Kristen Berman:    Location. Who I'm working for. Great. And so basically, you guys are kind of getting some of these questions. If you think about your job after college, you'd think about things like location, commute. So Intuit is actually an hour, now an hour with traffic, from San Francisco where I would live. And we know … What do we know about commute? It makes us less happy, right? And so that's one factor.

Another factor is lifestyle. So in San Francisco, we talk about things like blockchain and crypto. In Wisconsin, when I was there, it was mostly cheese curds … cheese curds and dodge ball.

And another factor, as a young woman, I'm going to a new city. What are the mating possibilities like? I have to think about my future in this way. And you compare Chicago and San Francisco. And in Chicago, it was more females, and in San Francisco, there were more males. So San Francisco should've won. I later realized and found out that most of them are engineers. This doesn't count. 

And so all of these factors should've contributed to my happiness. How did I actually make this decision? You're bankers in this room. You got it right the first time: pay. Right? So Intuit was paying me $9,000 more to go there. Now from an undergrad's perspective, I was like, "That's a lot of money. It's more. I should do this." Now when I moved to San Francisco, what I didn't realize: the cost of living. Insane. 100% more for rent. 78% more for bread. Avocado toast. Does anybody know how much avocado toast is right now? Anyone?

Speaker 4:    What is avocado toast?

Kristen Berman:    You have not lived until you've had avocado toast. Avocado toast is $9. $9 for putting avocado on toast in San

Francisco. So there's no way that $9,000 would've covered this cost of living. But I did something called the money illusion, which is just X versus X plus 9. Even though I had all of these other factors, I had all of this information that I could've used to make this massive, large decision in my life, I just used one heuristic. And even that heuristic of, "Where am I getting paid more? Who's paying me more," was incorrect.

Okay. So that's my personal story. Let's go to actually some research on how housing decisions are made. So George Loewenstein and Uri Simonsohn looked at basically people moving from different areas of the country to Pittsburgh, Pennsylvania. And they said what determines the type of house that these folks would buy? And so the question is, how would you think about purchasing a house when you're moving to a new city? You could buy something small or large. How would anybody think about this decision? Anyone? This is, again, participatory. Huh?

Speaker 5:    What can you afford?

Kristen Berman:    What can you afford?

Speaker 6:    How long are you going to be here?

Kristen Berman:    How long you're going to be there. Nice. 

Speaker 7:    Size of family.

Kristen Berman:    Size of family.

Speaker 8:    Location.

Kristen Berman:    Location.

Speaker 9:    Taxes.

Kristen Berman:    Taxes.

Speaker 10:    Schools.

Kristen Berman:    Schools. Great one. Not that all of yours weren't great. It's just especially wonderful. Okay. So again, all … You're correct. These are the factors that should go into decision-making. By the way, I just went secret shopping with some real estate agents. I'm not looking to buy a house, but I wanted to see how real estate agents present houses. And if they were answering this question, they would tell you, "Granite countertops." There are four different types of countertops, and you have to decide. And it seems like this is the most important decision that you should make to decide your new home.

But what actually determines decision-making … And they controlled for income. So the folks who were moving from these two different cities have the same ability to afford a house. What determined this was where they moving from. So if they were moving from San Francisco, a high-cost city, to a lower-cost city, they bought a large house. They felt rich. If they were moving from a lower-cost city, like Alabama, to a higher-cost city like Pittsburgh, they bought a smaller house. They felt poor. So while we had all of these factors of decision-making to go into, again, what is going to be the biggest purchase that people make, except kids. If you have kids, you know that's probably a bigger purchase. But the biggest purchase, we have all of these decisions to do. And what do we do? We just look at what the cost of our house was in the last city we moved from, right?

And they know this because then they looked at people who just rented. And after a year, the people who bought a big house, moved to a smaller house. And the people who had a smaller house moved to a bigger house. So we can correct our decision-making, but at the point of making a decision, we throw out the window all the things that we know in favor of some simple, and sometimes wrong, heuristics. So what this basically implies, from my personal story to this, is that basically, society kind of treats us like we're Spock. So we should maybe look at taxes to make these big decisions, but the reality is we're actually looking at other decisions in our environment. We should think about the time, and utility, and how much … or how long the commute is. But we're using other heuristics in order to make decisions.

And you're treating … And I'll say this: bankers tend to treat, lenders tend to treat customers as if they are Spock, as if they will take in all of the inputs and then make the perfect decision. And behavioral science suggests this is just not the case. I'll give you a few more examples. So there was a campaign started in 1991, 5 A Day. This is basically trying to sell fruits and veggies to the American public. So we are now 70% overweight and obese. We are a large country. And we were a little bit less large back then, but still large. And so America was like, "Let's … " A US organization, or government organization was like, "Let's promote fruits and veggies." And they went wild with this campaign.

Anyone remember it? We usually have a few folks … yep … who remember this five fruits a day campaign. So do we think that it worked? It actually was remarkably successful in driving awareness. So people remember it. So you went from basically not knowing that you should eat five fruits and veggies a day to knowing that you should eat five fruits and veggies a day. This 7% to 20% campaign is a wildly successful if you've … or marketing campaign, right? And the question is, did it change behavior? There was absolutely no change in behavior, in consumption throughout this full period. Right? Because just telling somebody that they should eat a tomato, or that they should eat lettuce, or that they should eat beets does not translate into them actually walking into a store, purchasing it, and then knowing what to do when they get it home.

I was actually at Walmart. I was buying beets, and the cashier was like, "What are those?" Right? So just knowing what to … about this concept of five fruits and veggies does not actually get us over the real barriers of consumption. So this is … now, we're going to bring it home for you guys. So the government … and I don't know the recent numbers. But in … or the recent budget that was just out. But it spent 670 million on financial literacy. So again, just like folks in the US are obese, we actually have a problem with financial knowledge and literacy in the US. A majority of Americans, actually over a majority can't answer basic financial literacy questions. And so, the government's trying to spend some money in order to help with this.

Given what I've just mentioned, how much do we think this changes behavior? This is … yeah. Okay. You're getting there. We're getting close to engagement. We're close. At the end, we'll get past the barriers. So 0.1% behavior change. So what does this mean? So it basically means that if I teach you about FICO and what you need to do to improve your credit score, do you actually do something to improve your credit score? If I teach you that savings is important, do you actually open a savings account and start savings? So this does not say that teaching people is a waste of time. It says they can increase their knowledge that, "Yes. I understand what a FICO score is." But when they know what a FICO score is, it doesn't translate into behavior change.

And so [John Lynch 00:09:16] and [Vanna Fernandez 00:09:17] summed up 188 of these studies. So we always say, when we're talking to financial literacy teachers, and we do a lot. We say it's very likely that you could probably be the 189th that works, but if you were to place your bets on anywhere, we'd probably place them somewhere else.

Same thing with calories. So the government also just has now regulated that small businesses, small shops put up calorie counts. So if you walk into a McDonald's, pretty soon you will see a calorie count on everything if you have not already. In New York and some other places, they're early to roll it out. And what this does is basically teach people how many calories are in the muffin. And it teaches people how many calories are in the Big Mac. And sadly, calorie labels also don't work. 

So just teaching people this information does not have any kind of correspondence to what they do differently. And you can kind of think this. If you're walking into a McDonald's and you see the calories are high, is this a surprise? No. You're in McDonald's. It's a Big Mac. It's not like you expected to go into a health food place, right? And so we have think about behavior changes as more than just telling people information.

And yet, we tend to rely on information, right? How many of us want to lose weight? We know how to lose weight. How many of us want to spend a little bit less or get rich? We know how to do all these things. And yet, personally, we know that those are still barriers to us taking action. We know that we shouldn't text and drive. It's not like we're trying to kill the person next to us. And yet, we consistently text and drive. I actually heard a very scary stat that around 40% of drivers are texting. And if you're on the road for more than an hour, it's close to four minutes. 

So we know that this is bad, and yet, it's … that does not translate to action. Okay. So now we're … this is very depressing. And we spent about ten minutes depressing you, and now we're going to talk about what actually does change behavior. This is when I leave. Somebody else … you'll come up. Right?

Okay. So this is a famous chart in behavioral science. This is organ donation rates by country. And on the right, for you guys, is the rate of organ donation for countries that are very high. They've chosen to donate their organs. And on the left are the rate for the countries who have chosen not to donate their organs. And so what is the difference? Are the people on the left just mean people? They don't want to help their fellow neighbor? Are the people on the right just very altruistic? They believe in helping their fellow man? Maybe the people on the left don't even like doctors. They think they're going to kill them.

If you know this chart, you know that's actually not the answer. What's changed here is the form. So in one case, on the people on the left, the form was, "Check this box if you want to participate." And the people on the right, the form was, "Check this box if you don't want to participate." Instead of being different, actually everybody is the same. Everybody chooses the same thing. And what is that? To do nothing. Right? So we're taking the path … what we're going to call the path of least resistance here. The path of least resistance suggests that it's not that we're so lazy that we can't pick up the pen. And maybe sometimes it is, but this is actually a very complex decision. 

It's a very complex decision what to do after life. You probably should've thought about it. But at this moment, you're going to take the path of least resistance, which is just following the default. Somebody else has thought about it. And you'll just follow the path of least resistance and do nothing. It doesn't mean that we're cognitively lazy. It just means that at this time, we have a lot of overwhelming decisions, and you'll follow the path of least resistance when able. 

Another example. This is one of my favorite charts. So in the 401K, or in the retirement space, we basically have gone from defined benefit to defined contribution. With that means is that in the … basically people can opt into a 401K. And in the early days, that's what it was. Everybody was offered the ability to opt in. And the top gray line says that 40% of people … It's actually between 40 … This is one example. But it's usually between 40 and 60% of people, when given the option to opt into retirement savings, opt in. And the bottom on is this opt-out enrollment. When you're automatically enrolled and you don't have to do anything, close to 90%, sometimes over, actually are saving for retirement. Now again, the question is, are the people in the top gray box, they just don't want a retirement? Do they not want margaritas on the beach or to sit with their kids on the porch? Do they want to work longer?

By the way, the people … The difference in people who they're ready and not is around seven years of extra work. So do these folks just make that decision consciously, say, "You know what? I would like to work longer in old age?" No. It's the form, right? It's the form that changes people's minds here. It's everybody is taking the path of least resistance. We sometimes joke that if you're … if you have … how many folks have kids? What do you want them to be when they grow up, other than a banker, lender?

We would propose form designers, that is a form designer who has the most power in our world, right? The form designer, whoever HR manager decided this form, is the person that's controlling our retirement. We didn't elect them, but they're still designing the form in order to control our retirement. The nice actually story on retirement savings is when this was launched and matches were launched for employers, there was some very small text at the bottom that said you could match … For example, you could give a 3% match. This was by some legal person supporting the bill. And they just said, "Let's give an example." And they chose 3%. And what is now the most popular number to match? 3%. Right?

So when we're faced with complex decisions, even very important ones, we look around our environment for cues, and then we take the path of least resistance. Here's another chart, basically savings enrollment. It looks like the one I just showed you, which is around 60% for an opt-in. Where people have to take an action, you get around 60% of people. When people don't have to take an action, in this one, you get close to 100% of folks. The only difference with this chart is that there are two lines on the top. And when you offer the two lines of default at 3% or 6%, everybody says yes. And again, the reflection is not that the people who are 6% are just so smart, and they know what to do. They understand financial literacy. They get it. And the 3% folks just are kind of lackadaisical about savings. No. Everybody took the path of least resistance. And sadly, right … this a tenure for 42 months … we don't change it. So we're very stuck in our status quo. It's not like we wake up one day and say, "3% is too little. Let me go change it."

Kristen Berman:    … 3% is too little, let me go change it. We're taking the path of least resistance, and the question really is then what happens when there's not a path of least resistance? What happens when … Actually in Switzerland they are very happy, they're a very happy country. They decided to basically try to improve the lives of their citizens and they increased the number of health insurance options out there. Instead of a small amount, they said "Let's actually increase it and we'll have big marketing campaigns to tell people about all of the plans. We'll tell people about the transparency, what they get, the price, we'll send out mailers, we'll make sure everybody knows what is on the table so that people can make the best decision for them."

Imagine that you're a person in Switzerland right now and you have a heath insurance plan and you've just increased the options for them. Does your life get easier or harder? The life gets harder. All of a sudden now they have to make a large decision, they have to compare a lot of options, and they have to decide which is best for them. What do we think happen to the folks in Switzerland when they were faced with all of these options, very transparent pricing options and delivery options? Anyone? They went skiing, yeah. Exactly. They didn't do anything. The switching went down. They opted to go skiing, I like that, that's very nice. They opted to go skiing and not make a decision on healthcare.

This is the same thing that happens in our retirement space as well. The number of plans that you offer people, if it's over 10, then switching goes down. But not only the switching go down for new people and new hires, people actually opt not to do anything. When were faced with complex decisions, we just make this decision to take the path of least resistance, and many times that's not taking an action. We've talked a lot about big decisions, let's focus on a very small one. We worked with a company on … they had a lot of technical support request coming in, and this was the form, it wasn't defaulted to high, that's just a screenshot. But there were two options, one was high urgency and one was a normal urgency.

In this case, the path of least resistance is equal. You could click one or the other. There's no difference between priority and normal. They we're upset that more people were choosing priority. They were upset that more people were choosing a very urgent request. If you're designing the path of least resistance, any ideas on what you should do here?

Speaker 11:    [inaudible 00:18:37].

Kristen Berman:    Yeah. Any other ideas? If you really didn't want them to do anything, we just added one question. But you can imagine a series of 10 questions, maybe you have references about their character that they have to put in. As soon as you make things harder, less people do them. We take the path of least resistance. In this case, it was just one checkbox that people had to say yes, I agree, and 24% reduction in the number of urgent cases. We've talked about these big decisions, it being complex, but we can also have a lot … we'll follow the path of least resistance for small decisions as well.

Okay, now it's going to get personal. A question we want to ask is why don't Americans save? How many of you, I know we have a mix of lenders and folks at a bank, how many of you are at a bank and think about the end user saving experience when they log in? A few? What else do you guys do? Anyone want to shout out where are their role at a bank? Where are their role?

Speaker 12:    I'm a tech person. I'm a tech person.

Kristen Berman:    Tech person, okay. I would argue that basically all of you guys are front-end people at some level, that basically at same level you're designing the systems that support your customer that pay your bills. While we're thinking you may not be directly in charge of the form, you're actually supporting those decisions with either the operations that make it easy or hard to design that form in order for people to make decisions. The questions of why Americans don't save? All we have to do is basically look at some of the front-ends of banks.

If you were to go into any bank and you'd want to say set up an automatic transfer, it's a lot of clicks. At Bank of America, Charles, Chase, all these are multiple clicks in order to set up an automatic transfer. What have we learned about clicks? Any decisions counts. We say we're going to add clicks, less people will do it. If you're going to set up an automatic transfer, what are you faced with? An empty box. An empty box is like the worst thing you could do to humans. Never give them an empty box. We actually did an experiment in a large company, we just took out the first question, it was like a what do you do? Imagine a small business describing something, what do you do? This should be so obvious to people, there is no ambiguity here.

How could people not know this answer? We took it out, and increased page over page conversion by 40%. People don't do well with this openness. We're going to say how much do you want to save? It's a very tough decision. In order to figure out, you'd have to know what your goal is, how much it costs to get that goal, when you want to reach it, and then divide those two things to know how much you should save per month. Not only we're talking logistical freedom of typing something in, but also psychological complexity with making this decision. 

Then, kind of the kicker is that banks and credit unions [inaudible 00:21:51] are asking us to set up an automatic transfer date at a random date, makes some sense, but majority of Americans are living paycheck to paycheck. There's 40% who [inaudible 00:22:03] some income volatility. This idea of just picking a day seemingly very easy and not complex is actually very, very difficult. You have to figure out exactly when you're going to have money in a consistent basis every day of the month. If you don't know that, or you get it wrong, what happens? Is that you get an overdraft fee. So not only is it a complex decision, but there's high risk for getting it wrong.

When we're faced with these things, what do we do? We do nothing. No wonder that American savings rate is so poor. We haven't made it easy for us to save. We just try to … If we were designing this, we'd basically say, if you're already an existing member, and you don't have something set up, we'd make it one click and very obvious big button for you to know what to do. We'd basically make sure that you knew that we were only going to take money at the time that you had money. Reduce all kinds of uncertainty with "If I have money in the account." They would just time it with their deposits. 

We'd ask people what they want to save for. Turns out that actually if you're saving for multiple goals, you save less in aggregate. It's important to have a priority-based system where you just pick one thing that you're doing. Now that we know what they'd be saving, we make some kinds of recommendations and say "Seems like you should save $1000, do you agree?" So we'd kill the empty text box, and replace it with some very clear options. Then we'd help them basically figure out how long it's going to take to get there. By the way, the other clever thing about this is it's a percentage. If you think about any kind of automatic deduction, what does this mean is that if you don't have money, they're still going to take $50 from you.

If it's a percentage and it's timed with your deposits, now all of a sudden there's no risk. By the way, people also don't understand percentages, so this is kind of this idea that you basically can say "Yes, it may be $10 or it may be $30, but at least I know I'm not going to overdraft." We give them some clues to when they're going to meet their goal. We can think about these kinds of situations where you're trying to get somebody to do anything and you can map out the path of least resistance and really understand why people aren't doing it. As soon as you do that, every screen, every decision, every click becomes important.

Let's do another one. We worked with Latino Credit Union in Durham, and asked the question of how would we help people who are coming in to cash checks save a little bit of money? What's the path of least resistance for cashing a check?

Speaker 13:    Mobile.

Kristen Berman:    Mobile. Let's say that they're coming to the teller, we had basically a blank canvas of the retail location. But, yes. The path of least resistance here is to walk up to the teller, give them your check, and then they give you money. This is how it happens, right, you walk up to the teller, "Here's my check," money. It's the exchange. What if you wanted to save a little bit from it? You wanted to save, you know deposit let's say 10% into your savings account, what would you have to do?

Speaker 14:    Fill out a form.

Kristen Berman:    You have to fill out a form, right? You have to fill out a deposit slip, you have to go and fill out some form that says what you have, how much you want. Then you have to go to the teller and wait in line to do this. It's not a fair fight. One is we don't actually know people don't want to save, or they just don't want to do anything. It's a confounded problem. All that we did basically is have two conditions and one condition, it was a control, that's like normal day, you just walk up to the teller and give them your check. Then the other condition, we forced everybody, regardless of if you said you wanted to save or not, to fill out a form. You didn't have to save, there was just now an empty slot for if you wanted to save, you could.

We basically made it a fair fight. So let's actually figure out if people don't want to save, or if they just don't want to fill out forms. From this, we got 10% of the people decided to make a deposit. They deposited an average of $169. By the way, American savings rate is you have, we've less than $400 in savings for 40% of America. These are pretty good stats. If successful, they get to more $2 million in deposits. By the way, we were super light on the recommendation in the checkbox in the form. This was not a strong, or paternalistic intervention on the form level. All it did was have an empty slot.

If you were designing a direct deposit form, basically your customers come to you, and you say "I'd like to use you for direct deposit." How would you design a direct deposit form in order to make more people save?

Speaker 15:    [inaudible 00:26:47].

Kristen Berman:    Yeah. Right now the option is … what's the default? To do the whole thing into checking. So the default is I put my whole paycheck into one account called checking, and then if I wanted to do anything else, which I totally could, I'd have to log in and set up that transfer. That could not be the right answer for us, that could not be the right answer given our savings rates in America. The path of least resistance is not to the checking account. One idea is you [inaudible 00:27:21] make the default the savings then people have to transfer to checking. But if anything, you could just have two fields and suggest that they make some of that goes to savings. You could also reorder.

In social security, if you just reorder the age that people take their social security benefits, you have a list, and instead of starting with 62 going to 75, you can switch it, more people choose to take their social security later. Small little nudges, but the environment matters here, it's not just giving information here, it's designing the environment. Saving more is just, I mean, at the end of the day, is just moving money. The essence of savings is going to be spending less and earning more.

For a second, I wanted to talk basically about how people think about spending less. I have a history, before at Intuit, I was on the Quicken Online team. But this is from Mint, Intuit then went on to buy Mint. This was kind of held as the [inaudible 00:28:21] of what personal finance management is. Turns out, Mint still has this, and most personal finance software have something like this, we call it a budget. If you are now thinking about this with this lens of behavioral science, it says the world is very complex, and when things are complex, people don't do anything. With this lens, is budgeting easy or hard? Budgeting is incredible difficult. Budgeting is incredible difficult for a variety of reasons.

Research supports that … we have no actually research that supports that budgeting works to decrease expenses. If anything, research is pointing to it just makes sense. It doesn't work and it makes us less happy on everything. Let's think about how we make budgeting easier. Imagine that you are going to the coffee shop, actually it's $4 in San Francisco for coffee, but you're going to a coffee shop, you're waiting in line, you're purchasing your coffee. That $4, what else could you do with that $4? That's something we probably should be thinking about when we're buying coffee, we're buying coffee every day. What else you do with the $4?

You could go to another coffee shop down the street is typically the answer that we get. We say what else would you do with the $4? People list things, it's usually what else could you do that morning with it?

Speaker 16:    Spend it.

Kristen Berman:    Spend it. Yeah, you could spend it. But the question is, if you spend it now, what happens down later in the month? Do you have enough money down later in the month? The reality is, we should be thinking about this $4, if we're rational, utility optimizing beings, is what could you do in retirement with it? That really should be our equation when we're spending money. Money is just about opportunity cost. It's just a decision of how to use it, and we could use it now or later. We could use it now between multiple different things, and we're optimizing between happiness and utility. But instead of thinking about that $3 for today, we just buy the coffee.

Now, if I were to give you a budget for the day, and you only had $50 to spend during the day, or you had $20 to spend, or $10 to spend during the day, now you're getting the coffee and you have a $20 budget. How differently do you think about this? If you're going up to buy the $4 coffee, the $3 coffee, it's very clear that if you buy that, you can't buy dinner in the evening. All of a sudden, when the timeframe shortens, our opportunity cost decisions become much clear. If I give you money for a day, that's fine. What about a week? What about a month? Typical budgets are in a month. Basically we're asking people to make decisions and saying that $3 should you use it now or should you use it at the end of the month? It becomes easy when we have day, very hard when we have month.

We worked to test out this framework with Propel. Propel is a food stamps tracking app. Crazy, but if you have food stamps, which one in seven Americans do, 43 million, there's actually no way for you to check your balance. You'd have to pick up the phone and call, or you have to buy something and look at the receipt. Propel is a very simple balance checking app for food stamps. We worked with them basically to think about this curve. This curve basically shows that people run out of food stamps in day nine.

There is a real question here that says "Actually, maybe that's okay." If people run out of food stamps, they may have other cash to use. That's a probably rational decision to use your food stamps first. You run out of the food stamps, and then you use your cash for the rest of the month. Turns out that's not the case. A, the way the food stamps budget was given, I was on a raw foods diet, and if we know things about people eating veggies, is we just did from the five a day, people don't eat veggies. There's just not enough money and store and grocery store theft goes up at the end of the month. That's not the rational decision, or people aren't doing this rational de- …

Kristen Berman:    … of the month. So, that's not the rational decision … or people aren't doing this rational decision of food stamps. They're just running out. They're just running out of the money. So, the question is, "How would we extend the number of days that these food stamps last?"

So, currently what happens is they come at the beginning of the month. It's a windfall. You get all of your food stamps at the beginning of the month, and you have to figure out how to use them for the rest of the month.

So, what our team did is basically just make opportunity costs much clearer. We've created a weekly budget for folks, so all it was just like your food stamp's balance divided by four. This is how much you should spend. Right? We're basically taking a decision that's across a month and shortening it to a week, and we increased the amount that the food stamps lasted by two days. This is kind of crazy. It's not like we said, "Hey, you should go shopping here or use it here." All we did was we made trade-offs much more easy for people to see.

Okay. So, the first mental model here is weekly. We're going to go … or the first thing to make budgeting easier would be weekly. Here's an experiment we did with EarnUp. EarnUp is a … they basically help people payoff their debt by matching the income and the payment, so they'll pay, if you get paid twice, they pay your debt twice. And we worked with them to say, "You know, there's a question on basically why people have to pay the amount that you say they have to pay, or a lender says they have to pay every month. They could pay more. It's just an anchor. What you're giving them is just an anchor." 

And so, we said, "How would we get people to pay a little bit more on their debt?" So, we asked in two ways. We said, "We're going to add $14 to their loan payment, and save them three years, or they could round up their loan payment and save three years." We're going to play a little guessing game. 

Who thinks the small number of $14 worked? Okay. Who thinks the round-up worked? We're about split and about probably a third of you don't want to vote, like it's too risky. She'll find me. Okay. So, the round up actually … So, A, all of the conditions. This was just an email and just by asking, we got an average 11% of people to choose to round up their debt. So, when we put something top of mind like this and ask, people may say, "Yes." Right now, it's not even in their attention set to think about increasing their loan payment. But round up actually worked more.  This equates to $64 a month with $8,000 in savings, saving them almost two years off their loan.

Why does it work? So, who, you guys have cars. You may have cars. You're in Austin. I hear this is like a everybody has a car city. You're at the gas pump. Where do you stop when you're pumping gas?  

Jerry Seinfeld:    Round numbers.

Kristen Berman:    Yeah, thank you. You're paying attention. You stop at round numbers. So 56 percent of people at round numbers. Seven percept of people actually stop at .01 which means they tried. They just failed. So close to 60 percent of people are going to the gas station and using round numbers, and researchers found that this was actually more prominent with lower income as well. 

So you can imagine, basically, thinking about someone's budget, what happens. You have maybe a 34 dollar utility bill, and you have an 82 dollar Verizon bill, and you have some loan payment that's 122 dollars. Some very difficult math equation to add up. 

So what do people naturally do? You just round up. Right? And so if you're gonna go to the gas station, do you really to in your head have to say I spent 17 dollars, and then have to figure out what you spent over the week, or if you have enough money left? No, you just say, "I spent 20 dollars at the gas station."

So the reason why we think this intervention worked, and again this is research so this is what we think, is it really worked with people's mental models. People were already rounding up in their head, and all we do is kinda go with that decision set, and create the environment so that people can make these decisions a little better. 

We also did this with when people were getting a car loan. So you basically intercepted that loan of origination and asked people if they wanted to round up their loan payment, and this time we added what they would call opportunity costs and said, "If you don't do this you'll miss out on this 13 hundred dollars. If you do do this you'll have the 13 hundred dollars at the end. What do you wanna do?"

So this time, a third of members opted to round up. So a third of members opted to round up an average of 33 dollars. Our loss aversion, which was this opportunity cost, worked even better, but in general, this tends to work. So when you're asking people to do anything, the question is: What is their mental model and how would you design the environment in order to facilitate it? 

Okay, third mental model round up. So in another example, again, we were talking about budgeting, how to make it easier. If you imagine, basically, people's expenses. We went to Fresno, California. Fresno, California is the second worst county in California. We asked people to lay … second worst by income and risk, and so if you were to ask people to lay out their expenses on a line, what would this look like?

It's messy, right? It's messy. You basically have expenses coming. You have payday. Nothing's lined up, and so if you were to think about how people do budgeting, this then requires people to do heck of a lot of mental math. Right? You have to figure out, if your rent's do at the end of the month, how am I gonna save up for that? It's actually a constant game of saving and setting aside money of you are living paycheck, and by the way many, I think it's 56 percent of people report living paycheck to paycheck, and a lot of that's regardless of income. So then what are people actually doing in their mental model is lining it up. 

So what they say is, "This paycheck is gonna be used to pay utilities. This paycheck is gonna be used to pay rent." So if we were redesign budgeting, you would say "Actually, there is no budgeting it's just the money left over after my expenses." 

Because imagine you basically get a bill and it's right before the end of the month. Let's say you get a bill and then you have payday. You've already paid this bill. Now you have payday. You kinda feel a little rich. Right? Versus if you get your bill after payday, you really have to understand what you have to understand what you have to pay for the rest of the week, for the rest of the month. So timing matters, and how we feel about spending our money. 

We worked with EarnUp generally, and what they have found, is that actually timing the income nad the expenses has actually lowered their default rate. We're currently working with Beneficial Bank in order to set up this timing of loans and incomes. So if you get a car loan, instead of it just being a random date, like 22 of the month, we'll time it with people's income. 

Okay, so the mental model here is: paychecks. I'll give you one final example. So how do people get paid in America? It turns out that 56 percent get paid hourly. That's around 76 million folks who are getting paid hourly. Now in theory, these two numbers are the same, if you're making 35 dollars or 75 K, these two actually equate to the same amount of money.

And the question we were asking is, "Given the amount of people who are hourly, what changes about their situation? How do they think about life differently?" Cause if you're making 30 dollars and hour, 35 dollars an hour and we ask you to do something like, "How much do you save for retirement? Or do you want to do anything around your financial health?" The question is, "Are you thinking long term?" So if you're making 35 dollars an hour, this really is a today mental model. I'm thinking about how much money I'm making today. 

If I'm making 70 K, now all of the sudden, I'm thinking a little bit more longer term. And so we ran an experiment with a company called Payable. Payable is invoicing software. They work with contractors. The average contractor makes, on their platform, around 22 K, and so instead of just saying, "This is what you made today." They basically said, "here's everything that you're making, and if we annualize that, this is what you'll make on an annual basis." 

So we had two conditions: one that was hourly or project based, and one that was annualized. And then we said, "How much do you wanna save for retirement?" And so the people who were making the 70 K chose to save more, because we're matching their mental model. The people who were in the annual experiment, that basically when we presented their paycheck in an annual way, chose to save more. 

So what this basically implies, is that for 70 million people, or 56 percent of America, we're actually framing a lot of our questions incorrectly. Right? We're framing it in their current mental model, which is short term, and we need to be framing I tin a longer term mental model if we want to have people think in a longer term way. 

Okay, so what we've talked about so far are three things. One: information does not work to change behavior. That was the first part. Second is: any kind of barriers or blockage to somebody doing something is going to prevent them from doing it. This is the path of least resistance. So if there's anything in people's way, we'll do less of it. And the third thing is, basically: how do we match people's mental model? And for complex things like budgeting, you'd say, "It's too complex for people to do on a normal basis. Let's match their mental model, and do things like shorten the opportunity cost, or think about how they think about their salary."


So we basically take the approach of saying that the world is too complex. Let's go with people's mental model, and so we also have another kind of angle of going with people's mental model, but for this I'm gonna let Jerry Seinfeld explain.
Jerry Seinfeld:    Time is one of the things I think people lie about the most. Anything 20 minutes is a lie. Anytime someone says, "I'll be there in 20 minutes. It takes 20 minutes." 

"I thought you said 20 minutes?"
"That was 20 minutes."
Nobody knows what 20 minutes is. If you wanna lie just say, "I have 20 minutes. I'll be there in 20 minutes." 
I saw an ad for a mattress store couple months ago. "No payments till June." Cause they know our idiot brain is gonna go, "Oh, June, well that's not really my problem then, is it? It'll probably never be June anyway. That's June guy's problem."

Same when you're watching TV late at night. Right? And you're tired and your binge watching all your little Netflix shows, and you think I don't know you're doing it, right now after you're done with me. You're gonna go back to your little show, maybe find out who the killer is. "What about work tomorrow? You gotta get up and get to work?"

"Ah, that's morning guy's problem. I'm night guy. Party rocks on for night guy. Fire up another episode. Crack open another sleeve of Oreos. No rules for night guy."

Then the next morning the alarm goes off. You're trashed. Crumbs in the bed. "Why did I do that? I hate you night guy!" Wait there's more. Cause night guy, night guy always screws morning guy. Nothing morning guy can do. He turns into coffee all day guy, who's then can't sleep at night guy, totally trashed doesn't do his work guy, and out of a job guy. 

Does night guy care? No. He's sleeping on a brand new mattress, courtesy of no payments till June guy. 
Kristen Berman:    Okay, so the last mental model I'll leave you with is what we called present bias, which is this idea that we are all night guy. Right? We all prioritize today over tomorrow. We all say up late to eat the Oreos in leu of basically taking care of either the work we should do … Do things on Sunday night because we procrastinated during the week. We overeat, spend too much, and this is a mental model that we all have. It's not something just a week where you don't have self control. This is how humans are built. This is how we're wired is that we're very, very present focused. 

And so when you're trying to get anyone, whether it be your kids, your spouse or your customers, or your fellow employees, to do anything that's not present focused or has immediate needs, we really need to think about that we're designing for somebody who is prioritizing the present. We're designing for somebody who has a lot of things going on. The world is very complex, and in order to have them prioritize the present, we need to give some immediate benefit. Right?

So something far in the future, whether you're selling a loan or insurance or savings, they're all far in the future. They're all talking to morning guy. They're not talking to night guy and so I think when we're doing things, it's like, "How would you design either to make the benefit so immediate that night guy cares, or you have morning guy lock in night guy." Right?

So this is one experiment that we did with Digit which is a fintech app to basically get people to lock themselves into savings. So we asked some people, before they got their tax refund, how much they wanted to save and some people at the point that they got their tax refund how much they wanted to save. 

And so the people who we asked before they got the refund, doubled the savings rate. Compared to when you were night guy and you have the refund in your bank account. So we can do things, that's called the Eleusis Contracts, you have morning guy locking in night guy to do something. People kept the money in there for three months, or 80 percent retention over three months. So this is not something that people don't want to do, it's just that you're talking to 2 different customers, 2 different people, and we just need to design for these things.

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