Earmarking and Partitioning: Increasing Saving by Low-Income Households

Knowing When to Spend: Unintended Financial Consequences of Earmarking to Encourage Savings

Maintaining savings is an important financial goal. Yet there are times when savings should be spent, such as when people face unavoidable costs, and spending their savings allows them to avoid high interest rate debt. Existing behavioral research has focused on consumer decisions between savings and discretionary spending and has proposed interventions to promote savings in these contexts. However, when spending is not discretionary, such interventions could risk exacerbating a pattern found in economic research in which people borrow high interest rate debt while maintaining savings that earn low levels of interest. To examine how mental accounting interacts with considerations of personal responsibility and guilt to contribute to this pattern, this article explores whether people spend their savings when they need money most: during emergencies. Six studies reveal that people's tendency to preserve savings by borrowing from a high interest rate credit option varies as a function of the savings’ intended use. Paradoxically, people are most likely to turn to high interest rate credit with the belief that doing so is the responsible option.

Temporal Reframing and Participation in a Savings Program: A Field Experiment

This study explores whether framing savings in more or less granular formats can increase sign-ups for a recurring deposit program in a FinTech environment. , A growing number of American workers are now freelancers and thus, responsible for their own retirement savings, yet they face psychological hurdles that hamper them from saving enough money for the long term. Although prior theory-derived interventions have been successful in addressing some of these obstacles, encouraging participation in saving programs is a challenging endeavor for policy makers and consumers alike. In a field setting, we test whether framing savings in more or less granular formats (for example, saving daily versus monthly) can encourage continued saving behavior through increasing the take up of a recurring deposit program. Among thousands of new users of a financial technology app, we find that framing deposits in daily amounts as opposed to monthly amounts quadruples the number of consumers who enroll. Furthermore, framing deposits in more granular terms reduced the participation gap between lower- and higher-income consumers: three times as many consumers in the highest rather than lowest income bracket participated in the program when it was framed as a $150 monthly deposit, but this difference in participation was eliminated when deposits were framed as $5 per day.

Cash versus Debit Card: The Role of Budget Control

Due to the financial crisis, an increasing number of households face financial problems. This may lead to an increasing need for monitoring spending and budgets. We demonstrate that both cash and the debit card are perceived as helpful in this respect. We show that, on average, consumers responsible for financial decision making within a household find cash and the debit card equally helpful for monitoring their household finances. Individuals differ in major respects, however. In particular, low earners and the liquidity‐constrained prefer cash as a budgeting tool. Finally, we present evidence that at an aggregated level, such preferences strongly affect consumer payment behavior. These findings suggest that the substitution of cash by cards may slow down because of the financial crisis.

What Would You Do with $500? Spending Responses to Gains, Losses, News, and Loans

Abstract We use survey questions about spending in hypothetical scenarios to investigate features of propensities to consume that are useful for distinguishing between consumption theories. We find that (1) responses to unanticipated gains are vastly heterogeneous (either zero or substantially positive); (2) responses increase in the size of the gain, driven by the extensive margin of spending adjustments; (3) responses to losses are much larger and more widespread than responses to gains; and (4) even those with large responses to gains do not respond to news about future gains. These four findings suggest that limited access to disposable resources, and frictions in adjusting consumption, are important determinants of consumption behaviour. We also find that (5) households do not respond to the offer of a one-year interest-free loan, suggesting that this is not a consequence of short-term credit constraints; and (6) people do cut spending in response to news about future losses, suggesting that neither is this a consequence of myopia. A calibrated precautionary savings model with utility costs of changing consumption, and a sufficient fraction of low-wealth households, can account for these features of propensities to consume on both the extensive and intensive margins.

Do people like financial nudges?

Do people like financial nudges? To answer that question we conducted a pre-registered survey presenting people with 36 hypothetical scenarios describing financial interventions. We varied levels of transparency (i.e., explaining how the interventions worked), framing (interventions framed in terms of spending, or saving), and ‘System’ (interventions could target either System 1 or System 2). Participants were a random sample of 2,100 people drawn from a representative Australian population. All financial interventions were tested across six dependent variables: approval, benefit, ethics, manipulation, the likelihood of use, as well as the likelihood of use if the intervention were to be proposed by a bank. Results indicate that people generally approve of financial interventions, rating them as neutral to positive across all dependent variables (except for manipulation, which was reverse coded). We find effects of framing and System. People have strong and significant preferences for System 2 interventions, and interventions framed in terms of savings. Transparency was not found to have a significant impact on how people rate financial interventions. Financial interventions continue to be rated positive, regardless of the messenger. Looking at demographics, we find that participants who were female, younger, living in metro areas and earning higher incomes were most likely to favor financial interventions, and this effect is especially strong for those aged under 45. We discuss the implications for these results as applied to the financial sector.

Misunderstanding Savings Growth: Implications for Retirement Savings Behavior

People systematically underestimate exponential growth. This article illustrates this phenomenon, its implications, and some potential interventions in the context of saving for retirement, where savings grow exponentially over long periods of time. Experiment 1 shows that a majority of participants expect savings over 40 years to grow linearly rather than exponentially, leading them to grossly underestimate their account balance at retirement. Experiment 2 demonstrates that this misunderstanding leads to underestimates of the cost of waiting to save, which makes putting off saving more attractive than it should be. Finally, Experiments 3–5 show that highlighting the exponential growth of savings motivates both college students and employees to save more for retirement. Making clear to employees the exponential growth of savings before they make crucial decisions about how much to save may be a simple and effective means of increasing retirement savings.

Getting to the Top of Mind: How Reminders Increase Saving

We provide evidence from field experiments with three different banks that reminder messages increase commitment attainment for clients who recently opened commitment savings accounts. Messages that mention both savings goals and financial incentives are particularly effective, whereas other content variations such as gain versus loss framing do not have significantly different effects. Nor do we find evidence that receiving additional late reminders has an additive effect. These empirical results do not map neatly into existing models, so we provide a simple model where limited attention to exceptional expenses can generate undersaving that is in turn mitigated by reminders. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2296 . This paper was accepted by Teck-Hua Ho, behavioral economics.

Co-holding behaviour: unlocking the puzzle

This article seeks to explain why households decide to simultaneously hold both credit and savings products. Beyond the arguments of ignorance or behavioural biases commonly used in the literature,...

The Effect of Partitions on Controlling Consumption

The authors demonstrate that partitioning an aggregate quantity of a resource (e.g., food, money) into smaller units reduces the consumed quantity or the rate of consumption of that resource. Partitions draw attention to the consumption decision by introducing a small transaction cost; that is, they provide more decision-making opportunities so that prudent consumers can control consumption. Thus, people are better able to constrain consumption when resources associated with a desirable activity (which they are trying to control) are partitioned rather than when they are aggregated. This effect of partitioning is demonstrated for the consumption of chocolates (Study 1) and gambles (Study 2). In Study 3, process measures reveal that partitioning increases recall accuracy and decision times. Importantly, the effect of partitioning diminishes when consumers are not trying to regulate consumption (Studies 1 and 3). Finally, Study 4 explores how habituation may decrease the amount of attention that partitions draw to consumption. In this context, partitions control consumption to a greater extent when the nature of partitions changes frequently.

Behaviorally Informed Policies for Household Financial Decisionmaking

Low incomes, limited financial literacy, fraud, and deception are just a few of the many intractable economic and social factors that contribute to the financial difficulties that households face today. Addressing these issues directly is difficult and costly. But poor financial outcomes also result from systematic psychological tendencies, including imperfect optimization, biased judgments and preferences, and susceptibility to influence by the actions and opinions of others. Some of these psychological tendencies and the problems they cause may be countered by policies and interventions that are both low cost and scalable. We detail the ways that these behavioral factors contribute to consumers’ fiancial mistakes and suggest a set of interventions that the federal government, in its dual roles as regulator and employer, could feasibly test or implement to improve household financial outcomes in a variety of domains: retirement, short-term savings, debt management, the take-up of government benefits, and tax optimization.

Malleable Mental Accounting: The Effect of Flexibility on the Justification of Attractive Spending and Consumption Decisions

Mental accounts are often characterized as self‐control devices that consumers employ to prevent excess spending and consumption. However, under certain conditions of ambiguity, the mental accounting process is malleable; that is, consumers have flexibility in assigning expenses to different mental accounts. We demonstrate how consumers flexibly classify expenses, or construct accounts, to justify spending. An expense that can be assigned to more than one account (i.e., an ambiguous expense) is more likely to be incurred than an unambiguous expense that is constrained either by existing budgets or by previously constructed accounts. We explore the justification processes that underlie these results and their implications for mental accounts as self‐control devices.

Balancing Savings and Debt: Findings from an Online Experiment

Many consumers have savings and debt at the same time, and so are faced with a trade-off: how much debt to pay down versus how much savings to retain. This brie

Does Saving Cause Borrowing? Implications for the Co-Holding Puzzle

Using an experiment in which 3.1 million bank customers were encouraged to save, we explore the mechanisms behind co-holding liquid savings and credit card debt. Theoretically, we first show that the joint responses of spending, saving, and borrowing to the nudge differ for different economic models of co-holding. Using machine learning techniques, we then find that the most responsive individuals reduce spending and increase their savings by 4.9% (206 USD PPP per month) while their credit card debt remains unchanged. For them, the marginal responses to the nudge are consistent with our model of co-holding for the purpose of self- or partner control.

Spenders and savers, tightwads and spendthrifts: Individual correlates of personal ratings of being a spender or a saver.

Does Saving Cause Borrowing? Implications for the Coholding Puzzle

ABSTRACT Using an experiment in which 3.1 million bank customers were encouraged to save, we explore the mechanisms behind coholding liquid savings and credit card debt. Theoretically, we show that the joint responses of spending, saving, and borrowing to the nudge differ across economic models of coholding. Using machine learning techniques, we find that the most responsive individuals reduce spending and increase savings by 4.9% (206 USD PPP per month) while their credit card debt remains unchanged. These individuals' marginal responses to the nudge are consistent with our model of coholding for the purpose of self‐ or partner‐control.

Unconditional cash transfers reduce homelessness

Homelessness is an economic and social crisis. In a cluster-randomized controlled trial, we address a core cause of homelessness—lack of money—by providing a one-time unconditional cash transfer of CAD$7,500 to each of 50 individuals experiencing homelessness, with another 65 as controls in Vancouver, BC. Exploratory analyses showed that over 1 y, cash recipients spent fewer days homeless, increased savings and spending with no increase in temptation goods spending, and generated societal net savings of $777 per recipient via reduced time in shelters. Additional experiments revealed public mistrust toward the ability of homeless individuals to manage money and demonstrated interventions to increase public support for a cash transfer policy using counter-stereotypical or utilitarian messaging. Together, this research offers a new approach to address homelessness and provides insights into homelessness reduction policies.