Surprises from the Consumer Financial Decision Making Conference (Behavioral Economics)

A highlight of my year is the Boulder Summer Conference on Consumer Financial Decision Making put on by the Leeds Business School’s Center for Research on Consumer Financial Decision Making. An event geared towards academics, its rigor is a refreshing complement to the work that I see from market practitioners at traditional industry shows. A handful of private sector folks come each year, but most are from academia or policy; being able to bridge the two worlds is extraordinarily refreshing. Why consumers make illogical (or even harmful) financial decisions is the general theme of the conference. I’ve put together some of the most interesting, surprising, or relevant tidbits that I heard over two and half days of presentation. Academics are a careful lot, particularly with their disclaimers, so my caveats are these: I’m an educated layman relating what I heard in broad strokes. I’m not attempting to replicate the precision of the presenters or discussants, nor am I going to cite them in accepted academic fashion. Instead, if you’d like to investigate the source papers, please go to the conference website, or click the conference program. What follows is a synthesis of what I heard, sometimes from one person, other times cobbled together from multiple sources. I’ll try to tease out the implications for banks and make some very high level recommendations. The devil, of course, will be in the details of implementation (an undercurrent running through the conference itself). Look for an expanded version of this in a forthcoming Celent report. As I tweeted during the conference, “Fascinating #counterintuitive#behavioraleconomics Boulder results on nudging and alerts; unintended consequences abound, intuition suspect.” What did I mean? Well, more savings is unambiguously good, isn’t it? Alerts are a great way to nudge people, aren’t they? And more information will help consumes make informed decisions, right? Well….not always. Let’s look at each. Savings Not all savings is good; sometimes you should be spending it or using it to pay down debt. Although people save for a purpose they will, on occasion, need to dip into that savings. In one case, old age, they may be able (or need) to start tapping into their savings earlier than they think, but they’re often reluctant to. Banks can help with this decision making process. Another case arises when consumers have high interest rate credit card debt. Rationally, they should tap into that savings to pay down the higher-cost debt. But many don’t, generally because they’ve engaged in earmarking and don’t necessarily believe that their future selves will have the self-control to replenish the savings account. Again, banks can help by setting up ways to help customers make the savings process easy, transparent and seamless. Alerts Not all alerts are good. Focusing on alerts only in the context of trying to stimulate behaviors (and leaving aside their potential to help in fraud, balance notifications, and the like), researchers found that some people who were told that their FICO score was good became complacent and indulged in behavior that subsequently lowered their score. Information Anchoring on credit card disclosures is very powerful. Initial experiences with the new credit card disclosures shows that borrowers are anchoring on the minimum payment figure, and on occasion paying less each month than they otherwise would. Scattered throughout were additional fascinating nuggets. Here are a few, in no particular order. I’ll expand on them in the upcoming report. We all know that what you say is important, and intuit that how you say it also matters. Indeed, much of behavioral economics is devoted to the framing of issues. But there’s a much more subtle point, one that practitioners are beginning to experiment with, that seems to be fertile ground for further academic inquiry. There are variations in how an issue is framed – the exact same words can be used to ask the same question, but the font, the background – any elements of the user experience – will also have an effect. These “UX” nuances matter, and refining the details of the user experience will be hugely important. Here are a few other tidbits that I’ll expand upon in the full report:

• People don’t like to pay taxes (no surprise). But tax costs are perceived more negatively than other costs; Betterment got people to trade less by highlighting the tax consequences of the trade.
• There is no such thing as the “right thing” for everybody. The right choice architecture will help people make the right choices for themselves
• Lottery wins can cause neighbors to go bankrupt
• Regulations may give consumers the confidence that they can undertake transactions (loan repayments under foreclosure) that they might not otherwise
• How a person writes a justification for a Prosper loan has some predictive power (up to 5.7%) about subsequent default probability over and above the typical financial information
• Save to win savings accounts (“lottery savings”) in Nebraska are a substitute for gambling –and help people make better financial decisions
• Credit utilization (that is, the proportion of a credit limit that a consumer uses) remains fairly constant over time
• Day Traders in Taiwan keep on trading even though they have cumulative losses. They are not rational learners
• People misunderstand the benefits of diversification: most tend to think it increases volatility and leads to better performance
• People have different learning mechanisms for positive and negative lessons.

Academics are sometimes a bit…academic (as they should be!). As practitioners venture into new territory, having them keep us honest by testing our naive, and often wrong, intuitions is incredibly valuable. A final caveat: any misinterpretations are of course my responsibility. If you’d like to learn more and are a Celent client, please look for the upcoming report. And if you’ve got comments or questions, please let me know.