1. R&D FOR FINANCIAL WELLNESS PART 1 September 2011 JONATHAN ZINMAN Professor, Dartmouth College Director, U.S. Household Finance Initiative, IPA Member, Research Advisory Board, HelloWallet

2. My Approach Today September 2011 R&D for Financial Wellness: Part 1 Outline problems and opportunities  Symptoms of financial illness  Causes (Behavioral Economics 101) Outline disciplined approach to address these problems using behaviorally-driven R&D [Steve and HelloWallet: detailed example of approach] Identify other concrete examples of how this approach can deliver better solutions Put forth actionable ideas for R&D we could do together

3. Financial stress Reduced productivity Financial Illness: Symptoms September 2011 R&D for Financial Wellness: Part 1 Many employees suffer low financial resiliency 29% no savings, most with little savings (EBRI) High debt reliance: expensive High “money on the table”  Poor shopping, mediocre mgmt  Low financial sophistication

4. Financial Illness: Causes (Behavioral Economics 101a) September 2011 R&D for Financial Wellness: Part 1 Cognitive biases that stack deck toward spending/borrowing, away from saving/accumulating  In preferences: costly self-control, loss-aversion  In expectations: “things will get better” (or at least not worse)  In price perceptions Underestimation of compound interest Underestimation of borrowing costs  (Limited attention) # 1

5. Financial Illness: Causes (Behavioral Economics 101b) September 2011 R&D for Financial Wellness: Part 1 Mistakes borne of misguided heuristics, other cognitive limitations  Information/choice overload  Anchoring  Low (financial) literacy, numeracy # 2

6. Financial Illness: Causes (Behavioral Economics 101c) September 2011 R&D for Financial Wellness: Part 1 Limited opportunities for learning  … on high-stakes decisions Mortgage/house Job Marriage Car (and financing it)  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 targets # 3

7. Financial Illness: Causes (Behavioral Economics 101d) September 2011 R&D for Financial Wellness: Part 1 Markets sometimes exacerbate consumers’ cognitive “bugs”  Advice markets are a mess and limited in scope Who covers the household balance sheet? For the mass market?  Price competition in product markets helps, but only partly # 4

8. Reduce stress Increase productivity Opportunity and Approach September 2011 R&D for Financial Wellness: Part 1 Use insights from behavioral social sciences to: Improve benefit features, delivery and utilization at low cost Improve workforce financial resiliency

9. 3-Pronged Approach to R&D September 2011 R&D for Financial Wellness: Part 1 Behavioral Research on what makes consumers and markets tick  Lots of suggestive evidence from theory, lab, surveys (much of it competing)  Little actionable evidence from real-world settings of interest  Very logic of behavioral research suggests that setting can matter a lot: importance of “context”, “frames”, “cues”, etc. # 1

10. 3-Pronged Approach to R&D September 2011 R&D for Financial Wellness: Part 1 “D” based on “R” Work with companies to apply behavioral research through innovations in:  Product development  Pricing  Marketing  Customer communication (messaging) # 2

11. 3-Pronged Approach to R&D September 2011 R&D for Financial Wellness: Part 1 Testing keeps the “R” and “D” honest Work with companies to evaluate innovations:  Develop success/failure metrics  Implement gold-standard methodologies that deliver sharp, actionable results E.g., Randomized-Control Trials Adapted per operational realities, other constraints  Reveal mechanisms underlying success or failure # 3

12. Experimentation & the Learning Organization September 2011 R&D for Financial Wellness: Part 1 A Virtuous Cycle: RDTest

13. Examples September 2011 R&D for Financial Wellness: Part 1 1.HelloWallet 2.More from JZ

14. R&D FOR FINANCIAL WELLNESS PART II: BUILDING ON SUCCESS STORIES September 2011 JONATHAN ZINMAN Professor, Dartmouth College Director, U.S. Household Finance Initiative, IPA Member, Research Advisory Board, HelloWallet

15. Product Development Example September 2011 R&D for Financial Wellness Part II: Building on Success Stories Performance bonds for goal attainment  Financial  Reputational/social Pilot: Successful for increasing savings Second application: smoking cessation with Green Bank in the Philippines Now extending all over world  Banks  Other financial service providers  Credit counseling agencies  HelloWallet  Stickk.com Commitment Contracts

16. Marketing Example September 2011 R&D for Financial Wellness Part II: Building on Success Stories Pilot with finance company in South Africa  Took regular mailings to former borrowers, randomly varied content based on behavioral theories of persuasion  Found large effects, relative to price, of content that triggers automatic (vs. deliberative) cognitive response Extending this work with financial service providers across the world  Banks, credit counseling agencies, HelloWallet, large debt collector Direct Mail Testing

18. Messaging Example September 2011 R&D for Financial Wellness Part II: Building on Success Stories Pilot  With savings account holders at 3 different banks in 3 different countries  Reminders raised balances by 6% Now extending to debt reduction, budgeting, and planning goals SMS Reminders for Goal Attainment

19. Next Generation of R&D: A More Holistic Approach September 2011 R&D for Financial Wellness Part II: Building on Success Stories Development focused on person (or market), not just on narrowly targeted behavior Broader, better metrics of success/failure HelloWallet great example of this:  Behaviorally-driven development in all aspects of customer interfaces  Metrics cover entire household balance sheet, and beyond Other opportunities for more holistic R&D…

20. Moving Forward: #1. Optimizing Benefits Menu September 2011 R&D for Financial Wellness Part II: Building on Success Stories Does it work?  How well and how cost-effectively, relative to other benefits you could offer? Could it work better?  Higher take-up with behaviorally-informed marketing and messaging  Greater effectiveness with content and follow- up (messaging) innovations “Why Should I? We already offer best-practice financial education, counseling, etc.”

21. Moving Forward: #2. Wellness Before Retirement September 2011 R&D for Financial Wellness Part II: Building on Success Stories What about other pieces of the balance sheet?  “Save in the workplace, borrow in the marketplace”  Trouble for employer as well as employee?  Dealing with “rainy days” much more pressing than retirement for most employees One (of many) potential solution(s): small-dollar loans as an employee benefit “Why Should I? We already offer generous retirement plans.”

22. #2. Wellness Before Retirement: R&D on Small-Dollar Loans September 2011 R&D for Financial Wellness Part II: Building on Success Stories Business model:  Underwrite using employer data  Direct debit repayments from paycheck  Use these levers to offer lower pricing, longer maturities than payday loans  3 rd party financing R&D opportunities:  Does loan benefit work as intended?  Use intermediation opportunities to optimize benefit:  Product presentation (beyond disclosure)  Follow-up messaging  Bundle with other benefits (planning aids)?

23. Moving Forward: #3. Safe Landings on 401(k) Auto-Pilot September 2011 R&D for Financial Wellness Part II: Building on Success Stories “Why should I invest in behavioral R&D? We already do pro-savings defaults?”  Opt-out 401(k) enrollment  Opt-out of auto-escalating contribution rate BUT… what makes auto-features so effective?  Limited attention  Procrastination/ self – control problems  Anchoring

24. September 2011 R&D for Financial Wellness Part II: Building on Success Stories *Same psychology that moves 401(k) outcomes can lead to unintended consequences Employee unthinkingly contributes to 401(k) Employee unthinkingly keeps spending constant Employee borrows expensively to do so (credit cards, payday loans, etc) NET EFFECT: Lower net worth Less financial resiliency More small plan balances Fault with 401(k) Defaults? ELEPHANT IN THE ROOM

25. R&D for Safe Landings on 401(k) Auto-Pilot September 2011 R&D for Financial Wellness Part II: Building on Success Stories Product Presentation (for segmentation)  Is 401(k) right for you? Messaging  Re: plans, resources, pitfalls Product Bundles/Enhancements  Debt, other assets, planning, commitment

26. WRAP-UP September 2011 R&D for Financial Wellness Part II: Building on Success Stories  Financial insecurity creates problems and opportunities re: employee productivity  Insights from behavioral social sciences can help: discipline for designing, testing, and improving solutions  Many potential levers/solutions: would customize based on your offerings, appetite, and operational realities

27. Going Forward September 2011 R&D for Financial Wellness Part II: Building on Success Stories More content at:  www.dartmouth.edu/~jzinmanwww.dartmouth.edu/~jzinman  www.poverty-action.org/ushouseholdfinancewww.poverty-action.org/ushouseholdfinance Questions? Contact me:  jzinman@dartmouth.edu, (603) 667- 5068jzinman@dartmouth.edu