The Behavioral Science Inspiring Better Financial Habits
Posted: June 28, 2019
“It sounds like a broad statement,” says Evelyn Stark, Assistant Vice President for Financial Health, MetLife Foundation, “but people are predictable. There are certain behaviors people will repeat again and again. Take the gym for example. Everyone goes to the gym in the first week of January and works hard on their New Year’s resolutions, but by February it’s empty again. Everyone wants to do the right thing, but it’s easier not to.”
Just like creating a new fitness habit, creating and sticking to healthier financial habits can be hard. Housed in the Center for Advanced Hindsight at Duke University, Common Cents Lab is transforming the way everyday Americans interact with money to help boost their financial health.
An insight into the Lab
Launched in the fall of 2015 with support from MetLife Foundation, Common Cents Lab aims to change people’s relationships with money. Using behavioral science, the Lab designs interventions – products, services, prototypes and optimizations – to help low- to moderate-income people manage their finances. The Lab partners with fintechs, credit unions, banks, nonprofits and state and local governments to bring the best financial solutions to the people who need them most.
Human actions vs human intentions
Mariel Beasley, Principal at Center for Advanced Hindsight and co-founder of Common Cents Lab, explains how the Lab works: “The environment plays a huge role in our day-to-day decisions. Our co-founder, Professor Dan Ariely, regularly reminds us that whoever designs the environment has tremendous power to shape human behavior. Look at it this way – no one wakes up in the morning and thinks ‘I want to struggle to pay my bills this month.’ But our everyday decisions, influenced by our environment and our psychology, lead us down these paths. There’s a huge gap between human intentions and human actions, and what we do is try to understand that gap and try to bridge that gap.
“We’re actively working to make households more financially secure,” adds Mariel. “People across the U.S. are financially underprepared. One in three households has a bill in collections, 38 percent of adults are carrying revolving credit card debt, and 39 percent would have to sell something or borrow to cover an unexpected $400 debt. What we do is work with financial service providers to create better products, services, and processes that leverage a greater understanding of human behavior for better financial outcomes.”
Making small savings go far
The Lab focuses on five core areas: increasing earnings, managing cash flow, decreasing expenses, managing debt, and increasing long- and short-term savings. In 2018, the Lab worked on nine short-term savings projects and 10 long-term savings projects. “We think about short-term savings as a safety net for cash emergencies, and long-term savings as more about retirement or a child’s savings account,” explains Mariel.
One key partner in the savings area has been the Latino Community Credit Union. “We helped the Latino Community Credit Union members to easily and painlessly build regular, small savings,” says Mariel. “When members set up their automatic repayment, we proposed that they round-up their payment and the Credit Union would save the difference for them. So instead of a payment of $138, they would instead round up each payment to $150. It was painless savings because people don’t tend to think about precise numbers in their budget; they were naturally already thinking of it as an even figure. By rounding up that figure, people were able to save a small amount without feeling constricted in their budget.”
Since launching in 2015, the Lab has:
reached over 1.7 million Americans
positively impacted the financial behavior of 498,000 low- to moderate-income people
helped people save over $10.5 million
Influence in the marketplace
Everything the Lab does is fed back to the market. And behavioral science from the market feeds back into the Lab too. “Behavioral science demonstrates, over and over again, that we cannot trust our intuitions,” Mariel explains. “You need to test, experiment and pilot. If you’re not testing your ideas, you could be harming people with the wrong solutions. We’re constantly trying to put new ideas out there and create things that work for people.” The Lab is working on developing a network of financial institutions that leverage the Lab’s experts but can develop the capacity to create their own interventions in-house.
As well as helping people save, the Lab has worked on projects that send shift workers text notifications so they never miss a shift, used age milestones to motivate older people to consider getting roommates, and designed new statements to help parents save for their kids’ college funds. By understanding what makes people tick and how they think about money, the Lab can create the right interventions for the right people, at the right times.
“Instead of trying to educate consumers one-by-one about the importance of savings, for example, we use behavioral science and enable financial service providers to build product features that make it far easier for people to save more without putting in extra effort,” says Evelyn. “MetLife Foundation is helping the Lab expand and enable similar work in other markets. We’re looking forward to reaching even more low- to moderate-income people in the US and around the world. It’s a fantastic project and one that MetLife Foundation is proud to sponsor.”