Behavioral economics heavily contributes to the way we design asset building and savings programs. We know that savers respond to cues, nudges, incentives, and targeted choices. Seems simple enough. One thing we are learning, however, is that individuals need more than just incentives. There was a time when groups would offer $50 to open a savings account and wonder why the take-up rate didn’t surpass 10 percent.
It’s a good question. Money talks, right? A recent post by Matthew Darling of ideas42 on CFED's blog presents some of the challenges of behavioral economics in asset building. Among those challenges, I would emphasize the need for easiness and shortening of time when enrolling. That’s right, short-cuts are key and time matters. For low- and moderate-income families, it matters a lot. Retail marketing gets this. Check out this pre-holiday store sign. Not only do you get the 30% off for signing up with their 20-some percent APR credit card but you also get to skip ahead to the front of the line! Literally, a short-cut to beat out the 30 people in line.
The “why” question here is important. Why does the 30% off not do the trick for opening the credit card? Why does going to the front of the line sweeten the pot greatly? Two reasons are that mental imagery and quick-action matter. People can’t necessarily envision 30% off of $40 jeans mattering enough to take the time to open a card and save a few dollars. Plus, by the time you wait in line, who wants to spend 10 more minutes opening a credit card? That being said, people can literally visualize moving past the long line of consumers to the front of the line. There is a real and immediate benefit to moving to the front of the line.
So, as a field, let’s borrow a bit from this spending example. What can we do to make saving easier and decrease the time it takes to enroll in programs? What if…you received your tax refund a few days faster if you committed to saving a portion of it? Or how about if a bank pre-enrolls you for a savings account when you open your checking account, leaving you a signature away from opening it? Again, incentives matter but cutting red-tape or passing a line full of angry, jean-holding customers, might matter more.