Sep 28 2009

Committed to Savings: Using Behavioral Economics to Motivate Members

Report  
Number  
194

This report explores how behavioral economics applied in a consumer finance setting, can help credit union members reach their saving goals. 

Dean Karlan, PhD
Professor of Economics
Yale University
Report Number 194

Executive Summary

Behavioral economics is an emergent field of study that explains economics by taking into account the often fickle nature of human behavior. As a credit union executive, you can probably attest to the presence of irrational behavior in your interactions with all sorts of financial consumers. In Filene’s latest publication, “Committed to Savings: Using Behavioral Economics to Motivate Members”, Yale Professor Dean Karlan explains how this field of study could be used to motivate members.

What is the research about?

Given the renewed interest in savings and consumers’ financial well-being in this economic environment, we invited Professor Karlan to write up a few ideas applying behavioral economics to the consumer finance setting. What follows is a research brief on the theory and opportunity inherent in understanding this increasingly important subject. The goal of this research brief is to spur credit unions to action and application of these ideas.

What are the credit union implications?

The brainchild of this report’s author, stickK.com is the application of a truly innovative idea called “commitment devices” or “commitment contracts.” Commitment contracts essentially allow people to take a contract out on themselves to spur some sort of positive activity: to stop smoking, lose weight, or save more money.

The potential role for commitment savings devices in the U.S. credit union market is quite large. The demand for commitment savings devices is already evident—for example, consider the many individuals who increase their income tax withholding on each paycheck so as to maximize their income tax refund, which in effect is both a deposit-side commitment (mandatory withholding) and a withdrawal-side commitment (time-based “maturity” of the tax overpayment).