Wendy De La Rosa – I and my family immigrated to the United States when I was pretty young, to the Bronx in New York. And my family was pretty cash strapped. So the topic of conversation often was about resources and how to manage money and how to make your money last. And so from a young age, I was always fascinated by finances, especially because it’s a very common immigrant story but the younger generation tends to have a stronger grasp on English. So I have strong, vivid memories of translating financial statements and being on the phone and sort of acting as that bridge between my family members and whoever else was on the other side of the transaction. But I never thought I would do anything with this fascination. I just kind of knew that I needed to change my financial situation, right? So with a lot of help from great people and also hard work, I got into Wharton, focused on finance. And any sort of Wharton undergraduate will tell you, sadly, there are two established tracks, consulting or banking. And I kind of chose banking and started out that way. But after a while, this nag and this fascination sort of came back to me of, what can I do to help people like my family, or just average Americans who are trying to make it day-to-day? And in school I had studied under Adam Grant, who’s a very famous organizational psychologist. So I got an early look at how you can help to shape behavior in one way, shape or form. And it wasn’t until I was at Google helping to start up their behavioral economics lab that I was then able to have, one, the skillset, but then finally the funding to start Common Sense Lab. So we at Common Sense Lab have a mission of trying to help low to moderate income people make better financial decisions and improve their financial security. We try to do that in what we think is a novel way. We work with fintech companies, credit unions, state and local governments and non-profits to run and implement interventions that we believe actually help people save, spend less and manage their debt. But I think our secret sauce is this. It’s not just that we have strong gut reactions backed up by years and years of psychology theory. But we test everything we do. We try to run randomized controlled trials wherever we can. And so at the end of an experiment or at the end of an intervention, at the end of a product launch, we can confidently say our intervention helped save or increased savings by x percent, or maybe our intervention didn’t work. I think those results are just as important to share because we want to know what works, what’s effective. But we also want to know what’s not effective so people don’t have to reinvent the wheel and waste resources down a path that we’ve already tried. So in a nutshell, I think for us, our key mission is to try to find those interventions that really move the needle in an effective way.
Ben Jones – Wendy and her colleagues are not only committed to carrying out the research, but also making it accessible. While a lot of their work focuses on low to moderate earners, my experience is that these concepts are applicable to clients in almost any income bracket. So I asked Wendy to give me an example of an intervention that Common Sense has implemented.
Wendy De La Rosa – I’m going to ask you a couple of questions. I’m going to bring you in. Are you ready?
Ben Jones – I’m ready.
Wendy De La Rosa – Okay. What are some of the best times to help people save, in your opinion?
Ben Jones – I would think that it’s whenever they get some sort of infusion of cash that isn’t part of their daily cycle. So whether it’s an inheritance or some sort of winnings or a tax return, etc.
Wendy De La Rosa – Exactly, right? We call those times golden moments. In the US, typically 85% of tax filers get a tax refund around the order of $3,000. It’s a great opportunity to help people save. And yet I find time and time again that financial institutions just aren’t doing enough to have a strong campaign around tax refund time. Right? It’s predictable. We know the season. So we partnered with an organization called Digit. Digit is a personal finance management app based out of the Bay Area. And what they do is that they try to take small amounts of money from your checking account, transfer it to savings in the hopes of building an emergency savings fund, which is great. We went to them, and we said, that’s wonderful. However, let’s utilize one of the golden moments, which is tax refund time. So we went about, and we created an experiment where we split all of their users into two buckets. In the first condition, once Digit detected that people had received a tax refund, we automatically sent them a text message saying, hey, you just received your tax refund. What percentage of it would you like to save? And then people could text back any percentage from 0 to 100 or not respond at all. In that condition, I want you to think about all of the barriers that we reduced. In a typical world, I would have to remember my banking password, my username, forget it, re-set it, go log into my e-mail address because I locked myself out three times, and then click through a bunch of screens to finally confirm my transfer from my checking to my savings. In this condition, all you had to do was answer a text message. So that’s condition number one. Condition number two was, we texted people early in the tax season, hopefully before they even received their tax refund, and we said hey, you might get a tax refund. If you do, what percentage would you like to save? Now, that is a much harder question. One, I don’t know if I’m going to get a tax refund. I don’t know how much, and yet you’re asking me to make a savings decision? And so that’s a little bit of a harder question. But we weren’t really that interested in which question is the hardest to answer. We were really interested in savings behavior. So what happened? In the first condition, when I texted you right away, right when you received your tax refund, people wanted to save on average 17% of their tax refund. Now, that’s huge, right? Why? Because according to the IRS, they give people an ability to split their tax refund and put some of it into a checking account and some of it into a savings account. And according to their latest numbers, roughly about just 1% of tax filers use that option. So the fact that we are able to increase savings in that condition is great. But now in the second condition, when we texted people way before they received a tax refund, they now saved on average 27% of their tax refund. So we increased that savings percentage from 17 to 27 just by changing the timing of when we asked. And now the question becomes, why? Why did we see these differences in savings behavior? Well, if you know anything about psychology and social science, the answer is not that difficult. Here’s the thing. In the future, we’re perfect. In the future, I’m going to lose some weight. In the future, I’m going to save for retirement. In the future I’m going to be a better wife. In the future I’m going to be a better daughter. In the future, in my mind, I turn into the best version of myself, and I become my personal Beyoncé, right? And I’m not alone in that. In the future, we become our perfect versions of ourselves. So of course when I’m making a decision for my future self, of course my perfect future self is going to be able to save more. But we often think about that bias as a negative. What we did here in this experiment was flip it on its head and turn that bias into a positive to help people save more.
Ben Jones – That’s a great example of an experiment and a control that worked and delivered real results. Can you give me an example of maybe your favorite failure, or something where you had a thesis of something that would work, and it just turned out to be not true?
Wendy De La Rosa – Okay, I’ll give you an example of something that “statistically” worked, but realistically didn’t, and I’ll share with you what I mean by that. A lot of states have a program that many families can take advantage of where they help families save for their children’s education through a 529 college savings account. So through a 529 college savings account, families can set money aside for future college expenses. You get tax benefits. It’s just a great program. And so in order to incentivize families to do this, often times states have matching programs where, for example, every $50 you put in, we’ll match you at a one to one rate up to some cut-off, with the hope that that’s really going to change behavior and help people save more. Now, the way in which many families are notified of this is through mailers. And so we embarked on a number of different studies where we try to optimize the letter. We did a lot of things. We put the letter in the children’s backpacks versus mailing it home. Because when you’re home and you get a letter in your mailbox, it’s in between bills and junk mail and all of that stuff. But if you’re a parent and it’s a letter that comes from your child, you should be more likely to pay attention to it. And then we tracked what percentage of families actually took up and opened their account and started saving. So statistically, yes. Putting the letter in the children’s backpack increased that. So if you run any stats test, great. You get nice, significant results. However, when you look at the percentages, they’re just so low. So we basically went from a 1% rate to maybe a 2.5%, 3% rate. That’s really not moving the needle. And part of the reason we think that happens is because the whole process is really difficult. So whenever we create an intervention, we think about what we call the three B framework. What is the behavior that you want to incentivize? What are all of the different small barriers that get in the way of someone getting to that behavior? So is your sign-up flow difficult? Are there too many screens? All of the little nitty-gritty barriers. And then what are the benefits to someone enacting that behavior? In the 529 college savings account world, we may have impacted someone’s attention to start, but the whole process of actually finishing and finalizing that 529 college savings account is so cumbersome. It’s dozens of screens where you have to remember your own Social Security number, your children’s Social Security number. It’s just a really big pain. And so we didn’t tackle, in that experiment, what we now know to be the biggest barrier, which is just it’s too hard to sign up.
Ben Jones – By the way, if you want to learn more about 529 and educational planning, check out Episode 77, Funding Education with a 529 Plan. Even if you’re not assigning experimental interventions, it’s helpful to approach your practice by keeping in mind the barriers that might stop your client from changing their behavior or taking current and ultimately receiving a benefit from your financial advice.
Wendy De La Rosa – One of the things that we find is, when we talk to an organization or even financial planners about, what’s a barrier to a family saving or investing? We often like to come up with barriers that we can’t control. Well, they don’t have enough money. They don’t earn enough, yadda, yadda, yadda. And as a financial planner, you really can’t pull the lever. It’s really hard for us to think about all of the barriers that we can control. Well, my dashboard is too difficult. I didn’t give them clear-cut choices. I wasn’t transparent. I didn’t give a clear recommendation. I sent them away to do something that I knew was really hard instead of having them do it in my office. We think about every barrier as every click, every step, every signature, every field in a maniacal way. Every single barrier is going to change behavior meaningfully. And then when we think about benefits, oftentimes we think about the rational benefits. I should save for retirement because when I’m old, I’m going to be really grateful that I have money to spend. But that benefit is far away, and it’s not immediate. And so we like to think about, what are the immediate benefits that make me feel good right now? What are those hedonic benefits, versus what are those utilitarian benefits that are not really going to motivate me to do something?
Ben Jones – What you’re saying is, you’re trying to flip the hyperbolic discounting paradigm backwards so that the doing something now feels like it triggers an immediate incentive or immediate feeling of success?
Wendy De La Rosa – That’s correct. Someone has picked up one or two behavioral science books. But let me tell you what great financial advisors do. What great financial advisors do is have a conversation. Do you want to round up your mortgage? Do you want to do this? Do we want to change your retirement allocation? We get people’s approval. And then the biggest way to reduce a barrier is to do it for them. That is what great financial advisors do. Because then now, you’re completely reducing the barriers. Obviously you’re getting their consent. They’re agreeing to changing their financial outcomes. And then you do it for them. And that is what I think separates a good financial advisor from a great one because now you’re allowing someone to live their life without constantly having to think about their financial situation. No one wakes up in the morning and says, I can’t wait to think about my financial situation. That’s not people’s primarily motivations. People wake up in the morning, and they’re excited to see their families and their children, and they need to go to work. I think that’s a key distinction between great and good advisors.
Ben Jones – Removing those pesky barriers for clients is best done hands-on in the office or when you have your client’s full attention. We also heard very similar advice on our last episode about financial wellness from Phyllis Klein. I wanted to learn from Wendy how advisors can take this kind of hands-on approach in a variety of situations, starting with a topic that I feel is often overlooked. The first thing that I’d love to address because I was really excited to see this is that the Lab’s not just focused on debt reduction, savings, budgeting, etc., but also focused on increasing earnings. And this has always struck me as an area, when people start talking about financial planning or financial advice, it seems like we always gravitate to debt reduction or budgeting or spending. But when you grow your earnings, that’s infinite. It’s not capped. Whereas reducing your spending has a floor in which you can reduce it to. So I was just curious, what are some of the behavioral science tools or ways that you’re looking to help people in this particular area?
Wendy De La Rosa – Great question. So in our lab, a large part of that work on increasing earnings is being able to match people with the benefits that they can be entitled to, whether or not that’s different public services, that based on your income, you are eligible for but people don’t know. That’s a large part of that work. But outside of that population, one of the biggest things that hinders people’s income ability is that people do not negotiate, especially in their salaries. And also they don’t typically ask for raises. Men objectively are much better at doing this than women. There’s a number of reasons why that is. But I think part of the reason and part of what we want to help people do is see the value of their own work and ask for a raise and negotiate their salaries. I was reading a story recently where a woman recently just paid off all her student loans, and created this nice video about how happy she feels. She was able to get a 40% increase in her income one year because she negotiated. Right, she jumps ship, and now all of a sudden she wasn’t beholden to whatever anchor there was of how she was underpaid. That, I think, is a primary way of helping people increase their earnings. We need to equip people with the right ways and to get — not — reduce that fear of having that conversation. The worst thing anybody can say is no. You’ll be in the exact same situation. Think about how great it would be for people to have a mock conversation or a mock negotiation with their financial planner. Because the biggest reason why people don’t do it is because they’re fearful. They don’t have the right words; they don’t know what to say. It’s not because they don’t want to. We all want more money, but it’s just because you don’t know what to say. And if you don’t know what to say, the best way to figure out what to say is to practice. If you have a conversation with your financial advisor, your financial planner, and he’s like, you know what; we really need to bring in more income. Based on my research, it seems like you’re underpaid. Most marketing managers in your area make X, you make Y. Do you think that there’s an opportunity there for you to get a raise? If so, let’s practice. Let’s come up with your bullet points together.
Ben Jones – This planning dialogue might not be for every client but I think it’s powerful to keep in mind that there are other tools besides cutting spending to help your clients achieve their goals. Next, Wendy gave me some tactics on how to help clients grow their savings or curb their spending.
Wendy De La Rosa – As a financial advisor, in order to help people save, you need to be taking advantage of these golden moments that we talked about. Whether it’s tax refund time or if you have someone expecting a bonus, I’m assuming the demographics of many of the clients of financial planners, they’re expecting a yearly bonus. We know when bonus season tends to come around. All of these times, we just need to be proactive and not just ask people when they receive the bonus, what they would like to do and how much they would like to save. But actually before, so that you take away that decision, that temptation, and create a commitment device like we did with the Digit example. The second way to help people save seems pretty basic but it’s just really kind of hard for people to get their minds around. If you go to any standard financial institution, the standard way of saving is to set an automatic deposit from your checking to your savings, let’s just say on the 25th of every month. That’s great for a lot of reasons. You pay yourself first, you get rid of that money from your account, awesome. But there’s an inherent problem in that, in that only 11% of people get paid on a monthly basis. So you’re creating a mismatch between those people who get paid bi-weekly and weekly and sometimes even daily now a days, so that there’s some resistance to signing up for an automatic transfer on the 25th of the month because I’m not sure if I’m going to have those funds on the 25th of every month. Instead, I would encourage advisors to think about a program and to set up this type of program where you save a percentage of your income. So that any time you get paid, you save. If you get paid a lot, you save a little bit more. If you get paid less, you save a little bit less. If you don’t get paid, you don’t save. So you get rid of this inherent uncertainty and potential for liquidity constraint if you just change the paradigm and the fundamental structure of how we set up those automatic defaults. So on the spending side, we ran a study where we showed that the number one expenditure that people regret outside of bank fees is eating out. Because it’s death by 1,000 cuts. You don’t recognize that the $12, $15 that you spend today are going to meaningfully change your checking account. But if you do that every day, now we’re talking about a sizable chunk of your paycheck. So there’s a couple of things that we can do. We’re running a couple studies right now, so stay tuned, but our hypothesis is this. That you can create a financial budget, you can spend $100 on eating out this week, or you can create a frequency budget. You can only eat out four times this week assuming that you spend on average $25 every time. Why do we think a frequency budget will be most helpful? Well, if I were to ask you how much did you spend yesterday on eating out, very few people can give me an exact amount. We just don’t remember that. Maybe it’s $10, maybe it was 12, maybe it was 22. But if I ask you did you eat out yesterday, we know that. That’s a binary answer, yes or no, so it’s much easier to keep track of and therefore stick to our budgets.
Ben Jones – Yet another way to think about helping your clients is to consider their environment. I’m a gardener, and I know that if you have a flower or a vegetable that’s not doing well, you generally don’t treat the plant. You have to pay attention to the environment: the soil, the water, the sunlight, the insects. Everything around the plant. Much of Wendy’s research touches on environmental cues that people draw from when they make financial decisions so I asked Wendy what can advisors do to create better decision environments for their clients.
Wendy De La Rosa – Here’s what I typically see that is really sad to me. Is that someone takes off some time from work to drive into the office of a financial advisor or financial planner, so they’re already making that commitment to go make an appointment with you and see you. And all they receive is information. Here’s how you budget, here’s what you need to do. I’m not saying that that’s bad, but if our goal is to change behavior, that’s not the most effective way. In fact, John Lynch, Daniel Fernandes and others have this nice, beautiful paper where they’re trying to analyze what is the impact of financial education on financial behaviors. They teach you how to save, teach you how to budget, what happens to your savings account. What they find is that financial education accounts for just 0.01% of the variance in financial behaviors. Not zero but very close to it.
Ben Jones – Yeah.
Wendy De La Rosa – And that, to me, is just so sad. Information is useful when it comes at the time in which I’m doing — I’m making a decision. If I go to the bathroom and there’s a little sticker as I’m about to pull my napkins to dry my hands that say these napkins come from trees, it’s not new information to me that napkins come from trees. But it’s really nice information for me to have so that I can curb how many napkins I take. That’s just in time information. I think that’s what financial planners need to do. In the moment in which you have someone, it’s not enough to give them homework. You know they have busy lives; they’re not going to do it. So why set up your clients for failure. They have to make their changes in your office while you have their biggest attention. And what does that mean? If you want them to set up an automatic savings transfer, let’s open up the laptop, let’s log into your banking institution, let’s set up that automatic transfer. By the way, we talked about automatic transfers and so we know what’s the best way to do that. It’s a percentage rather than a dollar amount. If we want people to round up their payments so that they can pay more on their mortgage, well, let’s open up your mortgage platform or let’s change the payment right now. The biggest motivation that someone has is when they’re in that room because they’ve already made the commitment to take time off of work, to drive, to find babysitter, to do whatever it is they need to do to be in that room with you. I think the worst thing a financial advisor can do is to send people away with a to-do list. They should be tackling that to-do list in your office.
Ben Jones – I am interested in talking to you a little bit about the idea of framing. Can you maybe share for our audience what framing is, and then maybe you have another example to just reinforce that.
Wendy De La Rosa – Yeah. Framing is a way of presenting the same set of options in different ways. I can present the same set of options in a gain frame or in a loss frame. I’ll give you an example of that. I can say, you can choose between stocks and bonds, stocks have higher rate of returns and bonds have lower rate of returns. Or I say I can choose between stocks and bonds, bonds have lower risk, and stocks have higher risk. It’s the same level of information but I’ve now just framed the decision differently because I focus people’s attention on a different piece of the puzzle. A piece of meat can be either 15% lean or 85% fat. The percentages haven’t changed but how you perceive the piece of meat, 15% lean, well, that’s a lean piece of meat, or 85% fat, that’s a pretty fatty piece of meat, will change. So that is the fundamental concept of framing. I’ll give you an example of recent research that I’m working on right now at Stanford; it’s how we frame recommendations. If I am deciding between two options, A or B, I can either recommend A or I cannot recommend B. In the world of financial planning, I can say I recommend that you invest in stocks, or I don’t recommend you invest in bonds right now. In this bond area world where there are two sets of options, the implicit or explicit recommendations are the same. But what we’re finding in the Lab is that people are much more likely to follow recommendation when you frame in that rejection frame. When you say I don’t recommend. Part of the reason is that people now perceive the differences between those two options to be much greater. I think for financial advisors, learning how to give recommendations in a way in which people are more likely to follow through with that recommendation, especially if you know that recommendation is meaningfully going to improve their financial well-being, is crucial.
Ben Jones – There are many ways to apply behavioral science to your practice as a financial advisor. The research at Common Sense Lab says that some of the most effective methods to help someone with their financial wellness is to reduce those pesky barriers that prevent them from following through on smart practices. We hope that you will use some of Wendy’s advice today to take a hands-on approach and start harnessing your client’s behavior for their own benefit, and providing them a good environment to make sensible choices with their own money. Thanks to Wendy for joining us in our office to share her wisdom, actionable ideas, and research with us. You can learn more about her work by checking out the Common Sense Lab, and we’ll put links to that in our show notes page including her TED talk on the subject. We’ll leave you with a final idea from Wendy on how to improve financial wellness overall in the U.S.
Wendy De La Rosa – We all share a responsibility to try to help Americans become more financially secure. This is not an individual game, this is a collective game. For the betterment of our society, for us, for our future selves, for our future children, we have to take an active role. I think the best way to take an active role is to change our environments. We have to get rid of this innate hypothesis that if we just teach it away, we just educate people, if we just teach them how to save, the problem will go away. No, that’s not the case, and that is not unique to financial decisions. We all know what we need to do to lose weight. Eat a little bit less and exercise a little bit more. And yet, we have an obesity problem in the U.S. and it’s because our environment doesn’t encourage us to make better eating decisions. We have the same thing with financial decisions. So I encourage everybody listening to this to take up the arms and say we have to change our environment. We have to create an environment where the incentive is not to spend at every moment of everyday.
Ben Jones – Thank you for listening to Better Conversations. Better Outcomes. This podcast is presented by BMO Global Asset Management. To access the resources discussed in today’s show, please visit us at www.bmogam.com/betterconversations.
Emily Larsen – We love feedback, and would love to hear what you thought about today’s episode. You can send an e-mail to [email protected].
Ben Jones – And we really respond.
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Emily Larsen – And I’m Emily Larson. From all of us at BMO Global Asset Management hoping you have a productive and wonderful week.
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