4.5 Behavioral Economics

Ideas42 is an organization that believes human behavior is at the heart of the world’s toughest problems. It works to apply behavioral science to devise innovative solutions that deliver social impact. In applying these concepts to savings behavior, ideas42 hopes to break down the behavioral barriers that keep people from saving regularly and help them to achieve their saving goals for the future.

Designing a savings product requires a model that explains why people make the choices they do. Often, the model that is used takes into account costs and benefits. If the benefits outweigh the costs, then people choose that option and then follow it with the necessary action. For example, in this model people look at the interest rates, fees, and policies of different savings accounts. Then they choose the one that maximizes their returns, decide to open that account, go to the bank, open the account, deposit money, and so forth.

However, ideas42 uses a different behavioral model to understand behavior. In order to understand why that decision and corresponding actions happened, ideas42 separates the decisions and the actions. Looking more closely reveals that factors other than costs and benefits often affect decisions. Sometimes there are too many choices, and people fail to make any decision at all. Even once a decision is made, many things can lead people to act in a different way. People may procrastinate, or forget a necessary step in the process, and small hassles can prevent people from doing important actions.

Ideas42 makes sense of these complexities by applying psychological tendencies that have been identified in academic research and observed in the field. Using this framework allows ideas42 to design products and processes that address the root causes of behavior, since each different psychology impacts people’s decisions and actions differently. With regard to savings behavior, ideas42 has identified a few specific psychologies that impact savings behavior. Using these psychologies in savings product design can help to increase the likelihood that a person will actually begin to save.