4.5.1 Three psychologies that are closely linked to savings behavior
The first psychology is called vivid representation and means that the easier it is to imagine something, the more a person cares about it. Saving requires planning for the future, and most people know that they should save and they and their families will be happier if they do save. However, the future is far away and it never feels as close as the present does. Making the future easier to imagine in a vivid and concrete way can increase the amount that people want to save.
Ideas42 applied this psychology to sole wage earning male laborers in India earning US$15 per week. Each laborer had two children, aged two to seven years, and a stated preference to save. The actual savings rate for this population is under one quarter of a percent. The researchers used four treatments, 1) one envelope for depositing weekly savings 2) an envelope with a photo of their children, 3) two separate envelopes, and 4) two separate envelopes each with a photo of one child. The study found that those with partitioned envelopes saved a minimum of 67 percent more than those with single envelopes. Adding a photo of each child to the partitioned envelopes increased the amount saved another 19 percent. In this case, separating the envelopes and adding a visual reminder (photos of each child) served as the most effective tool for encouraging laborers to save.
The second psychology is time inconsistency, or how people’s preferences can change over time. For example we can say that we will wake up early tomorrow morning. However, when morning comes, our preferences change and we stay in bed. Ideas42 applied this psychology with Kenyan farmers. Every farmer surveyed stated a preference at the end of the growing season to use fertilizer in the next growing season. At the end of the next season however, only 30 percent ended up using fertilizer. Ideas42 tested a free fertilizer delivery service that was offered one season in advance. This intervention allowed farmers to act on their preferences when the preferences were most likely to lead to a good outcome. Further, once we act on a particular preference, we are more likely to keep that preference in the future. Ideas42 found that 37 percent of those in the group who committed to the delivery service bought the fertilizer versus 24percent of those in the control group who did not commit to the delivery service. So working around farmers’ inconsistent preferences led to better agricultural practices.
The third psychology is limited self-control where we state a goal but do not have the self-control to act on it, such as going regularly to a gym. A study looked at gyms with two membership options: a monthly attendance fee of US$80 per month, or a US$10 charge per visit. People overwhelmingly chose the monthly attendance fee, but on average only went to the gym 4.4 times a month. This ends up costing $17 per visit, much more than the pay-per-use contract. Ideas42 applied this psychology to savings and farm inputs for Malawian farmers. Its research found that while farmers stated an intention to buy inputs, such as fertilizer, at the beginning of the season, that in most cases they did not have enough money at harvest time to purchase it. In this test, ideas42 provided a group of farmers with the option to set aside a certain amount of money at the beginning of the season and restricted access to it until harvest season. Results found that the farmers stuck to their commitment to purchase inputs and at the end of the growing season were able to purchase 27 percent percent more fertilizer than the control groups and increase their outputs by 22 percent. Here the intervention was fairly simple- don’t let people access their money until they need it- but had a significant impact.
The Bank on DC Program, in partnership with the Summer Youth Employment Program (SYEP), attempts to provide approximately 9,000 un- and under-banked youth in Washington, DC with low-cost starter bank accounts and financial education. Prior to the Bank on DC initiative, young people in the SYEP program received their wages on prepaid cards and did not have the opportunity to set aside some of their summer earnings using direct deposit or automatic savings transfers. The Bank on DC Program wanted to minimize the associated hassle factors of opening new savings accounts while avoiding potential choice overload of too many options. The program designed a simple process for SYEP participants to opt-in to a direct deposit savings account, rather than the default choice of a prepaid card. In addition, they used a lottery linked to the use of a savings account to encourage uptake. Within the first year, over 800 young people opened new bank accounts, 1,300 selected direct deposit and nearly 600 set-up automatic savings transfers.