This is Pacific Exchanges, a podcast from the Federal Reserve Bank of San Francisco. I’m Cindy Li.
And I’m Sean Creehan. Welcome back to Financial Inclusion & Beyond, an ongoing exploration of what we can learn from efforts around the world to improve financial inclusion and wellbeing. In today’s episode, we sat down with Ting Jiang, a behavioral economist who researches and designs products for behavioral change, both in academic and what we at the Fed would call “real economy” settings. At the time of this recording, which took place prior to the pandemic, Ting was associated with Duke University’s Center for Advanced Hindsight.
Show a story of a Kenyan man saving daughter gets sick and then because of the saving, they were able to send the kid in time to and the doctor say, “Well, it would have cost you much more money, if you come into the clinic too late.” And the wife at the end of the day say, I’m so proud of you that you’re taking care of our children. That story leads to 8% of people saving while the control calendar in the first month lead to 0% of savers. So you were talking about 0% of saver versus 8% just by having this story on the calendar.
In previous episodes, we’ve touched on the issue of how to bridge the gap from inclusion to activation and to financial health and resiliency. Ting tells us about her work, studying and designing products solutions to help low income populations improve their financial health decisions.
As Ting puts it, these tools are designed to help us conquer our inner Homer Simpson, the voice that overrides our intention to eat healthy and instead decides to eat another donut. In the case of Ting’s work, Behavioral Economics informed product design is helping individuals save more, spend less or simply remember the previous intentions when it’s time to decide and take action.
I also appreciate that Ting comes at her research with empathy and without judgment. Academics and policy makers sometimes make value judgments about the best use of a poor man’s money, where in reality, behaviors may be a perfectly reasonable reaction to the stresses of poverty. Here’s our conversation with Ting.
Well, Ting, thanks for joining us today.
So, before we start, could you just help us understand, for listeners who aren’t as familiar with what Behavioral Economics is, what is it and how has the science used in financial research, including efforts to improve financial inclusion, financial health around the world?
I like to frame Behavioral Economics as a science that try to adjust the Homer Simpson in us. Traditional economics like to assume that we are rational actors, because Economists like to think that everybody thinks like Economists. But in fact, if we look at normal people, we are not exercising as much as we want to, we’re not eating as well as we want to, we don’t sleep enough. There’s a lot of times where we know what is the best thing for us to do, but we don’t implement our intention. So, there’s a word that’s used a lot in Behavioral Economics, it’s called intention-behavior gap. So, we have the best intentions to behave in the most rational way possible. However, our behavior is not in line with our intentions and Behavioral Economics offer interesting insights and more realistic insights about human behavior. And by understanding better how humans truly behave, we can then come up with policies and products that would be interacting with the decision-makers in the most effective way possible.
Your research work focus a lot on financial health of the general population. Tell us a little bit about that.
So one of the biggest problems that we are seeing failures in behavioral change, both in health and financial behavior is that we don’t ask enough what the problem really is. So Einstein has a quote that if he would have one hour to address a challenge, he would spend 59 minutes to try to find out what the problem really is. And one minute to come up with a solution and I think in reality we’ll see that we quickly jump into solutions and we don’t ask enough about what the underlying problem, the core problem really is.
And in our work, we try to first ask the question, what’s the ideal behavior that we want that would make the most impact in the problem we’re solving? And because of that, we need to understand what the problem really is. So we do a behavioral barrier diagnosis and say, if people are not saving enough, is it that they don’t understand that saving is important? Maybe they do, they understand the savings is important, but they don’t manage to it, right?
So if somebody is not exercising every day and you ask him, “Do you understand the exercising is important?” And say, “Yes. I know that it’s truly important, but today I’m too busy, tonight I’m too tired.” There will be lots of reasons why he’s not exercising in the end and it doesn’t really help to tell them more information about how important it is to his health, because he already understands that. So then the barrier becomes whether he has self-control or he forgot to, during the implementation of the intention. So there, what we truly found out what the underlying problem is, the intervention all of a sudden becomes something very different. And that’s where I think it makes a difference how behavioral science leads to more effective interventions.
So one of the upshots of that seems to be that financial literacy or having an idea of what is the right decision to make in a specific case, whether it’s to save more or to spend less or to insure yourself or whatever it may be, that that knowledge isn’t enough. So what does that mean for kind of current approaches to a lot of these challenges?
So having the knowledge is helpful, in some cases might be necessary condition, but it’s not sufficient, right? So I think it really means that we have to think about what are these other leg that needs to be there in order for it to be walking. And it often involves, after helping the consumers have the right intention and more internalized intention, how do you help them implement their intention effectively? So automatic saving account, so if you help them open an account and you say, “How much do you wish that you would have saving every month, every week?” And they would say, “I really wish to have $50.” And at that point, if you would get them to sign up for an auto transfer, as a percentage of their paycheck etc. going into this saving account, it would take away all of this implementation barriers, like forgot to, there’s more frictions if you, if they have to do it every week and then they might be tempted to spend it on other things.
So I think for a lot of decisions, if we can automatize it, they would have more implementation success and then protect this sort of limited cognitive resource to spend it on other more important decisions that they really need to analyze. If you think about, we tend to make worse decisions when we’re tired, when we are occupied, like stress with other things, just means that these kinds of decision-making often compete for cognitive resources we have. And so I think technologies and also whatever interventions that we come up with, it should one really try to be cost effective, not just in money, but in cognitive resource.
Just to clarify the technique you are talking about here, is it what’s commonly known as nudging or does it go deeper than nudging?
That’s a great question. It includes techniques like nudging, but it’s not only about nudging. So if you think about habit change, it goes beyond a one-time nudge. So what a notch is something that can be there, for example, a text reminder, it’s a nudge. When you rely on a nudge, it has to be there all the time to provide just-in-time intervention. If you would create a habit like our toothbrushing habit, once it’s created, it’s there and you don’t need the nudge anymore, you can actually take away the nudge. It becomes incorporated into these individuals’ daily routines that it’s more cost effective again.
So maybe you could get into a few specific examples, I know you mentioned automated savings or a text reminder, which isn’t necessarily more than a nudge, but of technical solutions that you are applying your Behavioral Economics research to inform out in the world. So I know you have done work around the world here in the US and Africa and in Asia. Can you talk a little bit about a few examples of how this is working in practice, how you’re making a difference?
Maybe let me take an example of saving for healthcare in Africa. We worked in Kenya in the past few years and one thing we discovered is that there’s a social norm of women saving for healthcare, but not men. First of all, we check whether people understand that saving is important. 95% and above would say, it’s extremely important. If we ask them, “What do you think other people think?” All of a sudden that number drops, right? They would think maybe over 75% think it is very important. But still most of the people understand this is important.
But when we’ve asked women and men, their answers tend to be different and when we present a story of, in the urban slum, a male Joseph saves for healthcare and the daughter got sick and the money saved actually saved the life of the daughter, we got some funny reactions between women and men. Women would, were laughing at it, because that’s who it’s not really the typical thing that happened and the men were also shocked by the example, but then they say, “Oh, this is actually interesting.” So we created a story and we put this story on a calendar. Our partner have this Mobile Wallet where everybody can save for healthcare and then upon your opening of this Mobile Wallet account, you get a free calendar. So we say, that’s an entry point that is already there, so we’re not increasing the cost of the business by giving it additional giveaway, we just use that giveaway and we say, let’s change the design of this calendar. How do we change it? So they actually promote saving.
Instead of having branding images, which is very popular, you get people holding a mobile phone, doing the saving and typically we think that, that’s effective, right? So we have that as a control calendar and then we have another calendar where we show a story of a Kenyan man saving daughter gets sick and then because of the saving, they were able to send the kid in time and the doctors say, “Well, it would have cost you much more money, if you come into the clinic too late.” And the wife at the end of the day say, “I’m so proud of you that you’re taking care of our children.” That story leads to 8% of people saving while the control calendar in the first month lead to 0% of savers. So you were talking about 0% of saver versus 8%, just by having this story on the calendar.
So that is one that works in sort of changing people’s perceptions about how much other people are saving and what’s the tangible kind of outcome of this. This is more on the intention side. In another calendar, we actually asked people to circle the dates when they want to save and we also ask them to say, “Per month, how much do you really want to save?” Then they write down the actual amount. We say, “When you don’t manage to save as your plan, you cross it out, but put it in another date as well.” So we call this kind of the planning intervention. We see also a substantial increase in the amount of savings by just having this simple intervention. And that intervention is what we would call intention-behavior gap is that, now you have the intention and we want to make sure that you don’t just not do it because you forgot to.
So I’m just curious, do you track the behaviors of the participants of your experiment after this period of experiment where this new better habits, financial habits stick? How do you measure persistence?
We actually looked at six months after the calendar was given and we did see sort of persistent change in the saving amount of the ones using the calendar versus not. Now, this is not yet a true habit change intervention. So as we understand from research with animals, you need certain number of repetition for any behavior become really automatic. The more familiar they are with that behavior, the less cognitive resource it would take for them to remember to do it, and the perceived cost of engaging with that new behavior it’s much lower. So even when you are extremely tired, if you, for example are not familiar with the three-step deposits of this new mobile wallet, you want to do it only when you have the most energies. When you’re tired, you’re like, “Oh, something might go wrong. And because I’m not familiar with it, I’m just not going to go into it. I’m going to do it tomorrow.” So you go keep on procrastinating on something that you don’t feel as good at, right?
So we did another experiment where we just let people try it out, and this is interesting for new app and digital solutions for user engagement. We have one group, they just try doing the deposit on this mobile wallet once. And with another group, we asked them to do it three times with different amounts. The total amount save is exactly the same, but then another group would break it into three amounts, and we give them some excuse to sort of practice three times. And we also after each time, we give them a positive reward like, “Oh, you did a great job. You’ve managed to deposit.” And again, we double the amount of savings. This was going from 22% to 45%. That’s a substantial effect size, and it’s a very simple intervention.
And it again shows when intention is not the problem, lot of tiny frictions, even no matter how tiny it is. I know it’s a friction in real life and you just never plan it into your daily routine or you feel that this behavior, even though it takes one minute, because you’re unfamiliar, you’re afraid of the potential errors you make. You have the psychological friction not to want to go into it. So the intervention for us there was quite simple.
You mentioned digital wallets and payment apps as a part of your experiment. I’m just curious. It seems like financial technology has played a quite an important role. Do you feel a financial technology compared with just traditional financial services providers have a kind of advantage in promoting this behavior change?
That’s a great question. So if we break down financial behavior into earnings and savings or reduce unnecessary spendings versus finding enough opportunities to grow your income, we are seeing quite a big number of opportunities to reduce unnecessary spending, for example, betting. So in our context, we know that because of stress, there’s maybe even a bigger need to feel some sense of social belonging and security and so you spend a lot of money actually on alcohol, on bedding, because with bedding, you at least have some hope that you’ve kind of gained some income. We even found that for women, they like to get their hair done and when we actually play in a financial decision book game with them to help them understand that there’s decisions like soda, bedding, those that do not yield use future incomes and there’s spending on like buying a chicken, they lay eggs every month, which can actually earn your future incomes.
We let them choose between these decisions and experience shocks, financial shocks and see how the lack of income, lack of savings, is linked to whether you can cope well with the shocks or not after they played the game. They themselves were the one to say, instead of drinking once a week every Friday, I want to drink only once a month, and I’m not seeing a huge downside of that. Because now I see tangibly how this reduction of unnecessary spending can actually lead me to a better position dealing with the shocks down in the future, because I had that emotional experience in the game. For women, they say, “Well, actually I can ask my girlfriends to help me with my hair. I don’t necessarily need to go to salon.” So one thing that was very interesting about the psychology of trade-offs is that we don’t see when we say, save more for healthcare, they would report themselves trying to reduce saving in other areas.
And they don’t see reducing spending on soda and all these things are the opportunities for increasing saving. They would put the trade off in the same bucket of saving. I don’t have money to save for healthcare because I already need to save for opening a business or saving for education. But when you point out that there’s a link, they would be shocked at first, but then they start to have a more concrete picture. After they simulate this decision for every month, they would get a prompt when they are spending there like set soda or the set time that they go out for a drink, they can set up this intention of wanting to give up on this. So the fourth time they can say, I’m going to, yes, this was my intention for tomorrow not to drink, but to say, let me press this button and the money would just be transferred automatically.
So the digitalization is, I think it’s very effective in reducing the friction of their intention implementation. But we do need to map out what are the true opportunities they can increase their income or reduce their unnecessary spending. Not until we pin down what’s the behavioral change required, we would be lost in the digital solutions because we might be just trying to come up with something really cool and technologically they’re advanced without addressing the problem.
So pinning down that problem and mapping it out, are you talking about, say someone who is sharing their financial data with whatever provider you’re talking about, so that gives them that ability to map out their income flows their expenses? Or is it actually relying on that user to help you or the service provider map it out and then you can solve the problem? Are you also talking about automating that mapping out of the problem for them?
Absolutely. I think that’s the advantage as well. But there are a few simple ones like, how much percentage of your paycheck do you want to move to saving? That, it just, everybody can answer that simple question upon opening the bank account without actually tracking the data. But you could get an average and say, “Hey, on average there is this room for saving this amount. Looking at your past three months, you can actually save 20%.”
This is just fascinating to me, because this is a technology, but it’s not really rocket science type of technology. It’s a relatively low level but it helps just by presenting the data, analyzing the data, just to assist the decision making process.
But for some behavior you do need adjustment. What are the moments where you do on a prompt them, for example, they did manage to save and maybe you want to kind of reinforce that intention to grow their income, so you can give feedback on, “Look at your saving has already grown this past month by this much.” And then have them set newer, even more advanced intentions on progressing.
This may be more of a philosophical question, but I’m thinking I was seeing a founder of a company in this space whose product basically tries to nudge and create habits around savings. And this person was describing their product in similar terms to the way a user might use a mapping application like a Google Maps on their phone, that in the future, all of us, we don’t have to use that part of our brain. We don’t have to remember directions. We can have confidence that this tool is there. We have more cognitive resources to use the language you had before to apply to other problems and that is generally an unambiguously good. And I think I tend to agree for the most part, but I’m just wondering when you think about the broader perspective of creating healthy financial beings with a sober understanding of the limits of human behavior and human ability to bridge that intention to behavior gap, do you imagine a future where all of these applications are making a lot of these small decisions for us and it doesn’t matter? Is there any worry that that can maybe undermine just-
… agency, autonomy, but also just, is it good for all of our citizens to be wandering around and not necessarily having any clue of how to do this without their phones or their computers?
How much should we be aware of the strategies? Suppose the bank can come up with this, 10 strategies is perfect for our financial wellbeing, they just implement it, we have no idea what’s happening in the background. Is it a good idea? I would tend to say, no. There are two parts of it. The things that can be automatized, a lot of things that can substitute our decision-making in a future. I do think it’s good to in some situations for people to be aware of it so that they can be the strategic thinker for renewing the strategies over time. So the optimization should take place at the individual level. It should take place at a dynamic level. So you could kind of have a baseline where everybody had this like auto saving account and taking away some barriers and reaching a sudden threshold of wellbeing that is easily reachable.
But then what is truly amazing about human beings is that our potential in seeking opportunities, to grow 10 times, a 100 times our income, if you think about those journeys, they’re not going to be done through an automatic process. Because there’s this agency of this person looking at what opportunities actually match with my skills and with my situation that I can grow over time and a habit of checking opportunities once a week, like where I can find actually a better job, I can build my skills so that I get a better job, those things need to kind of take place with the full participation of the human being. But having the habit being automatized, it’s the supportive part, so the agency, I believe is crucial.
And maybe to build on that with some examples, some really big financial questions, you want people to be asking, how do I save enough for my child’s education? Or how do I, can I afford it to buy a home in this region? Or should I consider moving to this location with this income expectation in this housing or cost of living, tools that can help them make those decisions better, but you still need to be asking the questions, you still need to know that there’s something to worry about.
The reason why we call our game Africa “Happy Money” is that, money ultimately is a tool, it’s supposed to maximize your happiness. Now there’s a very philosophical question here is that, sometimes having more money left does not necessarily mean that you make use of the money in the best way and what to spend on. At some point, I think we’ll have the sophistication where people will rate every spending and say, maybe for you eating out one time in the restaurant is great, but for another, he’s willing to sleep in a sofa because eating out gives him so much happiness. So his decision rule and what to spend on become completely different. And these things really need the individual to participate. So I think it’s an important question to also think about what do you get out of the money spent? It’s not just merely a quantitative game, calculation game with how much money you can save.
Ting, we spend a lot of time talking about changes at individual level or household level. Just wondering how this experiment or research projects of yours and your colleagues can connect to the bigger picture of a financial resilience of a country or region.
One interesting question or phenomenon is with the access to credit. Now China’s also gaining a lot more access, if you look at WeChat, it just, in the past, as in typical Asian country, we almost like my parents, they would never spend more than 50% of their income. So now we’re seeing, because of the technology, because of actually easier access to credit, the phenomena of over spending, for example among migrant workers is increasingly problematic. So we spend ahead and we some point just put ourselves in a situation of stress when we run into emergencies and that we have to borrow with high interest rate and it gets into a vicious circle.
If we think about middle or high income people who don’t suffer from financial scarcity, but time scarcity, we do the same. We over commit, we over spend the amount of time we have and then resilience is really about having a more realistic picture of how much time and money you have and be prepared to have the financial slack to deal with emergencies. How to build that, I think both at the institutional level, at an individual level, there are lots of opportunities. When we think about myopia, not seeing the benefits in the future, one interesting experiment done by UPenn Professor is to show people the future self, right? The 60 years old version of yourself before they make a decision and they found that it doubles the amount of saving that they set aside.
I mean, in a lot of ways, that’s similar to the experiment you did with the calendar, right? And the person that’s saving money for healthcare and then suddenly their daughter is saved by this decision, it’s the same thing.
So you make the future benefits more tangible and visible.
Less abstract. If you think about resilience, it would be helpful for people to train themselves into imagining all the potential unexpected shocks, not at abstract level, but in a very concrete level. You can even imagine simulating that, when they are in a situation facing this unexpected shock.
Now, of course you can also think about risk pooling. If I’m in a community of say, I mean insurance obviously is one, where you kind of increase the entire population’s resilience, but can we think about also encouraging each other to save for that collective slack?
Well, you could also see it effecting the way social safety nets are planned too, it depending on individual resiliency. I was just going to ask, you mentioned China and you mentioned migrant workers, could you tell us a little bit about the work you’re doing in China? What are the kinds of problems you’re seeing there, challenges you’re looking to solve? Are they generalizable to other parts of the world?
So we are seeing the same problem, I might call it just myopia among migrant workers as well. So these people come to the city. Typically, they change jobs every few months, they don’t stay in the job for a long time. They move around. Because their mindset is so day-to-day, they spend and save as if they don’t really have a future to look forward to. And one intervention that we are looking into is the relationship with factories, by helping them, the entire process of building their CV, get matched with a factory, prepare their, all the documentation needed, even have the bus transport them to this and healthcare insurance, all of that. They basically got a middleman for it, but then they also have this so-called “Sisters,” even if it’s a guy agent, they call them Sisters, every migrant workers is connected with a Sister who helps them at a daily basis, to help them manage this journey.
We see the, a lot of psychological dependency of our migrant workers on this Sisters system. And it’s an interesting exercise to look at how much psychological capacity building and agency, self-efficacy, basically by having them putting more faith in future and grow a sense of empowerment through another human being. How much can that actually impact their likelihood to take up opportunities and engaging good decisions? We’re looking at how aspiration can play a role and how this aspiration can be created through both the role of humans and technology. I think that area is fascinating because we have seen some evidence coming out, sort of mental health, even psychological therapy, increasing women’s uptake on ANC (antenatal care) visit to connect because depression can be causing inaction. So feeling more vital can actually get you to be motivated to take action, to interact with opportunities given to you that relies on both technology and actually some psychological capacity building and behavioral interventions.
You have already given us some great examples on how your work in Behavioral Economics could make decision-making by financial consumers more effective. So on an individual or household level, this may be incremental changes to one’s saving habit or spending behaviors, but can you talk about the big picture of what can be achieved collectively for the society? I think the magnitude of potential impact can be huge. For example, you mentioned China’s migrant workers.
300 million people, about quarter of the entire population and it is this group of people who will be connecting the cities and the, so the urban and rural areas, right? So if you assume a large number of poor low-income actually in the rural areas, is not entirely up to the government to kind of fight the poverty. A lot of times the migrant workers working in the cities are the one who actually will help improve the income situation back in the rural area. So helping them in some way, it’s an effective way to help also the low income through the informal system, which is slightly different than I think if we think about more individualistic societies and set up.
As we embarked upon this broader series of interviews on financial inclusion and beyond building resilience and health, one of our interest is, what can we learn from what’s going on in other countries to inform our own solutions here in the United States and one trend I think you can see very clearly is organizations that care about the topic of what is normally been called financial inclusion in the US is they’re moving beyond that concept to other ideas of health and resilience. And I think to the extent we’re seeing successes in Asia and countries like China and including people and giving them the basic access, that’s great. And we should be cheering efforts in India and other places that are trying to bank that last person.
But it’s a lot bigger of a challenge and so it was just be interesting to learn from examples like the research that you’re just embarking on in terms of migrant workers, because maybe the US population isn’t quite the working, the workforce isn’t quite the same as China’s migrant population. But a lot of those issues you just mentioned are of course important. It’s like, how can you work with people that are considering a career change or moving to a new location or struggling with the interconnection between financial and mental health and making good economic decisions, these are all global challenges. So, it’s interesting to hear that. I think it’ll be exciting to see your research and think about how it can apply to the US.
Maybe one last example that again, probably shares a lot of commonality between the two countries. So one intervention that Common Cents Lab did was, creating a weekly budgeting prompt and compared to a monthly budgeting prompt. And so in the migrant worker project in China, we, the company already features their brand with the weekly payment system. They channel the salary from the factories and they have it scheduled instead of monthly, they have it schedule in a weekly basis and they claim that this is something that increased their financial health and wellbeing by a lot. They say this was something that they know that it’s working. So, that’s again interesting, it’s a simple thing of, instead of giving them really a long time horizon to think of, let’s just shorten the horizon so that the myopia problem is not as salient, right? And again, it counts on the digital technology to be able to show this weekly and monthly or kind of set it up so that it works fluidly.
One question that I’ve had in the back of my head as you’ve been talking is thinking about the incentives of service providers to promote better behaviors. I mean, sometimes financial institutions would like more say, low cost deposits. So promoting savings of customers can be beneficial, but firms also like to lend because they make theoretically, if they’re running a good business, they’ll make a decent margin on that loan. So I just wonder if you think about this challenge and what it means for the role perhaps of public policy and regulation in promoting these tools that hopefully are having a beneficial outcome. Does it require public incentive or public mandate, as opposed to just hoping it’s in the self-interest of a company to want to attract customers because they’re doing the right thing for their customers.
I just heard somewhere that there’s this new trend of business wanting to align their profits with consumers wellbeing again, because that’s less myopic, right? I think for even this migrant worker company, they were talking about how important they want to view financial wellbeing of these 300 million, because at some point this is their target group who will buy any products, financial products from them. So now they’re talking to us as if they’re this paternalistic extremely altruistic and caring employers caring about their well-being and life quality. But as I poke further, I understood that they want to make sure that these are really moneymaking. So I think that route is really just convenient on both sides.
Thank you very much Ting.
Yeah, this was great. Thanks so much for joining us.
We hope you enjoyed our conversation with Ting. Behavioral Economics informed financial technology is clearly a powerful tool. It can be used for good and bad. I loved our conversation, not just wondering about how these tools can drive healthier decision-making but also the need for policy makers and regulators to pay more attention to their risks of predatory technology.
Yes and clearly these tools are just beginning to impact the market. So it’s a space to watch. For more episodes like this, you can find us on iTunes, Google Play, Stitcher and Spotify. If you like what you hear, please do leave a review. Feedback from listeners like you will help more people find us and for even more content, look up our Pacific Exchange Blog available at https://www.frbsf.org. Thanks for joining us.