How Behavioral Science Can Improve Financial Technology Innovations

Eldar Shafir

Guest blogger: Eldar Shafir, Co-Founder of ideas42, Princeton University Professor, and Advisory Council Member for the Financial Solutions Lab

Like many of us, I’m lucky enough to be able to manage my daily life while devoting just a sliver of my mind to looking after my personal finances. But for lower-income American households, navigating continuously challenging financial situations takes up a significant portion of their time, attention, and cognitive resources. Since we are all creatures with limited mental bandwidth capacity, this means less mind left for other important concerns in daily life.

In one study, preoccupation with financial challenges temporarily lowered low-income individuals’ IQ by thirteen points. An ever-growing group of capable and well-intentioned academic researchers, non-profit leaders, entrepreneurs, designers, and some bankers aim to help all Americans who struggle with financial challenges by better understanding – and potentially alleviating – the psychological impact of financial scarcity.

Americans are worried about their financial situations for good reason: 44% don’t have enough savings to cover even 3 months of normal expenses, and 92% would prefer being financially stable to moving up the income ladder.  Many of us think minimum incomes should be higher, and benefits made more generous and easier to obtain.   But as long as poverty persists, we must look for ways to free up mental bandwidth by making household financial management easier.

That is why the Financial Solutions Lab, managed by the Center for Financial Services Innovation (CFSI) with founding partner JPMorgan Chase & Co. , is bringing together the best and brightest of the financial technology world. The Lab is taking real, tangible steps to tackle financial instability by connecting these entrepreneurs with the industry experience of a major financial institution, as well as the design expertise of ideas42 (a behavioral design firm I helped found) and ideo.org. The Lab’s first challenge asked entrepreneurs for innovative solutions that help consumers better manage household budgets. The nine winners will each receive $250,000 along with partnership opportunities, industry expertise and mentorship.

As a member of the panel of judges for this challenge, I was encouraged to find a group of finalists that were energized, smart, and clearly interested in improving lives. The finalists’ projects are exciting, offering a range of innovative ways to help consumers organize complex finances. Digit relieves the burden of remembering to save money by calculating our savings opportunities and nudging us to set manageable amounts aside for future needs. Neighborhood Trust’s PayGoal tool brings financial goal-setting into the workplace. For hourly and part-time workers, Even turns scattered, inconsistent paychecks into a steady salary, automatically setting aside extra income earned during busy times to boost paychecks when work hours are slim. In a creative twist on a physical concept, DipJar recreates the tip jar in a virtual environment to make sure hard-working employees get tipped via credit card.

Understanding and designing for real people with real financial needs will be a critical success factor for these entrepreneurs. Their products will need to prove their relevance and usefulness specifically for lower-income consumers—in everything from accessing software to using devices to trusting and understanding the systems. These products will likely appeal to middle-income consumers as well, but it’s their success in ameliorating the lives of the poor that will really move the needle on solving the scarcity problem. Effective design requires taking into account what we know about human behavior so as to shape product offerings and test out new approaches with real people. The marketplace, not a panel of judges, will serve as the ultimate judge of success.

In the meantime, the Lab will be instrumental in helping the winners of this first challenge tailor their products to the communities they are meant to serve. Coming from a variety of backgrounds and with varying levels of funding and experience, the entrepreneurs bring many perspectives to the table. The advice, expertise, and resources provided by the Lab will be particularly important for making sure these new, creative tools continue to appeal to consumers and are scalable in the long term.

I’m hopeful about the potential that these ideas hold and the optimism that these efforts represent. The Lab entrepreneurs are addressing interesting challenges that have a more profound impact on people’s lives than had typically been assumed. Insightful solutions could help millions of people rise above the context of scarcity and live more successful lives.

Eldar Shafir is a Co-Founder and Scientific Director at ideas42. He is the William Stewart Tod Professor of Psychology and Public Affairs at Princeton University, and has served as a member of President Barack Obama’s Advisory Council on Financial Capability. He studies decision-making and judgment, and his recent work has focused on behavioral economic analyses of decision-making in the context of poverty and, more generally, on the application of behavioral research to policy. He is also the Inaugural Director of the newly announced Kahneman-Treisman Center for Behavioral Policy at Princeton.

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