Just-in-time financial advice and other behavioral “nudges” might be the ticket to curb spendthrift behavior and boost savings rates.
Mobile applications that let people see their bank accounts or spending patterns at the point of purchase have shown promise in cutting wasteful discretionary spending, said Shlomo Benartzi, professor at UCLA’s Anderson School of Management, speaking Monday at the LPL Retirement Partners conference in Rancho Palos Verdes, Calif.
People forget what they learned in the past, Benartzi said, so education at the decision point works better than traditional financial education, which “is generally a waste of money.”
Benartzi and doctorate student Yaron Levi studied users of the Personal Capital website, which tracks spending. They focused on subjects who used Personal Capital’s smart-phone application. These users accessed the site more than a dozen times per month compared with two visits per month for website users. As a result, their spending went down by nearly 16 percent for the more active users.
The mobile app “led to decisions not to buy stuff, because people can see they’re not on track” with spending goals, Benartzi said.
Similarly, an e-mail “nudge” study with military personnel was far more effective (and a lot cheaper) than education or financial incentives in getting people to save more, Benartzi said.
Use of cheap and effective technology-enhanced tools to affect behavior “is where the industry should focus,” he said.
But Benartzi warned that with investment portfolios, immediate and easy access could backfire, by luring people into reacting to short-term market movements. This so-called “myopic loss aversion” risk could become a bigger issue as more investors embrace mobile access to their investments.
“We know that people make more emotional decision on smart phones,” he said. “Do we really want to let people cash out their retirement fund at the [shopping] mall?”