At the first Think Forward Summit last year, participants defined three areas where people experience challenges in their financial decision-making. These challenges gave birth to five projects, which participants were busy working on throughout the past year. This is an overview of the Social-norm nudge-project, their research and the practical solution being developed based on the research.
Can peer pressure make us save
By Marieke Blom and Nick Watkins
“Ladies, tell me, how much do you have in savings?” One evening I decided to ask two of my best friends at dinner. My friends were much keener to share than I had expected – maybe it’s not the taboo I thought it was…
One had about 20 times her monthly income available. I was quite impressed. I shared that my household has about four months of gross income available. Not bad, said the other two, sounding slightly bored by my response. We are all around 40 with above-average incomes, and I am – as for savings – probably as average as can be. The third started laughing: “You know me, I love to spend. I have... a couple hundred euros... I feel embarrassed.” I know she loves to spend, but this took me by surprise. She and her husband earn a good income. She could easily save, if she decided to skip some of her weekend trips, or some of the gifts she brings us.
I see how the world is full of ways encouraging her to spend. But what if the car breaks down or they experience an ‘income shock’ if one loses their job? How much of their buffer should be based on recommended buffer calculations, and how much on her sentiment towards the adequacy of their savings? Measured either way: a sizeable group of people exist who – like her – do not save enough.
So this is our question: How can we encourage people to save more? The savings working group of the TFI is taking on this challenge.
Social norms: encouraging or discouraging?
We know that people like to behave as others do. Social norms have a strong influence on us. So an often-used nudge is a bit of ‘peer pressure’ meant to induce ‘desirable’ herd behaviour. By informing individuals how the majority behaves or how one should behave from a societal point of view, many change their behaviour. Research proves this often works, such as when stair usage was increased (instead of the elevator) by informing people that a majority used those stairs. Or when tax compliance was increased by letting people know that tax cheaters were a minority.
However, so far no research has proved this works for savings. Worse even: the effect of knowing what others save appears to discourage people from saving. My one friend may simply be demotivated, feeling she will not reach the norm. The other could decide to save less, since she found out she is overshooting.
Our research and practical solution aim to overcome this. Our research will do this by fine-tuning various social norms for different peer groups. Also, it will make it easier for people to see how they can save.
Visualising goals as a solution
Our practical solution, an app, will help people visualise their goals. By setting out a personal goal and making it possible to compare to either the savings of peers or advises from trusted financial institutions, the app helps people to reach the goal and set up levels to make the steps smaller towards reaching the final personal goal. We will send pop-ups, such as right before payday, to remind them of their goals. We will give hints and tips. We will try to get people to save for a more positive goal. Finally, we’ll use ‘gamification’ to encourage people to compete on saving.
A lot of research indicates peer pressure is a powerful tool to help people change their behaviour. We believe we can make it work for savings.
It appears to have worked for my spendthrift friend. She now has just over a thousand euros, which is a 200 percent increase. She asked me for my financial spreadsheets. Social norms may work. But we will have to do some more research, as the three of us are way too small a sample size.
Many people do not have enough buffer savings and don’t know how to start saving. That is why the practical solution helps consumers in making their savings goal really concrete (by selecting a personal goal and visualisation) and motivate them to achieve these goals.
By comparing savings of peers, this solution motivates and guides how to start “unspending” and thus saving, hereby giving individual suggestions based on personal data and rewarding the small steps towards the goal.