Use behavioral economics concepts to understand how people make decisions and design more effective financial services, advises innovation expert Pete Foley of Pete Foley Innovation.
Classical economics is only the tip of the iceberg, he says. Behavioral economics—the application of psychology to explain human economic decision making—is the big hidden chunk below the water.
People don’t always make completely rational decisions, says Foley during the CUNA Economics & Investments Conference in Chicago. Many times they use mental shortcuts and habit to avoid slow, analytical evaluations.
“Sometimes we need a little nudge to do the right thing,” such driving safely, eating healthily, and making sound financial decisions, says the veteran of Procter & Gamble.
Credit unions can nudge consumers in the right directions with the following concepts:
• Context rules. Making decisions takes a lot of energy and humans have a limited capacity for them.
Therefore, when you ask someone to make a decision—such as early in the day versus the end of the day—may highly influence the energy a person will put into the decision.
“Timing is everything,” Foley says. For example, he says, you’ll likely buy more food if you go shopping while you’re hungry.
• Tyranny of choice. The amount of choices can quickly become a negative. Every time you ask someone to compare choices, you ask them to spend mental currency.
Ask yourself if your credit union offers too many or too few product options.
“Really keep this in mind,” Foley says. “You could quite possibly be turning people away with too much flexibility and choice.”
• Choice architecture. People will often take the lowest energy decision path. Therefore, presenting something as “opt in” versus “opt out” can have a significant impact on use.
“The way in which you present choice is really important,” Foley says.
• Endowment effect and loss aversion. People value something they have in their possession more than something they don’t.
In financial services, members get rewards or interest after a certain period of time. What if you reframe that and give them a reward up front and activate it later, Foley asks.
• Herding and social proof. Most people will choose the busy restaurant versus the empty one on the other side of the street. They assume the crowd knows which restaurant is best.
Let other people do your marketing for you with reviews and ratings, says Foley.
Foley says credit unions can use these concepts to inform people about their products and offers. But, he warns, you have to test your methods.
Often, “you can’t predict,” how consumers will respond. A lot of information is below the water line until you get data from tests.
Behavioral economics is “incredibly fascinating,” says Bill Hampel, CUNA’s chief economist and chief policy officer. And it's practical knowledge for credit unions.