When a Penny Saved is Not a Penny Earned


Here’s a hypothetical question: Would you rather take a job with a $5,000 bonus that would cost an additional $1,000 in transportation expenses, or the exact same job with a $2,000 bonus and save $2,000 in transportation expenses? It’s not a trick question.

Professor Eesha Sharma, who studies behavioral economics and teaches marketing at the Tuck School of Business at Dartmouth College, surveyed 268 people online and found that 65 percent were more likely to choose the job with the $5,000 bonus, even though the dollar gain is the same for the two jobs.


“They like the end-of-year bonus being higher,” says Sharma, who co-authored with fellow Dartmouth business professor Punam Keller her January 2017 paper, “A Penny Saved is Not a Penny Earned.” “People are much more likely to think about opportunities to ‘earn’ rather than ‘save,”’ she says.

This might go part of the way to explaining why, in a Federal Reserve survey, 46 percent of Americans said they don’t have $400 to cover an emergency expense without selling something or borrowing money to cover it. Why are people so averse to saving? Behavioral economics has been studying how individual psychology affects our decision making, often in ways that don’t advance our own interests. It has upended traditional economics by advancing the view that people act irrationally, which impacts economic models and our understanding of how individuals make decisions.

Several new startup companies as well as traditional financial institutions are likewise using the concepts of behavioral economics to induce people to make better financial decisions. Clarity is an app for the smartphone that prompts people to spend less and negotiates or cancels subscriptions for them. Barclays is using behavioral economists on staff to help investment clients overcome emotional hurdles that get in the way of good investment decisions. A credit union in North Carolina is automatically enrolling customers in a retirement savings account.

One researcher who has been working on many of these applications is Kristen Berman, who runs the Common Cents Lab at Duke University with noted behavioral economist Dan Ariely. The lab’s focus is to improve the financial well-being of low- to moderate-income people and to bridge the gap between the academic world and the companies that want to apply its insights into human behavior. Berman was intrigued by Sharma’s experiment on whether people wanted to “earn” or “save.” Enacting a similar experiment for a financial app formerly known as APAsave, which helps people pay down their debts, Berman found that running a Facebook ad for the app with the word “earn” instead of “save” resulted in a 59 percent higher click-through rate. As a result, APAsave has since changed its name to EarnUp.

The concept of savings implies it’s for the future and is very abstract, says Berman. “We value the present more than the future,” she says. Also, savings implies a loss. You are paying your future self at the expense of your present.

But there are ways to overcome such hurdles. Earn-Up tried another experiment: prompting consumers by email to round up the dollar amount on their debt payments. Counting student loans, mortgages and other debt, those who responded to the email and rounded up their debt theoretically will save an average of $8,000 over the life of their loans, says EarnUp co-founder and CEO Matthew Cooper. “Consumers like round numbers,” he says.

You’d think banks wouldn’t really be interested in helping their customers pay down their debt sooner. But Cooper says lenders have been receptive to the program because it helps consumers manage their finances and pay their debt on time. “Basically, you know when you look at your account how much money you have to spend, knowing that your loans are already paid,” Cooper says.

Twenty partners, including banks and credit counselors, are paying EarnUp to offer the app to their clients. Alternatively, it costs $9.95 per month for an individual to download the app and use it. Cooper declined to name his partners or the number of customers who are using the app, but said about $1 billion in debt is now being managed through EarnUp.

Budgeting apps such as EarnUp have proliferated. Some of them are used by banks as an offering for customers, and they are natural extensions of technological progress made possible through the smartphone. But in another sense, they are taking advantage of growing awareness of the concepts of behavioral economics and a genuine desire to help individuals improve their financial decision-making.

“What you are seeing is a wave of companies that have learned from what behavioral economics has taught,” says the founder of the app Clarity, Adam Dell, who happens to be the brother of Dell Inc. founder Michael Dell. “Behavioral economics has had a profound impact on economics generally, but it takes time for the findings of academia to trickle down to the ecosystem of technology,” he explains.

Apps such as Clarity will “nudge” you in the direction of making better decisions. If you overspend one day, the app may suggest you bring your lunch from home the next day. Unlike Mint, a competing budgeting tool that accesses your bank accounts, it has helpful suggestions for how to manage your money. Plus, it haggles on your behalf for better rates on your subscriptions or cancels them for you, and recommends different credit cards that might save you money. Clarity can be used with 18,000 banks that also use Plaid, a data aggregator that allows banks to interface with a variety of applications. Companies such as Clarity are exciting a variety of people, including prominent investors such as George Soros, who has injected money into Clarity, and Harvard University history professor Niall Ferguson, who is on the company’s advisory board.

Behavioral economics has even trickled down to some employers automatically enrolling employees into 401(k) accounts to overcome our natural tendency to procrastinate and avoid saving. Those who don’t want to enroll “opt out” by filling out paperwork. For those who don’t have retirement accounts through their employer, the Self-Help Credit Union in Durham, North Carolina, decided to step in, working with the Common Cents Lab to develop a pilot program. The credit union, which has $800 million in assets and 20 branches, has begun asking members if they have a retirement savings vehicle, and if they say no, they automatically get a retirement savings account that sweeps 3 percent of every deposit into the account. It’s a true savings account, not an investment vehicle for stocks and bonds, so the small rate of interest it pays potentially will be less than what savers could make investing over the long term. Although people will be able to opt out of the accounts, the credit union will phrase its offer as if “this is normal behavior for people in our credit union,” says president Randy Chambers.

And companies aren’t just “nudging” people to save. While the Self-Help Credit Union focuses on low and moderate-income communities, Barclays in London wanted to use the concepts of behavioral economics to help its wealth clients. The company hired several behavioral economists, including Peter Brooks, who has a Ph.D. in behavioral and experimental economics from the University of Manchester. It formulated a financial personality assessment in 2007 for clients. The bank says the assessment goes beyond your typical tests for risk tolerance and delves into important psychological factors that govern decision-making. For example, it’s common for people to feel more comfortable investing when market prices are high and to abstain from investing when prices are low. Also, we hate losing money, and are more likely to sell winners and hold onto losing investments. “Ninety percent of the time, you are managing the investor and not the investments,” Brooks says.

While financial advisors have long known this to be true, banks in general might benefit from incorporating more of these concepts into all aspects of their work, says Berman. Although money is fungible, we tend to separate it in our minds for different uses, such as the mortgage payment or an upcoming vacation. Banks could do more to help people visualize their savings goals, automatically deduct a certain amount out of deposits into a savings account or help them overcome common investment mistakes. “We want to scale the work we do,” Berman says. “We want to share our research and we want people to use it.”


Naomi Snyder


Editor-in-Chief Naomi Snyder is in charge of the editorial coverage at Bank Director. She oversees the magazine and the editorial team’s efforts on the Bank Director website, newsletter and special projects. She has more than two decades of experience in business journalism and spent 15 years as a newspaper reporter. She has a master’s degree in journalism from the University of Illinois and a bachelor’s degree from the University of Michigan.

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