If you’ve ever had a hard time sticking to a diet, quitting a bad habit or finishing a project, you might recognize yourself in the scrolling list of user-submitted goals found on stickK.com. People have committed to losing weight, to spending more time with their families, to stop biting their nails, and to finish writing their novels. Ranging from mundane to poignant – and sometimes uncomfortably familiar – these resolutions offer a glimpse into the everyday struggles of willpower that plague us all.
The site takes a unique approach to helping people meet their goals. Users commit to a goal, and then pledge a certain amount of money toward achieving it. They choose a referee – often a friend – to help keep them on track, and even sign a contract. If they achieve their goal, they get the money back; if not, it goes to a predetermined recipient: ideally a person or a political cause the user doesn’t particularly like. To that end, the site provides a list of “anti-charities,” representing either side of divisive social and political issues and sports rivalries. The combination of tactics seems to work: when users sign contracts alone, their success rate is 29%. But when they appoint a referee and put money on the line, it shoots up to 80%.
What does this have to do with finance? More than you’d think. The site was founded by a group of Yale professors and students that includes Dean Karlan, a noted development economist with a heavy focus on behavioral economics. His research often explores how people’s use of financial products and services can be improved by behavioral approaches – some of which resemble the tactics used on stickK.com. Whether their goal is to help people save money or lose weight, the underlying assumption of these approaches is the same: human behavior isn’t always rational, and efforts to change it must take this into account.
For instance, research has found that people often take on loans – sometimes at high interest rates – even when their savings exceeds the amount they’re borrowing. Why would people voluntarily pay a bank for access to liquidity they already have? When researchers in the seminal “Portfolios of the Poor” study asked that question to subjects in economically disadvantaged communities, many of the respondents explained that high interest rates were actually an incentive to repay their loans. “Because at this interest rate I know I’ll pay back the loan money very quickly,” one said. “If I withdrew my savings it would take me a long time to rebuild the balance.” Another borrower noted that “the pressure of interest charges encouraged him to repay quicker, which he liked.”
Human nature is consistent in people of all income levels. When faced with the challenge of forgoing a pleasure or tackling a daunting task, our mental discipline tends to be stronger when we raise the stakes. And as researchers looked into the issue, they found other reasons why it’s easier to repay loans than to build savings. For example, nearly all lenders create a workable installment plan, and they act as counterparts with a keen interest in the borrower’s successful repayment – playing much the same role as the referees at stickK.com. The effectiveness of these elements has led both researchers and financial services providers to explore ways they could build similar features into products that facilitate savings without the expense and risk of high-interest debt.
One solution they’ve identified is commitment savings accounts. The approach used in everything from education and medical savings accounts to pension plans and automated debits from paychecks. Thanks largely to the growth of microfinance and mobile access, similar approaches have proliferated in emerging economies. In Kenya, for instance, Jipange KuSave uses M-PESA’s mobile money platform to provide clients with interest-free loans, one-third of which is deposited in a savings account. Clients are encouraged to set a savings target, and they pay a penalty if they withdraw money before the target is reached. But there’s a carrot to go with the stick: once clients repay their original loan, they become eligible for a larger loan under the same conditions. Under this system, borrowers’ savings grows until their savings account balance exceeds the loan amount and they are essentially borrowing from themselves.
In the U.S., where lack of a credit score can be as big a problem as lack of savings, the Local Initiatives Support Corporation (LISC) has taken this approach in an interesting direction. LISC, a community development organization, offers clients $300 loans that they commit to paying off in set monthly installments of $26.24. Each payment is deposited in a locked savings account until the loan is paid off – and as an added incentive, LISC deposits a matching amount each time clients make a payment on time. After a year of repayments, along with counseling from a credit-building counselor, clients receive their original $300 – and up to $300 more in matching payments. More importantly, their year of prompt payments has earned them a credit score that often approaches the national average. And to help participants build upon this momentum after the program, LISC requires clients to use at least $300 of the total savings and match these funds to open a secured credit card.
Lending approaches like these offer people with little to no credit a real incentive to both borrow and save. And the insights of behavioral economics have shown that, whether you’re trying to lose weight or save money, raising the stakes can be a practical and efficient way to foster the discipline required to reach your goal.