The U.S. economy has shown renewed strength and vigor in recent years—yet many families and workers continue to struggle. Particularly for those trying to work their way up the economic ladder, progress can be slowed by uncertain job prospects, unexpected income swings, too much debt, low savings rates and a lack of essential financial knowledge.
But could better decision-making help low- and middle-income Americans improve their financial situation? That’s the simple idea behind the Common Cents Lab, an initiative at Duke University’s Center for Advanced Hindsight, a research center focused on achieving gradual social change through applied behavioral science.
The Common Cents Lab, with funding from the MetLife Foundation as part of its commitment to financial inclusion, explores ways to improve financial decision-making through rigorous testing of the psychological and behavioral mechanisms tied to earning, spending, saving and investing. The goal is to help consumers better understand how they can take control of their financial lives by adjusting their behavior and forming better habits.
“While Common Cents Lab is a research entity, its work does so much more than create interesting research,” Evelyn Stark, assistant vice president for financial inclusion at MetLife Foundation, explains in a foreword to the lab’s 2017 Annual Report. “It creates easier, more intuitive ways for people to save—which is something most people say they want to do, but find difficult.
“We think these experiments are just the beginning,” Stark continues. “As each partner organization continues to apply what it’s learned about human behavior, there will be more ways for low-income people to continue improve their financial health.”
Achieving change by changing behaviors
The lab was launched in 2016 under the leadership of Dan Ariely and Kristen Berman, top scholars in the field of behavioral science. Ariely is a professor of psychology and behavioral economics at Duke, and the author of several popular books aimed at translating the lessons of his social science discipline for general readers. Berman previously led the behavioral science team at Google and is a leading thinker on translating the findings of behavioral science into viable products and services. Ariely and Berman also co-founded Irrational Labs, a non-profit consulting firm that shares behavioral insights with non-profit and corporate clients.
The Common Cents Lab is staffed with a team of researchers, data scientists, designers and product managers who work with financial tech start-ups, established financial institutions and non-profit organizations to develop solutions that boost financial health.
The Common Cents Lab’s 2017 Annual Report surveys the basic approach, breaking down the research portfolio into five broad areas representing the pillars of personal financial management:
- Increasing earnings
- Managing cash flow
- Decreasing expenses
- Managing debt
- Increasing short-term and long-term savings
It’s not simply about hectoring people to save more or spend less – in fact, many people understand what they should be doing, but have trouble getting started. In some cases, a more constructive approach is to structure the available choices to promote better decision-making and improve the probability of desirable outcomes. Or it may focus on using simple tools of influence, persuasion and attention management to help consumers understand their options with greater clarity.
This behavioral approach recognizes that in many cases, constructive interventions don’t necessarily have to be large-scale and intrusive. Instead, the most effective interventions can be modest, in the form of a “minimally effective dose,” with the aim of achieving gradual, sustainable improvements.
A sampling of the Common Cents Lab’s recent work:
- The Lab’s research served as the intellectual foundation for an April 2018 report titled “The State of America’s Workforce: The Reality of Retirement Readiness.” The report notes that procrastination is the biggest challenge when it comes to retirement saving, and offers tactics to encourage American workers to take action on a critical financial priority.
- Berman and researcher Bradley Swain note that for many workers, the road to improved financial performance runs through their employer’s human resources department. In a series of articles, they’ve worked to share insights about behavioral science with HR professionals, who are on the front lines of managing many American families’ retirement and insurance needs.
- In an experiment with the St. Louis Housing Authority aimed at alleviating poverty, Lab researchers will study new tactics to help low-income families to take advantage of housing vouchers to relocate to lower poverty areas where they can more greater economic opportunities.
- Working with Latino Community Credit Union, the Common Cents Lab defaulted borrowers into a program that rounded up the loan payments to the nearest $25 or $50. The extra payment was steered to a savings account in the borrower’s name, so borrowers were increasing their savings as they retired debt. Participation jumped from 26% to 38%.
Other examples of the Common Cents Lab experiments are found in their annual report. While the Lab is still a young effort, the researchers track their impacts carefully to quantify the results to date:
“Since our launch in 2016, our 57 pilot optimizations and prototypes have reached over 1.7 million individuals and positively impacted the financial behaviors of 498,000 low-to-moderate-income individuals. At full rollout, we estimate that these projects will reach 4.4 million people, and positively impact the financial behaviors of 1.4 million individuals.”
This isn’t “pie in the sky” research – the findings are intended to be actionable intelligence that can have a real-world effect. And it’s not just consumers who benefit from these types of findings. Financial industry leaders, policymakers, non-profit leaders, and employers and HR personnel could benefit from examining these research findings to discover ways they might structure programs more effectively to foster constructive financial behaviors.
Good habits and smart decision-making are especially important given the complexity of today’s financial environment. When it comes to addressing the financial challenges of many working and middle-class families, creative thinking is vitally important to help them navigate the various products and services available. Initiatives like the Common Cents Lab are helping by developing new solutions to empower less advantaged families and workers to reach a higher level of financial success through their own actions.