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Predictably Irrational: How behavioral economics could increase engagement in CSAs

Tuesday, August 11, 2015

It's no secret that we all respond to incentives. Our behavioral choices are far less freely determined than we might like to believe.

But our decisions aren't driven by the considerations that one might expect, often, and we may be susceptible to forces that we would not normally recognize.

If that's the case--and behavioral economists like Dan Ariely make a persuasive case that it is so--then even fairly subtle changes in how given opportunities are structured may provoke significant changes in people's response to them. Including, perhaps, in programs like CSAs.

We're certainly not behavioral economists, but we have a strong interest in exploring levers that can encourage active engagement in asset-building opportunities like CSAs--the type of engagement that may lead to stronger identities as college savers, larger balances, and healthier financial positions. Toward that end, there are intriguing overlaps between the findings related by Ariely in Predictably Irrational and the imperatives facing CSA practitioners and champions around the country.

Behavioral economics have been incorporated into many progressive savings efforts, building on such concepts as the need to get people to commit upfront to their preferred path, so that they are more likely to follow through. Other points raised by Ariely--and supported by evidence from psychological experiments--represent more novel approaches to shaping behavior. For example, if we can't really know what we want until we see it in context, might putting savings opportunities next to a 'decoy' option increase the likelihood that people take up the path we prefer? Could this be used at tax time or other moments when people are faced with decisions about how to allocate a given amount of money?

And what about imprinting? Since it seems to be a powerful force, causing people to often attach to the first thing they see (like goslings!), might this be another reason why the provision of accounts at birth is preferable to those offered later in life? Are there ways that the account exposure could be manipulated to increase this attachment? Loss aversion could play in here, too. Our tendency to value what we own more and avert loss of what we have most strongly suggests another rationale for getting people accounts, seeding them, and then using statements and other interventions to help people feel like 'owners', even of balances they did not contribute. It may be easier, then, to get people to cling to accounts they have, rather than to urge them to create them in the first place.

One of the most revelatory parts of Ariely's book may be the finding that introducing money into a decision--or conversation--triggers market norms, rather than more beneficent social ones. This may be a reason to emphasize the aims of cultivating expectations, improving educational outcomes, and caring for children, as goals of CSAs, more than the more tangible utility of paying for college. This may also help to explain why the account ownership effects of CSAs, rather than the asset accumulation functions, have been particularly salient selling points for the interventions.

Most of these ideas are still unproven in the arena of children's savings, but many warrant investigation. Even when the field has achieve the vision of universal CSA provision to every American child, engagement will still matter.

We will still need ways to encourage families to deposit, to talk with children about their accounts, and to cultivate behaviors associated with stronger academic performance and financial positions.

Scholars like Ariely and the empirical body their work has revealed have a lot to teach us, as we seek these aims. Uncovering the many forces that shape behavior, often in overlapping and even contradictory ways, may reveal small nudges that, collectively, can help to reshape the institutional context in which children and their families experience a Children's Savings Account intervention.

It may not be rational, but it could be profound.

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