Behavioral Economics And Credit Unions Make A Fine Pair

Designing products that serve the "predictably irrational” is the new path to putting members first.

 
 

Credit unions live and die around the idea of putting members first. Now, there’s an emerging field of academic study that offers actionable insight on how credit unions can nudge their members into putting themselves first, too.

Behavioral economics (BE) tries to understand behavior through multiple lenses such as psychology, judgment, decision-making, and, of course, economics. BE offers approaches that can help the credit union movement help its members address problems like:

  • Emergency Savings: 47% of Americans can’t come up with $400 in an emergency without borrowing or selling something, according to The Federal Reserve.
  • Long-Term Savings: 60% of American families have less than $5,000 in savings and 25% have none at all, according to The Urban Institute.
  • Financial Education: 41% of Americans give themselves a grade of C or lower in personal financial management and 61% don’t have a budget, according to CUNA.

These are macro problems that are aggravated by myriad factors, including stagnant wages and sky-high medical and education costs. But there’s an assumption that all people need is to be told how to handle their money better, and if they’d listen, it’d all be hunky-dory.

People don’t work like that. The credit union movement has an opportunity to pivot on how it approaches this sticky wicket by embracing and evolving the principles and practices of behavioral economics.

Help Members Make Better Decisions

The field of Behavioral Economics is proving how traditional economic models are terrible at predicting consumer behavior. When every message, price, and process a member encounters sways how they analyze options, it’s no wonder they make seemingly irrational decisions. Luckily, with the right tools, credit unions can tweak their member experience to encourage positive decision-making. Join Understood Connections and Callahan & Associates for a two-day workshop to build your better behavior toolkit.

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Predictably Irrational

Last year’s Nobel Prize winner in Economics, Professor Richard Thaler of the University of Chicago, helped pioneer BE as a field of study in the 1990s with research and writing about how long-held economic theories and assumptions could not explain consumer behavior.

In other words, people don’t always make the choices that appear to be in their best interest, which helps lead to the situations described above.

I’m not naïve enough to argue that all financial woes are the result of bad decisions or that good decisions will solve all financial woes. But I will argue that credit unions can do more to help their members make better choices — starting with what and how they offer choices and in what context.

Behavioral economists speak in terms like “nudge units,” “choice architecture,” and “default options.” These are all useful, actionable concepts that I’ll get into in future blogs on the topic of BE.

Meanwhile, Callahan & Associates has partnered with the experts at Understood Connections to launch a series of BE workshops for credit unions and CUSOs that directly serve credit union members.

Join leaders from credit unions around the country for a workshop on behavioral economics. Learn more about Understanding Behavioral Economics: The Truth About Decision-Making today.

According to Thaler’s research, consumers don’t make the “rational choices” that traditional economic models predict. Instead, consumers are predictably irrational.

Those last two words — “predictably irrational” — are critical to understanding BE and putting it to work for members’ benefit. Thaler’s work shows that consumers depart from rational behavior in predictable patterns that, if a credit union recognizes them, can serve as the basis for products and services that really put members first.

For example, take the power of opt in and opt out, which falls under the idea of default options in BE parlance.

“Setting a recommended option as a default is a powerful way to nudge people to make choices that are in their own or society’s best interests without forcing them to do so,” reported The Harvard Business Review in an October 2016 article about BE. “Being transparent about the intent and potential influence of defaults likely won’t reduce their positive benefits.”

 

People are much more likely to save a percentage of their income if they have to opt out of saving, and some companies have started making employees choose not to contribute enough of their salary to earn the company match. Credit unions originated with default savings in mind. How many members still deposit a portion of their paychecks into a share account? How many credit unions still offer that option?

This is just one way to put BE principles into practice. And if there’s a way to make it happen by default, opting in before members can opt out, so much the better.

As for transparency, that’s an easy one. Tell members up front that you’re doing it and explain why. Tell them you’re putting them first.

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April 17, 2018


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