Members’ Choices Aren’t So Rational

Goldilocks and Starbucks offer lessons in behavioral economics that credit unions can use to help members make decisions that are “just right."


One of the first things you learn in marketing is that the fastest way to drive sales of your highest priced model — be it coffee, a blender, or gasoline — is to introduce a new, even higher end model. It’s the Goldilocks concept. Consumers don’t want the biggest because, “It’s too extravagant.” They don't want the smallest because, “I’m being cheap." They tend to go for the middle option, which they feel is “just right." 

For-profit companies have been making use of this knowledge for years. I’ll bet many of you don’t even remember when Starbucks offered a short option to go with their tall and grande cup sizes. Then came the venti and the short option disappeared from view. (Although you can still get one if you know to ask for it.) All of a sudden, the grande size seemed pretty reasonable.

Dilip Soman, a professor of strategy and behavioral economics at the University of Toronto’s Rotman School of Management, presented these ideas last week at a Filene Research Institute symposium in Toronto. The field of behavioral economics has been growing in years. It recognizes that those perfectly rational agents in traditional economic models are really human, and as such, we don’t always act the way perfectly rationale people should.

To underscore how companies leverage consumers’ tendency to choose the middle ground, a tendency Professor Solman calls “anchoring,” he also pointed to Shell, which introduced a 94 octane gasoline. Apparently the gasoline is only really necessary for airplanes. Shell not only added the 94 octane option, but designed the pumps to have that option be so visually dominant that the next highest option was smack in the middle of the pump. They were playing on customers’ Goldilocks instinct to pick the one in the middle, hoping to drive sales of that product.

Another consumer behavior that companies often exploit is the human instinct to avoid loss. I suffer from this affliction myself. I’ve been paying Netflix a monthly DVD rental price for two years and have rented maybe 12 movies since then. Why don’t I cancel? My rationale is that I might one day want a movie that’s only available on DVD. I never took the time to change my subscription options and discontinue my DVDs – classic loss aversion according to behavioral economics.

Cable companies also play to this instinct. That’s why you get three free months of those premium cable channels when you first subscribe to basic cable. There is a much greater likelihood that you will “renew” because you don’t want to lose something, although it’s something you never really wanted to pay for.

Credit Unions Are Different

How credit unions might use this knowledge truly underscores how credit unions and banks are fundamentally different. Banks have an incentive to use this knowledge to improve earnings for their shareholders. Credit union governance dictates that they do what’s in the best interest of their owners, who also happen to be the members.

Let’s look at how credit unions might put the power of behavioral economics to work for their members by examining some of Professor Soman’s other examples.

Example 1: Scheduling Check-ups

It’s well recognized that preventative medicine is less costly than treatment. In one experiment doctors were able to get patients to come in for preventative annual physicals at a much higher rate by proactively scheduling appointments. Rather than calling to tell patients that they needed to schedule an appointment, the doctor’s just went ahead and assigned a date and time a few weeks into the future. Attendance skyrocketed.

Could credit unions proactively reach out to members and schedule financial fitness assessments? Most credit unions have data that could be used to indicate when members might have a need for this. From a credit report, you can see when members have loans elsewhere that might be financed at a higher rate or if there has been a sudden decline in FICO score. Or closer to home, you can immediately flag a change in direct deposit.

Or, understanding the concept of loss aversion, could credit unions set up home banking to automatically sweep wage increases into a separate account, rather than requiring a member to manually designate changes? In this case, I would set the amount that goes to my “spending account” (aka checking) based on current consumption. If I get a raise, work additional hours, or receive a bonus payment, the credit union would automatically increase the amount diverted to savings, and I’d never miss the money. This is the same logic as deducting 401(k) contributions from your wages before you even see them.

Example 2: Visual Encouragement

In an experiment in India, economists divided worker’s cash wages into two envelopes, one for spending and one for savings. On average, workers saved 6% with this method of dividing their wages into “buckets.” Then, the economists took the experiment one step further and put photos of the wage earner’s children on the savings envelope. Savings rates grew four-fold just by putting a photo on the envelope.

I’d love it if I could upload my sons’ photos to my homebanking account so when I log-in to check balances — or when I get my estatement — I have a visual reminder of why that money should just stay there. Members might chose to upload a picture of their dream home, the logo of their first-choice in colleges, or some other goal worth saving for.

Example 3: Work Around Members’ Laziness

In Canada, the government offers $500 Smart Saver college account, yet only 16% of people were going through the effort to take this free money. Why? Transaction friction. The people most likely to benefit thought it was too much effort to set-up the bank account needed to get the money, often because it would involve taking time off work. Solution: bring the bank to the communities. Just by bringing a mobile branch to the communities, adoption increased to 64%.

Palisades FCU ($153.7M, Pearl River, NY) is already playing with this concept with their mobile branch, “constructed to be a rolling credit union.” They take the branch to communities for the elderly and disabled, those most limited in their ability to get to a traditional branch and probably less likely to be using online services.

Credit unions can help members make smarter choices and help push them through what behavioral economists call the “bounds of rationality.” Now that we know how other companies and industries are using these behavioral theories to manipulate customers into spending more, we can use this knowledge to “manipulate” members into doing things that are good for them.

I’d love to hear your thoughts on how to do this.


Feb. 13, 2012


  • The behavioral folks are definitely on to something. I'll get around to doing something about it as soon as strategic planning season is over. :)