Behaviorally informed policies for household financial decisionmaking

Abstract

Low incomes, limited financial literacy, fraud, and deception are just a few of the many intractable economic and social factors that contribute to the financial difficulties that households face today. Addressing these issues directly is difficult and costly. But poor financial outcomes also result from systematic psychological tendencies, including imperfect optimization, biased judgments and preferences, and susceptibility to influence by the actions and opinions of others. Some of these psychological tendencies and the problems they cause may be countered by policies and interventions that are both low cost and scalable. We detail the ways that these behavioral factors contribute to consumers' financial mistakes and suggest a set of interventions that the federal government, in its dual roles as regulator and employer, could feasibly test or implement to improve household financial outcomes in a variety of domains: retirement, short-term savings, debt management, the take-up of government benefits, and tax optimization.

The Entrepreneurial Society

“…Not everyone has the inclination and skill to manage a portfolio of earlystage equity investments. Moreover, financial literacy remains low, and people are generally susceptible to behavioral biases and have a hard time selecting the products and services that best fit their preferences and risk attitudes (Rooij et al 2011;Madrian et al 2017). This justifies significant regulation on how different options should be presented and those who prefer that their pension savings be invested in low-risk assets should, consequently, always have a secure alternative.…”

Choice Architecture for Healthier Insurance Choices: Ordering and Partitioning Can Improve Decisions

“…Some user models' predictions are relatively accurate and uncontroversial. For example, most people undersave for retirement, would like to save more, and usually endorse the use of choice architecture tools such as defaults to increase their savings (Madrian et al 2017;Thaler and Benartzi 2004). Similarly, many individuals are not very physically active, would like to exercise more, and support the use of choice architecture to promote going to the gym more often (Milkman, Milson, and Volpp 2013).…”

Negative Responses to Taxes: Causes and Mitigation

“…For example, the form could require individuals to sign their names at the beginning of income tax forms instead of at the end, making moral standards top-of-mind before they have the chance to lie about their incomes (Madrian et al, 2017; Shu et al, 2011). Also, because individuals tend to feel more comfortable with lying by omission (leaving out a truth) than by commission (uttering a lie), researchers have suggested adding a question to tax forms: “Did you report all of your income accurately?” While lying about income by leaving out a source of income may seem relatively benign, lying in response to such a question may be seen as a more active and egregious form of lying (Madrian et al, 2017). Framing wealth as a “responsibility” improves attitudes toward taxes (Whillans, Wispinski, & Dunn, 2016); including such language on tax forms or in past-due notices might improve tax compliance.…”