What’s in a Word? Maybe Financial Decisions

On May 10th the RAND Behavioral Finance Forum held its annual one-day event on in Washington, D.C., bringing together some of the most recent research on applying lessons from behavioral economics to important goals such as increasing retirement savings or protecting consumers from bad advice from brokers.

One of the main themes was the impact of concepts of time, our connection to our “future self,” and on our ability to forego consumption now for additional benefits later. One presenter, Shane Frederick of Yale presented some very relevant findings on how simple words can impact likelihood to spend now or save for later.

For example, in one survey Shane used to test time preferences he asked respondents a question in one of two ways: “Would you rather have $900 in 4 months or $1,200 in 20 months” versus “Would you rather have $900 on September 12, 2011 or $1,200 on January 12, 2013“ Respondents took the delayed option 42% of the time in the second version, but only 10% in the first version, suggesting how mere wording can impact how much the length of time resonates with consumers.

However, a key question that was not adequately addressed by presenters at this event was how might culture and local context impact time preferences (for example if life is riskier, the future may feel less certain) when making financial decisions like whether to save for your future?

As I waited for this answer, I began to think about what universal lessons recent research like Shane’s on temporal preferences might have for poor people, and I was reminded of some of CGAP’s recent work to improve disclosure and pricing transparency formats for microcredit products.

Our conversations with consumers on factors influencing their financial decision-making, and subsequent testing of draft disclosure formats with these same consumers, has shown how choice of words or layout of information can matter as much or more to the consumer as how you require the interest rate be calculated.

But have we ever really evaluated the impact of details as minute—yet apparently impactful—as using “months” versus a specific date on consumer understanding and decision-making, like the aforementioned U.S.-based study did? And how could this help to advance the growing efforts in microfinance on disclosure and pricing transparency? Hopefully this is an area that we can adapt some of the lessons from the U.S. context to our own markets.

Click here for a recent study on temporal preferences and financial decisions in rural Malawi.