Behavioural Economics:

seven principles and their

application to the Saving Gateway

Emma Dawnay
The seven principles

1) Other people’s behaviour matters

2) Habits are important
3) People are motivated to ‘do the right thing’
4) People’s self-expectations influence how they
behave
5) People are loss-averse
6) People are bad at computation
7) People need to feel involved and effective to
make a change
Other people’s behaviour matters

Standard Economics:

Preferences are fixed: incentives will have no lasting effect

Behavioural Economics:

Preferences not fixed

Other people’s behaviour has strong influence on the evolution of
people’s preferences

Application to Saving Gateway:

Saving in general: if everyone around you does it, you are more
likely to

On participation in Savings Gateway:

Who are key influencers?

What groups exist? make sure that people feel it is for ‘people like
me’
Habits are important
Standard Economics:

People maximise their ‘utility’

Behavioural Economics:

People do things out of habit. For us to change our habits they must be
‘unfrozen’ and consciously considered – then we may change our
behaviour which may become ‘frozen’ as a new habit

Habits are stronger and more difficult to change:

When they are repeated often

When there are strong related ‘rewards’

When the reward comes soon after the action

Application to Saving Gateway:

Incentive to consciously consider saving – such as matched saving
scheme – could help unfreeze habit of not saving

Make it easy to participate – for some it might be a big hurdle to walk into
the bank branch. An assessment for eligibility may be a big disincentive.

Could be beneficial to encourage saving little and often, and give
‘rewarding’ feedback – perhaps an immediate mini-statement
People are motivated to ‘do
the right thing’
Standard Economics:

Financial incentives always expected to be motivating

Fairness not considered a factor

Behavioural Economics:

People often want to ‘do the right thing’ for internal reasons

‘Fairness’ is important

Application to Saving Gateway:

Scheme should be seen as fair

Beware: matching scheme may ‘crowd-out’ own good intentions to
save, especially for people who just don’t qualify
People’s self-expectations influence
how they behave
Standard Economics:

Commitments and self-expectations not expected to alter
behaviour unless backed by financial incentives

Behavioural Economics:

Commitments can be powerful method of changing behaviour

Commitments are stronger when

They are written rather than verbal

They are made publicly

Groups of people together make a commitment

People don’t feel coerced

Application to Saving Gateway:

Get people to commit to making regular future savings? (without
penalties)

If participation in Savings Gateway makes people feel that they
are ‘savers’, they are likely to continue to save afterwards
People are loss-averse
Standard Economics:

People are expected to have preference for risk, but be neutral to
loss or gain

Behavioural Economics:

Link between risk-taking and wealth: wealth appears to enable
more productive risk-taking as individuals with wealth have ‘buffer’
and can have longer time horizon

People usually try harder to prevent a loss than they do to make a
gain

Application to Saving Gateway:

Having savings should be beneficial

‘Framing’ in terms of loss rather than gain; e.g. “by not
participating you stand to lose £100” is a stronger message than
“by participating you stand to gain £100”
People are bad at computation
Standard Economics:

People are fully rational
Behavioural Economics
Discounting: people under-estimate future events
and put more emphasis on short term gratification
Framing: people are influenced by how information
is presented
Defaults: people are influenced by defaults
Anchoring: people are influenced by arbitrary
starting points
Intuition: people can quickly jump to ‘wrong’
mathematical answers
Mental accounting: people attach significance to
the source of label given to money
People expect price to signal value
Application to Savings Gateway
Could explain under-saving. ‘Framing’ could be
used to try to compensate.
This can be used with other ‘principles’ to enhance
message, e.g. loss aversion
A default, such as paying a certain amount every
month by standing order or direct payment from
benefits, could be beneficial.
Consider carefully how much maximum is: this
becomes a goal
Have examples in explanations.
1:1 matching may be extremely powerful as
people can imagine what it means
Allow people to name account e.g. “holiday
account”
People are sceptical about 1:1 matching
People need to feel involved and
effective to make a change
Standard Economics:

Information and choice always beneficial

Participation itself not considered relevant: only end result

No account taken of self-efficacy

Behavioural Economics:

People need to feel ‘in control’ to be effective:

Individuals with wealth feel more ‘in control’

Too much choice or information can lead to feeling of helplessness and
inaction

Participation itself is motivating

Application to Saving Gateway:

Having a little wealth rather than none is enabling

Being presented with a savings opportunity, but not taking it up (perhaps not being
able to), may further reduce self-efficacy

Information should be presented in straightforward manner

Could participants design their own savings scheme? (time frame, how often
payments are made etc)
Concluding comments

Savings are beneficial to those who have them

A matching saving scheme may help build saving habit

For Saving Gateway

Make it easy to join

Encourage regular “active” saving (to promote habit) or default
saving – perhaps through a personal commitment statement

Try to find out why people don’t participate

For people struggling with finances, Saving Gateway could be

promoted through a ‘one-stop-shop’ for financial needs such as
the Community Banking Partnership approach, which aims to
provide a seamless service offering:

Saving facilities

Affordable loans

Access to basic banking services

Bill and debt payment systems

Money advice and support