Contracts, Contracts, Contracts...
We often signal our intentions by signing a contract, be it at a gym, financial institution, or food coop. Contracts serve a legal function, but they can have the added benefit of financially and morally binding us to stick to a behavior--healthy eating, working out, building credit. And it turns out that a lot of research in behavioral economics is showing that these instruments are indeed highly useful motivational tools; only the most effective contracts turn out to be those we sign with ourselves.
These tools are called commitment devices, defined as "strategies whereby people agree to have a penalty imposed on them (that is, they agree to incur a loss) if they do not reach a particular goal" (World Development Report 2015). A whole host of free and low-cost websites and apps have cropped up to offer people commitment devices; these include Beeminder, stickK, 21 Habit, and Go Fucking Do It (yes, that's actually what it's called!). They all have their quirks, but the basic idea is the same: you commit to a goal, such as to run 3 times per week, and if you don't meet it you allow the company to charge your credit card. SticK's model is really interesting: if you miss your goal, not only are you charged, but the funds get donated to a cause in which you don't believe (e.g., if you are pro choice, the funds will go to a pro life organization).
Some Great Tools
I just signed up for Beeminder and set two goals: to lose some weight and blog four times per week. Even though the financial penalty would be small, I do not want to incur it, and thinking about the cost of inaction puts me in the frame of mind of taking action!
Financial incentives, however, aren't the only motivational tool. We are social animals, and social pressure can be very motivational. To that end, there are other sites, such as Habit Forge and HabitRPG, that make it easier for others to hold you accountable. Of course, social media can have the same effect; by posting our intentions on Facebook, not only can we garner the support of others, but we also are more likely to follow through, in part because we don't want to disappoint our friends. This is why AA, Weight Watchers, and places of worship are all effective venues for empowering people.
Don't Take It Away!
There is another concept, that of loss aversion, that goes hand-in-hand with commitment devices. The idea here is that we react more strongly to the possibility of something being taken away than to that of something being given. For instance, one study looked at financial incentives for teachers. Those who were paid a bonus at the beginning of the year did better than those who were promised one at the end of the year. Those receiving the bonus would have had it taken away had their kids not performed well, and that ended up motivating them more than the potential to earn money later on.
So let's look at how we might use commitment devices and loss aversion to improve loan repayment and other metrics. One idea we are piloting is to promise borrowers a $10 gift card if they make their first payment on time; early results indicate that this has the potential to lower defaults. This makes sense: though the dollar amount is minimal, what matters is the principal of not wanting to lose that which has been promised us. It must be noted, however, that this idea does fall somewhere in the middle: we aren't giving the card up front, but neither are we promising it at the end. Our hope is that because the gift card is promised after just one month, it'll have an effect similar to that of giving the card at the time of making the loan (an idea we will likely pilot in the future).
Another idea is to give financial coaching clients the option to sign a commitment contract with us. The contract could, for instance, allow us to charge the client $5 if they miss a coaching session or fail to open a bank account. Regardless of the technique, it is clear that constant experimentation and refinement are the only way to turn theory into effective practice. We'll continue to update you on what we learn!
I strongly feel that these behavioral psychology concepts are the key to social change. What they all share in common is that they unlock people's potential set and stick to their goals. That's important to understand, because it's possible for this to be manipulative. Still, we know that the vast majority of our clients want to pay their loans and want to show up for coaching appointments; loss aversion, commitment devices, and other tools simply make it easier for them to do so.
More Reading
24 Free Apps To Help You Change Your Habits (Fast Company)
World Development Report 2015: Mind, Society & Behavior (World Bank)
Applying The Business of Behavior Change…To CGF and Myself! (CGF Blog)
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| Image Credit: Gold Lawn Firm |
These tools are called commitment devices, defined as "strategies whereby people agree to have a penalty imposed on them (that is, they agree to incur a loss) if they do not reach a particular goal" (World Development Report 2015). A whole host of free and low-cost websites and apps have cropped up to offer people commitment devices; these include Beeminder, stickK, 21 Habit, and Go Fucking Do It (yes, that's actually what it's called!). They all have their quirks, but the basic idea is the same: you commit to a goal, such as to run 3 times per week, and if you don't meet it you allow the company to charge your credit card. SticK's model is really interesting: if you miss your goal, not only are you charged, but the funds get donated to a cause in which you don't believe (e.g., if you are pro choice, the funds will go to a pro life organization).
Some Great Tools
I just signed up for Beeminder and set two goals: to lose some weight and blog four times per week. Even though the financial penalty would be small, I do not want to incur it, and thinking about the cost of inaction puts me in the frame of mind of taking action!
Financial incentives, however, aren't the only motivational tool. We are social animals, and social pressure can be very motivational. To that end, there are other sites, such as Habit Forge and HabitRPG, that make it easier for others to hold you accountable. Of course, social media can have the same effect; by posting our intentions on Facebook, not only can we garner the support of others, but we also are more likely to follow through, in part because we don't want to disappoint our friends. This is why AA, Weight Watchers, and places of worship are all effective venues for empowering people.
Don't Take It Away!
There is another concept, that of loss aversion, that goes hand-in-hand with commitment devices. The idea here is that we react more strongly to the possibility of something being taken away than to that of something being given. For instance, one study looked at financial incentives for teachers. Those who were paid a bonus at the beginning of the year did better than those who were promised one at the end of the year. Those receiving the bonus would have had it taken away had their kids not performed well, and that ended up motivating them more than the potential to earn money later on.
So let's look at how we might use commitment devices and loss aversion to improve loan repayment and other metrics. One idea we are piloting is to promise borrowers a $10 gift card if they make their first payment on time; early results indicate that this has the potential to lower defaults. This makes sense: though the dollar amount is minimal, what matters is the principal of not wanting to lose that which has been promised us. It must be noted, however, that this idea does fall somewhere in the middle: we aren't giving the card up front, but neither are we promising it at the end. Our hope is that because the gift card is promised after just one month, it'll have an effect similar to that of giving the card at the time of making the loan (an idea we will likely pilot in the future).
Another idea is to give financial coaching clients the option to sign a commitment contract with us. The contract could, for instance, allow us to charge the client $5 if they miss a coaching session or fail to open a bank account. Regardless of the technique, it is clear that constant experimentation and refinement are the only way to turn theory into effective practice. We'll continue to update you on what we learn!
I strongly feel that these behavioral psychology concepts are the key to social change. What they all share in common is that they unlock people's potential set and stick to their goals. That's important to understand, because it's possible for this to be manipulative. Still, we know that the vast majority of our clients want to pay their loans and want to show up for coaching appointments; loss aversion, commitment devices, and other tools simply make it easier for them to do so.
More Reading
24 Free Apps To Help You Change Your Habits (Fast Company)
World Development Report 2015: Mind, Society & Behavior (World Bank)
Applying The Business of Behavior Change…To CGF and Myself! (CGF Blog)
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