Behavior Change Through Contracts--With Yourself

Contracts, Contracts, Contracts...

Image Credit: Gold Lawn Firm

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).

On Balancing Risk & Rewards In Lending to the Poor

Photo Credit: David Yu

Mission Versus Business
Here's a fundamental challenge in our business: the greater the alignment between our lending and our mission, the greater the strain on our loan portfolio performance.  Phrased another way, the highest impact loans--those to ex-offenders, domestic violence survivors, and the temporarily homeless-- are also the riskiest.  This is through no fault of their own; rather, it's simply a result of the tremendous strain that personal and financial instability places on a person.

As a nonprofit, it is incumbent on us that we adhere to our mission, which is to use financial services to create pathways out of poverty.  Yet as a business, especially as one that debt finances its lending operations, we must also ensure that we are fiscally sound.  To address this tension, we've taken several approaches.  First and foremost, the interest rates we charge are designed to compensate for higher losses.  In fact, whenever someone questions why we charge 30% on Emergency Loans, our answer is simple: losses are around 15% and servicing costs are very high.  That said, we don't really care who pays the interest; funders are welcome to subsidize the loans so that the borrower pays a lower rate!

On the Arts & Wealth

The Power of Live Theatre (yes, I prefer the British spelling!)

The Walt Disney Concert Hall in LA cost $240 million (Photo Credit)

Growing up I was privileged in many ways, one of them being the number of plays, musicals, and concerts I had the opportunity to see.  I distinctly remember dressing up for the show, the architecture of the theatres, the voices and movements of the actors.  Several theatrical experiences stand out as seminal moments in my development as a person in general and a writer and poet in particular.  For instance, a number of years ago my parents and I went to see The Glass Menagerie at a small playhouse in Burbank, CA.  The play, which is a masterpiece, came to life thanks to absolutely brilliant acting; when the curtain finally came down I was transfixed.

Live theatre, when done well, can be a transformational experience.  It opens the mind, stirs the soul, and awakens the senses.  In short, it can play a critical role in a person's life--making them more cultured, thoughtful and self-aware.  Unfortunately, as I've grown older and become more involved in fighting poverty and injustice, I've found myself increasingly concerned that all too often the arts are by the rich, about the rich, and for the rich.

On Dogs, Humans & Personal Responsibility

Dogs--We Sure Love 'Em

A loving and loyal friend. Image credit: Wikimedia.org

Take a dog lover to an animal shelter and you will almost certainly hear some variation of, "What did the dog to do deserve being here?"  And unless it is particularly vicious, the answer is: nothing.  We don't blame dogs for being strays, and we are sad to know that so many of them live out their days in small cages in noisy, dirty pounds, often destined to be euthanized.

Our love of dogs is understandable.  By and large, they are loving companions.  They bring us joy and friendship.  They guard us and guide us and support us.  And in exchange, we Americans spend just under $56 billion on them!

On New Year's Resolutions & Behavior Change

Happy New Year!
It's that time of the year again: family gatherings, reflections on the past, and commitments for the future. That last item, New Year's Resolutions, is of particular interest to me.  I see a lot of similarity between the packed gyms of January 1, the "back to business as usual" gyms of January 30 and the challenges of affecting social change.  A fundamental tension seems to exist in humans; evolutionarily speaking, it is in our best interest to eat when the bounty if plentiful, for we know not when we will again be flush with food.  In modern life, however, we must constantly resist that instinct--when food isn't scarce and calories are cheap, the challenge is not starvation but rather obesity.*

Put another way, we struggle to think long-term and to delay gratification.  We eat too many sweets and tell ourselves we'll exercise tomorrow; we buy the cheapest appliance even though the more efficient one will cost less over time; and we avoid building retirement savings until it's too late.  So powerful is this dynamic that social science research has shown that "..a child's ability to delay [gratification]...predicted higher SAT scores and a lower Body Mass Index" thirty years after the initial study (the famous Marshmallow Test).  Why?  The hypothesis--and I think it makes perfect sense--is that those with better self-control are more likely to have the discipline to eat right and study.

Observations and Ideas (That Involve Dogs!)

Image Credit: The.Rohit

Dogs!
Bianca (my fiancee) and I are interested in adopting a dog and, as many perspective dog owners are wont to do, we've visited more than our fair share of adoption websites and shelters.  Throughout the process I've noted several things.  First, there are (obviously) far more dogs than there are people to adopt them.  No surprise there.  But second, I've been blown away by how many nonprofits exist to help animals: each shelter is full of volunteers and and veterinarians and computerized systems for keeping records on the animals.  And lastly, the more I pay attention to dog owners walking their dogs, the more I see that pets immediately bring smiles to strangers, passers-by, children, the elderly...pretty much anyone and everyone.

So what does all this have to do with Capital Good Fund and The Nonprofit Life?  Well, it seems to me that whenever there is an excess supply of something that brings people joy (adoptable dogs) and a lot of people in need of that joy (ex-offenders, the homeless, the elderly),  you have the opportunity to put two-and-two together and solve a problem.

Nonprofits & Sloppy Data

Suppose I were to tell you the following about Capital Good Fund clients: borrowers who pay off their loan on-time are more likely to build their credit than those who default.  I imagine you wouldn't find that surprising; after all, by virtue of making payments you are bettering your credit, and those who don't pay us are likely falling behind on other debts as well.

So far so good.  Now what about this: borrowers who complete Financial Coaching before taking out the loan are more likely to pay back than those who did not receive Coaching.  Again, not too surprising.  The skills you learn in Coaching translate to better and more responsible financial habits.