The psychology of saving

Nov 12, 2020
  • Dan Ariely
  • Deborah Winshel

Why is it so hard to save, and so easy to spend? Watch this clip of behavioral economist Dan Ariely sharing his thoughts on this topic and more with Deborah Winshel, BlackRock's Global Head of Social Impact.

  • Moderator: So, I'm delighted to have the chance to welcome and interview Dan Ariely, the James B. Duke Professor of Psychology and Behavioral Economics at Duke University. Someone who's dedicated his career to answering questions about what influences human behavior. We know Dan best as the founding member of the Centre for Advanced Hindsight which houses Common Cents Lab, one of our partners in BlackRock's Emergency Savings Initiative. Dan wears many hats, including three-time New York Times bestselling author, and biweekly advice columnist in the Wall Street Journal called 'Ask Ariely', I love that. Ted talks, bestsellers, you have so much to bring to the table so, Dan, let's start at the beginning. Generally speaking, why is it so hard for people to save?

    Dan Ariely: Okay, so, there's kind of basically two types of answers. Err, The first one is that it's hard for us to do lots of things, err, that take into account the long-terms. Err, it's hard for us to, err, eat well. It's hard for us to sleep. Err, it's hard for us, say, to take care of our health. It's hard for us to care about the environment. I mean, the list goes on and on. Basically, every place where we have something that is long in the future, we're bad at it. That's, err, that's he first thing, and spend-, and saving money is one of those things. Then, the second thing is that we have to understand that we're not operating in a neutral environment. Err, what happened is that there's basically two ways, err, to get people to act. A rational and an emotional way. Err, so, for example a supermarket, err, can, err, explain to you very carefully the benefits of eating fruits and vegetables and, err, err, reducing your sugar consumption, all kinds of things, or they can put cookies at the end of the aisle. Err, which one of those is easier? It turns out the emotional part, an emotional pathway into our decision-making, is much easier. So, we've created an environment-,if you think about it, we've created an environment that tempts us all the time. And, because this environment tempts us all the time, err, you know, you walk down the street and every store wants your money, attention. Every app wants something from you right now. We've created an environment that wants from us things right now, and we fail. Do we fail all the time? No, but do we fail a lot? Yes. So, you might walk into a supermarket with a plan of what you're going to do, but the supermarket also has a plan and their plan is not the same as yours. And they control the environment, and therefore you end up doing what their plan is more often than we do our own plan. So, those are the basic two, err, two buckets, err, of things. And then-, and then the third one, which is connected to money but not to other things like health, err, and, and this is part-, also part of our joint work together, is that a lot of the important economic activities are what we call invisible.

    Moderator: Yeah.

    Dan Ariely: Think about your, your neighbors and friends. Err, how much do you know about how much they are saving? Err, how much do you know about what insurance they have? The answer is very little. On the other hand, how much do you know about what they're spending? Quite a lot. So, we said there are things about now versus later, the environment is tempting us, but some of the most important financial decisions that we need to make are invisible. They are basically hidden. We don't pay attention to them, our family doesn't look at them, nobody says thank you if you're increasing your saving or paying debt, err, faster. On the other hand, if you buy a toy, or a car, or renovate your kitchen or buy some nice shirt, people see around it. So, all of those things are creating an environment that makes it incredibly tough for us to do the right long-term behavior.

    Moderator: You've often talked about how people want to save. This is something that they often already identify as a priority for them. One of the things that is so interesting in this Covid environment that one of our partners-, one of your partners, Capital, has identified is that they've seen a 500% increase in emergency savings goal settings. It almost seems contradictory that you would see that in this moment. Can you talk a little bit about why you think we're seeing that and what's some of the behavior that might be driving this increased activity, and also how that might play out post-Covid?

    Dan Ariely: Yes. So, it comes from lots of different reasons at the same time, like, lots of interesting complex phenomenons. One, of course, is fear, right? Fear is out there. The second thing is that consumption has gone down. People eat less out, people don't travel abroad so there's some slack. There's an ability to do it. So, it's the combination of fear and reduction of spending that are contributing to this ability to open emergency savings. Indeed, we see a really wonderful behavior for this. Now, the important question is, can we make it sustainable? So, imagine that tomorrow there's a cure and a vaccination at the same time, a wonderful day for humanity, for Covid 19. It's all over the day after tomorrow. We also can produce the vaccination and the medication quick, and everything is over the day after tomorrow. To what extent will behavior go back to what it was a year ago, and to what extent will we sustain some lessons, right? A lot of us are probably eating more at home. I've learned to cook, I make an unbelievably good omelet by now. You know, we've acquired some new habits, some good, some bad. To what extent will they stay and to what extent will we say, 'Okay, we're so tired of this. Let's just go back and spend even more and do all kinds of things.' I think it's really a question of, are we going to set things the right way now so that they will stay with us for later? For example, would we be able to create automatic deductions to savings? If we can create

    automatic deductions for saving, it will stay with us for longer.

    If it's waiting for people to put money into saving, it will not stay for longer. Could we get a new standard of what is appropriate? Could we get some new social norm of, '20% of your salary should go into saving'? Should we just restrict ourselves to emergency saving or should we start helping people think about all kinds of other goals? If tomorrow Covid 19 is over and we don't do anything to prepare for that, I think that behavior would go back quite quickly. I think we can do much better, but it's up to us to create the mechanisms that will make this temporary behavior last much longer.

    Moderator: Can you talk a little bit about what you think some of the opportunities are, specifically around savings that employers can start to consider or embrace that will help them, sort of, support this movement to greater financial security for their employees?

    Dan Ariely: Yes. So, let me give you two examples of how we might think about this. Imagine the following setting. Imagine you have an employee who comes back on their first day, to work, and they save this form that says, 'How much of your salary would you like to put in 401(k)?' Let's say it's up to 10% of their salary. The person who puts 10%, that's great but they're going to bring home 10% less. So, think about that person, their psychology, and they're saying, 'Am I going to put more money to something that will happen in 30 years from now, or should I bring more money home this month?'

    Which one of those win? The money that you bring home now is going to be visible. The money that the family will get in 30 years from now is not visible. Could we make the invisible visible? So, imagine the following thing. Imagine you and I are a couple and I go to this new workplace and I get this form of how much do I want to put in 401(k) but it asks me to call my significant other. It gives me a little text that says, 'Hey, my darling, love of my life, I just got to this new job. I have an opportunity to put up some of

    my salary into retirement. It's up to 10% of my salary. How much do you think we should put in?'

    Now, think about that. First of all, that two people consult, but the second thing is me, in this case, I get brownie points for saving for the family. I'm not just thinking, 'I'm going to bring home less,' all of a sudden, I get credit for, 'Look at this, my workplace is allowing me to save for our future. How much should we put in?' Basically, saving goes up quite dramatically. Now, does the significant other remember it later on to appreciate the fact that more money is going to 401(k)? Probably not, but who cares? In this case, we care about that one decision. So, it's about creating the right conditions so that that decision has appreciation. It becomes more visible. That's the first thing.

    The second thing is that there are all kinds of opportunities for naming accounts. For example, there was a beautiful study that looked at kids, to kids on the day that they were born, dividing half of them, group one and group two randomly, and giving half of them $500 in a college savings account. They basically did nothing and waited four years and then they went to visit those kids. What they found is that the kids with the college savings accounts with $500, not enough to pay for college, had higher social and cognitive skills. Now, how can that be? Do these kids know that they have college savings accounts? Of course not, but once in a while their parents get a statement that said, 'This little kid, while still in diapers, already has a current savings account.' Very small amount of money but that doesn't matter. Now the parents think about their kids as having college savings accounts. What do they do? They buy them a few

    more books, they read to them a little bit more, not a lot. If you think about this, the big point here, it's not about college savings account. That's, of course, a great thing to do but it's about the fact that savings accounts are not just financial mechanisms, they are a mechanism to change people's mindsets. If we give people an account and we're saying, 'This is your charity giving account,' they start to think about themselves as giving to charity. Give them an account and we say, 'This is your college savings account for your kid,' they start thinking differently about their kids. If we say, 'This is your future home account, your future small business account, your future whatever,' this is something that helps define thoughts. So, when we think about, how do we get people to move forward, there's the amount of money that the business is giving the employees in all kinds of ways but if we use correctly names of accounts, we can shift behavior in a deeper way.

    Moderator: Interesting. I was thinking about your comment about visibility and invisibility and how tricky that is in an employment environment because, of course, people tend to think about their financial situations in a very private way. Whereas, you point out, spending can be as private or public as you decide it could be. So, interesting the idea about sharing with a loved one or a partner. You've got the 401(k) long term end of the saving spectrum, which has a lot of restrictions and ways that you are required to put it into practice. You've got the short end part of the savings with virtually nothing to support it or, in a way, to define it. Can you talk a little bit about other mechanisms that you can imagine an employer embracing that would help create these opportunities, as you say, to really reinforce this really important practice?

    Dan Ariely: Yes. So, here are, kind of, two directions. The first direction is to create a social norm about what it is. So, if you remember, there's this very nice company called Opower that sends your electricity bill and tells you how much you're consuming compared to your neighbours. Now, it doesn't say how much you're using compared to the neighbour on your left, it says compared to your neighbours in general, how much you're saving. It's not saying, 'John is doing this and Mike is doing that,' but it's giving you a general sense for what you're doing compared to a standard, right? That's very helpful. The point you're making, which is incredibly important, is that people don't talk enough about finances. There was somebody in Atlantic, he had these statistics, I don't know if it's true or not but he said that American men are happier to talk about Viagra than about credit card debt. I don't know if it's true, but what-,

    Moderator: But you can imagine it.

    Dan Ariely: People are not really happy to go and say, 'Hey, here's my credit card debt. What do you do with yours?' Even though you would want us to talk about this, we don't. So, I think creating a social norm, what's acceptable, not acceptable, what's desirable, that's one approach and I think it's very important. You can imagine how employee benefit forms are not just, 'How much do you want to put?'

    Moderator: Right

    But you would say, 'Here is what we recommend and here is what the majority is putting up.'

    Moderator: Right

    Then, the other thing is to make the data less granular. What do I mean by that? It's not about the amount of money, it's about the actions. So, for example, in our lab here, we asked people to take a glass and we gave them pebbles, everybody got pebbles, and we said, 'For each percent that you save from your cheque into retirement, put one pebble into the glass.' We basically have on display lots of glasses with lots of pebbles. It's not very precise but you get a sense. Now, you could do things like that. You could say, 'This month, 98% of the employees put some money into 401(k),' or 'Put more than half of the match'. You could put all kinds of numbers, not revealing what John or somebody specific is doing, but it's giving you a general sense for what the activity around you is and even if people don’t talk about it you get a sense of what’s going on and what’s the appropriate behavior. 

    Moderator: It's so interesting because I've heard you talk so much about social norms but really you're talking about, how can a company define its own cultural norms? So, it doesn't have to be something necessarily that we have to take on in the country, but within each company and its specific environment, you can really think about, how do you sync this up in a way to reinforce, 'We're really here to help build out financial health for employees.'

    Dan Ariely: I want to give you one more example of something we did. So, imagine that my company matches up to 10% but I only put 5%. What happens, every month I put 5%, the company puts 5%, it goes for saving for retirement. But imagine the process was slightly different. Imagine the company says, 'Hey Dan, we put 10% in escrow waiting for you to match,' and then my match is 5%. Then the company writes me the day after and says, 'You matched 5%. It means from the 10% we allocated, we're taking 5% back.' Think about it. Financially, it's the same thing. I put 5%, the company puts 5%, but I see the money I did not match. In the tests we did, that's an incredible-, because, you know, if you put 5% in the beginning, you never go back to it. It's not that every month you see the money you didn't match. In our approach, it's incredibly salient how much money you're leaving on the table every month. Very aversive, very unpleasant to see the money you leave on the table and very quickly, people increase their savings. So, we really need to think about the little details. You know, if people one time sign up for something, how do we not settle for that? How do we make it feel not ideal unless they get to a much better place?

    Moderator: As we talk about different ways for employers to support their employees, it reminds me of a conversation we've had around, how do you help employees appreciate-, or, as an employer, how do you know that by offering these somewhat intangible or non-dollar based benefits, that employees actually feel that they are of value and that they create that bond that's so important, of trust and support between employer and employee? Just curious your perspective on that.

    Dan Ariely: Yes. So, a lot of benefits are not really about financial transaction, they are about caring. So, opening for your employees' current savings account for your kids will say, 'Hey, we care about something really long term.' A salary is monthly. Somebody did some work, they get paid. They did some work, you settle the books. The right employee benefits are the ones that have long term feelings connected to them. It's like a handshake. It's like an agreement. 'We're here together for this.' We've had lots of evidence about the value of benefits, especially when they are framed in the long term, but we just did a study since the beginning of Covid and one of the things we saw was that the value of salary compared to benefits flipped. So, people are now caring more about benefits than salary. Why? Because it says the company cares for you. By the way, the way we looked at it is we said, 'What are the companies that are doing best in the stock market, that have high financial returns for their portfolios?' What we saw is that employee benefit is getting a bigger and bigger chunk. Salary is getting less of a role in that. Also feeling appreciated, you know. Basically spending some time saying to people, 'Thanks' ends up being incredibly important. So, benefits were always important. They are even more important when there's uncertainty because if you think about benefits, what they do is they say, 'The company really cares about me. It's not just about the financial transaction and they can let me go at any moment, they really care about me.' So, I think in this period, benefits are taking an extra important role and giving them, thinking about them and communicating them as a way for caring is incredibly important.

    Moderator: Dan, thank you. What a great conversation. And so helpful to hear how you think about applying the behavioral insights that you spend so much time studying, specifically to helping people think about financial health and security, especially for employees. It’s a perfect Segway into our next session with BJ Dorfman, who’s the director of benefits at UPS, and our moderator Matt Soiffer, who’s head of retirement distribution at BlackRock. And, we really got to know BJ and UPS as one of our early partners in BlackRock’s Emergency Savings Initiative, a philanthropic effort that we launched in 2019 with $50m of non-profit funds to help figure out how can we work with companies, fintech, researchers, to create right place right time emergency savings solutions. UPS is one of our first partners to actually launch a pilot into the markets specifically to make savings easier for their employees. So, BJ, Matt, welcome, and over to you.

Dan Ariely
Behavioral Economist, Author and James B. Duke Professor of Psychology and Behavioral Economics at Duke University
Deborah Winshel
Global Head of Social Impact, BlackRock
BlackRock Savings Summit
At the recent BlackRock Savings Summit, we brought together some of the world’s leading thinkers and decision makers on financial health, tech, and policy to discuss how we could build a more inclusive and secure savings system in this country.
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