*Editorial Note: This content is not provided or commissioned by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through a credit card issuer partnership.
This article was last updated Oct 09, 2017, but some terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the issuer website.
Behavioral economics is a field of study that melds psychology with financial management. Those who work in this field observe that even though people may study the lessons of finance and learn about financial literacy, they often fail to save as much as they should, stick to a budget or make other smart financial choices.
Behavioral Economists discovered that people often lack the mental discipline or emotional motivation to follow through on their plans. The combination of economics and psychology were studied to come up with strategies and techniques that really do work and help people reach their desired goals.
Incentives play a big role in behavioral economics, which is closely related to the branch of psychology known as behaviorism. Behaviorism, or behavioral psychology, can be defined as a theory of psychology based on the idea that all behaviors are acquired through conditioning. The origins of behaviorism can be traced back to research performed by groundbreaking psychologists of the 20th century. You may have heard of them:
- Ivan Pavlov studied dogs to learn about the kind of classical conditioning that occurs when we are presented with something we desire. Pavlov’s dogs would salivate just by seeing food, exhibiting a physical and biological response even without actually eating the food.
- B.F. Skinner employed positive and negative rewards and studied the responses associated with them. For example, a child reaching for the cookie jar before dinner would elicit a negative response –like a hand slap –a child completing their chores would elicit a positive response –such as a reward.
Fast forward to the 21st century and we have researchers, scholars, and entrepreneurs applying similar concepts to influence the behavior of consumers. These concepts are now being put into practice online to help people achieve their goals.
The purpose for this modern twist to conditioning is to help consumers make or break a habit or lifestyle. It is believed that through behaviorism, consumers can successfully manage their money.
Three Businesses Putting Behavioral Economics into Practice
HelloWallet’s founder, Matt Fellows, launched his business because he wanted to provide independent financial guidance to all American’s. HelloWallet is mostly geared toward corporate-level research, providing tools like financial software to help employees of large companies save more and manage their retirement accounts wisely. HelloWallet applies psychology by teaching consumers to be more aware of their spending patterns and to break bad financial habits.
Some consumers spend not because they just want a product, for example, but because they expect that the product will fulfill a deeper emotional need. Those $250 shoes may improve your self-image, for instance, but when the credit card bill comes and you cannot pay, that debt does serious damage to your self-identity and creates unwanted stress.
What differentiates HelloWallet from money-management websites is that their team performs extensive research analyzing the latest trends in order to understand what the future holds. The tools and techniques provided by HelloWallet can help gain insight into the reason these psychological factors influence behavior in order to tackle financial management at the source of the problem for a sustainable and viable solution.
Dean Karlan, founder of StickK.com, came up with the idea to launch a “Commitment Store” where people essentially sign contracts requiring them to achieve whatever personal goals they set, such as weight loss or opening up a 401(k). The commitment contracts were based on two popular principles: that people don’t always do what they say they want to do; and, incentives get people to do things.
The logic behind these contracts is that economic and behavioral research shows that people who have some “skin in the game” in the way of their reputation or their hard-earned money, are more likely to reach their goals. StikkK.com primarily leverages negative incentives to influence consumer behavior.
Ideas42, established by people with credentials from Harvard University, MIT, the World Bank Group, Princeton University, and the Brookings Institution, applies behavioral economics to design innovative solutions to a wide range of problems. The nonprofit organization works, for example, on ways to increase savings rates in developing countries and to stem the tide of college dropouts in the USA.
An estimated 56 million Americans have little or no money saved for retirement, and Ideas42 implements strategies to help them manage their budgetary and savings priorities for a better outcome and brighter future. JP Morgan Chase also recently partnered with Ideas42 to launch a $30 million initiative to help low- and moderate-income consumers improve their financial health.
If you have a good grasp of what makes you tick, you can employ some of the below tactics on your own.
- Use your online credit card account settings, for example, to text or email you with an alert whenever you spend beyond a certain limit.
- You can also set up automatic systems to sweep money every month straight out of your bank account and into a retirement account.
- Blueprint tools offered by companies like Chase also help to manage your credit card debts and payments, and oftentimes seeing a graph that shows how well you are doing at paying down debt will help encourage and motivate you.
- One of the best motivators is keeping track of your free credit score. As you implement prudent financial strategies to reduce you debt and improve your score, you’ll be able to see your credit score go up – giving you a winning feeling
*Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.