October 14th marked the first instalment of WES Presents - a series of off-season talks with renowned thought leaders - in the 2021-22 WES calendar. Students gathered both in-person and online to listen to Professor Shlomo Benartzi: an American behavioural economist, Professor Emeritus at UCLA Anderson School of Management, and co-founder of the Save More Tomorrow Movement.
In an insightful keynote address, followed by a live Q&A session, Prof. Benartzi enthused about the art of making better financial decisions through an increased understanding of savings schemes and retirement plans - ultimately illustrating how quickly the benefits of these decisions can be reaped.
And if you’re thinking, “but I’m so young; why would I care about my retirement already?!” - well, this is exactly the issue that Prof. Benartzi addressed through his research. In fact, he highlighted how the common (well-intended, but in many ways misguided) mantra of ‘living in the moment’ can easily compromise financial stability, leaving us prone to uncertainty and financial dilemmas later in life.
Speaking about the almost aggressively ‘do-it-yourself’ environment of the contemporary western world, Prof. Benartzi emphasised that “people will have to save on their own… they have to figure out how much to save, how much to invest”. He argued that greater individual-level awareness about the benefits of savings and value of future needs is necessary to overcome low savings rates and overwhelmingly lacking financial education.
Prof. Benartzi went on to diagnose the fundamental problem - which causes people to de-prioritise savings - as a fascination with current spending, where people are drowned in a culture of overconsumption in the commercialised world. An apt analogy was offered in the form of the empty promise to start hitting the gym in a New Year’s Resolution, or start a new diet on Monday; people are terrific at prioritising current over future gain, to their own longer-term detriment.
This is where the idea for Save More Tomorrow emerged; “the idea was to take behavioural economic principles, and try to increase employees’ savings”. Now, you may be thinking: that doesn’t sound too complicated, and seems like a self-evident solution to the problem of under-saving. But you’d be surprised to hear that the programme creators were incredibly hard-pressed to find an employer to buy into their idea. After finally launching in 1998 with a mid-sized US manufacturing firm (after a two-year hunt!), the programme initially yielded more questions than answers.
However, by taking their research into the field, some insightful conclusions began to emerge. The first of these was the temporal importance of encouraging increased savings after a bump in pay: “if [employees] only save more when they make more money, then they never have to cut their spending and feel the pain of loss”. Indeed, as economic agents, we are hard-wired to seek consistent utility levels, and to resist any fall in utility.
In fact, to the surprise even of the programme creators themselves, 80% of the employees at participating firms were ready to sign-up for a scheme that projected a 3% annual savings rate, regardless of current financial hardship. Starting with 16 million Americans, the project now has 25 million active participants. In short: we would all like to save more, we just need the motivation and easy access to an opportunity to start now - not tomorrow, or on Monday, or on New Year’s.
But how can we ensure the consistency of these savings rates, and that the cost of forgoing current disposable income does not stop people from making a positive financial change? The answer turned out to lie in the power of storytelling, and of framing savings contributions in the right temporal terms. “As a behavioural economist, my thinking is always that nothing would be as powerful as changing the default”. When savings contributions were presented to employees as a percentage of their monthly income, the contributions seemed too high to many. A presentation of the contributions as weekly was much better received, and while the contributions were literally extracted on a weekly basis; the framing that most successfully widened the programme’s reach (to 30% enrollment) was a daily periodicity and presentation. When considered on a daily basis, your savings contributions appear almost equal to the change you tip your Starbucks barista.
Now, if you aren’t surprised by the importance of shorter-term temporal framing, you might also expect that this phenomenon varies with income. And you would be right - in part. Again, a common assumption is that the poor are less willing and able to save money. However, when presented with daily input values, 30% of employees earning <$25,000 closely matched the 31% of employees earning >$100,000 who signed up for the programme. In the end, perhaps we are not that different after all; we face the same dilemmas, and follow the same way of thinking. This wider perspective might even bring us all closer to better financial decision making.
Now, let’s take a step back to consider just how innovative Prof. Benartzi’s results really are. In his keynote address, he said himself that “if not us, somebody else would probably have introduced [an equivalent Save More Tomorrow]”. With the rapid digitalisation of the financial sector, and plethora of virtual educational resources detailing superior financial decision making and savings rates, our levels of awareness as average employees and consumers should be far higher than they actually are. And thus, while Prof. Benartzi’s arguments in favour of improved financial education are compelling, our behavioural biases are often obstacles to accessing even the information that lies right at our fingertips.
Making it as easy as possible for people to save, and to perceive saving as an approachable, navigable and un-intimidating action for significant future gain, may be the true key to unlocking increased savings rates. In fact, it may be the very solution that allows those of us who are ready to take action and think differently access to more financially sustainable futures.