Smart financial decisions may seem straightforward: pay with cash, save money, shop around for the best deal. But, as the United States’ $14.5 trillion in household debt attests, such decisions can be tough for consumers. Economists and policy makers can help, according to a study by the Behavioral Science & Policy Association’s working group on financial decision-making.
One of the main problems, the research argues, is that consumers often don’t shop around enough when choosing financial products. “People either aren’t factoring in all the information or aren’t aggregating it,” says Chicago Booth’s Abigail Sussman, one of the researchers in the BSPA working group. “It’s easier to call one company than to shop around.” Because buying a home and financing college are decisions made rarely, perhaps even only once in a lifetime, people don’t learn from experience the way they do from smaller, more frequent decisions. So it’s important to make those big decisions wisely.
The social context in which a person makes a decision also plays a role. People may fear being judged poorly for exploring certain cost-saving options, such as federal aid. They may be influenced by peers’ decisions, or by a default option that’s presented. Finally, they may put too much trust in advisors or companies that don’t have the customer’s best interests at heart—or they may be afraid to trust advisors at all.
“It’s not actually helpful to the company to have customers defaulting all the time. They’re interested in helping.”
— Abigail Sussman
But companies, policy makers, and others with influence can assist customers in making better choices, the researchers write. Employers could make enrollment in a retirement plan the default for new employees, for example. Credit-card companies could notify customers before a charge is added to their account or provide tools to make clearer how compound interest works. Governments could encourage people to have specific savings plans in place to invest their tax refunds.
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When It Makes Sense to Raid Your Savings AccountThe researchers also suggest some fixes aimed directly at US borrowers, including that the US Department of Education could develop tools to help people figure out the amount in college loans they should borrow, the salary they can expect after graduation, and the likelihood of defaulting on their loans. And the US Consumer Financial Protection Bureau could create a tool for potential home buyers that would show the best type of mortgage based on individuals’ data as well as their projected risk of defaulting.
Do companies that profit from consumer, school loan, and housing debt want to help people reduce their debt levels? Yes, says Sussman. “It’s not actually helpful to the company to have customers defaulting all the time,” she notes. “They’re interested in helping. And from a branding perspective, this is particularly true—they want to be thought of as looking out for their customer.”
Brigitte C. Madrian, Hal E. Hershfield, Abigail Sussman, Saurabh Bhargava, Jeremy Burke, Scott A. Huettel, Julian Jamison, Eric J. Johnson, John G. Lynch, Stephan Meier, Scott Rick, and Suzanne B. Shu, “Behaviorally Informed Policies for Household Financial Decisionmaking,” Behavioral Science & Policy 3, no. 1 (2017).
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