Would 401k participants like to save $5 every day, $35 a week or $150 a month?
It’s a simple—yet important—question Shlomo Benartzi recently asked and answered as part of a new partnership with Acorns, the enabler of mobile technology that allows individuals to round up investments with spare change.
The famed behavioral economist joined the firm as chair of the Behavioral Economics Committee, and will head its Money Lab, “an initiative that aims to create, test and build solutions to increase the financial well-being of the up and coming in America, with a special focus on savings and investment.”
In its first experiment, Benartzi and his team found that the total amount of money set aside is practically the same, yet while only 7 percent opted to save $150 a month, nearly 30 percent decided to save $5 a day.
“What accounts for this huge shift in preferences, even when all the choices are equivalent?” Benartzi rhetorically asked. “Saving $5 a day makes us think about skipping a Starbucks latte (that seems doable), while $150 a month makes us think about car payments, which is a much more daunting amount to give up.”
In addition, the findings show that framing investments as daily versus monthly can close the savings gap between the lower- and upper-income users; for example, someone who is making $25,000 a year and saves $5 daily can close the retirement savings gap with someone who makes $100,000 annually.
According to the company, the first call for research proposals for field experiments focused on reducing consumer spending has proved that there is great interest in the initiative: academic teams from 25 universities (e.g., Carnegie Mellon, Chicago, Colorado, Columbia, UCLA, Yale) have submitted project ideas.
Along with Nobel Laureate Richard Thaler of the University of Chicago, who is also an advisor to Acorns, Benartzi pioneered the Save More Tomorrow program, a behavioral prescription designed to help employees increase their savings rates gradually over time.
“I’ve spent my entire career trying to answer a simple question: how can we get everyone to make better financial decisions about the future?” Benartzi said in a statement. “At Acorns, I have the opportunity to apply my learnings at scale and nudge millions of customers to make decisions that will improve financial outcomes—everyone deserves to have a better and safer financial future.”
“We’ve solved the first big societal problem: getting people to start investing,” Noah Kerner, Acorns CEO, added. “Now we’re focused on how we can combine insights of psychology and economics to create an entire financial system that helps people save and invest—our Money Lab can really make an impact.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.