The Psychology of Savings: Designing Savings Products to Save Us from Ourselves

March 8, 2011

Over thirty representatives from financial service providers, civil society, non- profit, donor organizations and the central bank met last week to discuss the psychology of savings, using behavioral economics to outline implications for product design.
The event was an information exchange, co-hosted by The Pacific Financial Inclusion Programme (PFIP), and the Reserve Bank of Fiji (RBF), designed to look at issues of importance from the perspective of many different stakeholders, with the goals of forming partnerships, generating discussions and finding solutions.
 
Michael McCaffrey, Financial Inclusion Technical Specialist, observed that, “almost everyone realizes savings is important, yet also admit they are not saving enough. This phenomenon can be mitigated by learning about the psychology behind our decisions to save, and then designing products which complement our psychological dispositions.
 
One of the concepts highlighted in the presentation was inter-temporal discounting, practically meaning that it is much easier to make rational decisions about events that will occur in the long term future, than it is about events that occur in the time period closer to the present. The implication for savings is that it is easier to plan to save at a future time period, but as time passes, and the future time approaches, keeping that commitment to save becomes harder and harder. Practitioners around the world have developed some interesting techniques to help prevent people from continually failing to keep this promise to themselves -to save. As a man from Northern Solomon Islands, succulently put, “I am my own first robber; I save in the morning, and then withdraw every afternoon.”
Hence, we all need a helping hand when it comes to savings. Pension plans are a good example of a successful product design, as they often to ask you to commit a proportion of future wages to savings, and then directly deduct those wages in the future period, so the savers do not have to continually make the decision to save.
However, in many situations direct deductions are not possible. For example in rural areas around the world, women come together in groups of 10-30 to save together. The idea is that when they try to save alone, outside pressures often become too much, but by saving together as a group they use their solidarity to overcome that. Their desire to fulfill their promise to each other, to save an agreed upon amount helps them overcome the desire to dedicate the money to other uses. This has the effect of helping ensure that they can best use the resources they have, when they realize there is something they need.
Manoa Seruvakula of the Fiji Savings and Credit Union League, found the session helpful in thinking about how to get people to do things they need to do, yet have trouble doing anyways, “[Psychology] is the missing link” he explained. The session went on further to suggest that we develop mechanisms to save without having to make the decision each time to deposit money. What if everytime you went to the grocery store, one percent of the value of your purchases went automatically into a long term savings account for you? We would not even feel it, and over time we would have passively put away a large sum of money.
Savings products need to be catered to the way we think, and make decisions, and if financial service providers can make savings attractive, therefore motivating clients to enter formal financial systems, and build assets throughout their lives, this will ultimately lead to economic and social advancement for their clients and their client’s families.
The PFIP team has facilitated several information exchanges in different countries around the Pacific every year. The information exchanges begin with a short presentation on a topic of interest followed by some informal discussion on this topic as well as the promotion of financial inclusion in general with interested counterparts.
PFIP is funded by the Australian Agency for International Development (AusAID), UN Capital Development Fund (UNCDF), European Union, and the United Nations Development Programme Pacific Centre.