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Behavioral Interventions to Increase Tax-Time Saving: Evidence from a National Randomized Trial: Evidence from a National Randomized Trial
Abstract
We provide new large-scale experimental evidence on policies that aim to boost household saving out of income tax refunds. Households that filed income tax returns with an online tax preparer and chose to receive their refund electronically were randomized into eight treatment groups, which received different combinations of motivational saving prompts and suggested shares of the refund to save—25% and 75%—and a control group, which received neither. In treatment conditions where they were presented, motivational prompts focused on various savings goals: general, retirement, or emergency. Analysis reveals that higher suggested that allocations generated increased allocations of the refund to savings but that prompts for different reasons to save did not. These interventions, which draw on lessons from behavioral economics, represent potentially low-cost, scalable tools for policy makers interested in helping low- and moderate-income households build savings.
... Seventeen measured saving amounts: ADD; Assets for Independence[Mills et al., 2016;Ratcliffe et al., 2019]; Parks Opportunity Program [Wiedrich et al., 2014]; Collins and Urban (2016); Duflo et al. (2006); Goda et al. (2012); Leckie et al. (2010a); Loke et al. (2016); MI SEED [Engelhardt et al., 2012; Marks et al., 2009; Osborne et al., 2016] SEED OK[Beverly et al., 2014;Clancy et al., 2016;Huang et al., , 2017;Grinstein-Weiss et al., 2015;Grinstein-Weiss, Cryer, et al., 2017;Grinstein-Weiss, Russell, et al., 2017;Moulton et al., 2015;Roll et al., 2018;Smith et al., 2017; Tufano, 2014. BIRKENMAIER ET AL. ...
... Saving amounts were measured at the following time points: (a) end of treatment(Duflo et al., 2006;Goda et al., 2012;Grinstein- Weiss et al., 2015;Grinstein-Weiss, Cryer, et al., 2017;Grinstein- Weiss, Russell, et al., 2017;Loke et al., 2016;Roll et al., 2018; Tufano, 2014); (b) end of treatment and 6 and 12 months later(Collins & Urban, 2016); Parks Opportunity Program[Collins & Nafzinge, 2019;Wiedrich et al., 2014]; (c) 10 weeks(Osborne et al., 2016); (d) 1 year (Assets for Independence[Mills et al., 2016]; and Moulton et al., 2015; (e) 18 months (Nam et al., 2013); (f) 30 months (SEED OK [Beverly et al., 2014]); (g) 3 years (SEED [Beverly, Kim, et al., 2015]), (Assets for Independence [Ratcliffe et al., 2019); (h) 4 years (Leckie et al., 2010a); and MI SEED [Engelhardt et al., 2012; Marks et al., 2009]); (i) 5 years (SEED [Huang et al., 2017], Smith et al., 2017); (j) 6 years (SEED [Huang et al., 2015]); (k) 7 years (SEED OK [Clancy et al., 2016]); and (l) 10 years (ADD [Grinstein-Weiss et al., 2015]). Debt amounts were measured at the following time points: (a) immediately after treatment (Theodos et al., 2016); (b) end of treatment and 6 and 12 months later (Parks Opportunity Program [Collins & Nafzinger, 2019; Wiedrich et al., 2014]); (c) 9 months (Parks Opportunity Program[Gons, 2013]); (d) 18 months; (e) 18 and 48 months (ADD[Huang, 2010]); (f) 4 years (ADD[Grinstein- Weiss et al., 2008]); and (g) 5 years(Smith et al., 2017]).Credit score was measured at the following time points: (a) 6 months before and immediately after treatment(Theodos et al., 2016); (b) end of treatment and 6 and 12 months later(Parks Opportunity Program [Wiedrich et al., 2014]); (c) 9 months (Parks Opportunity Program[Gons, 2013]); (d) 1 year (Credit Building[Birkenmaier et al., 2012]) andMoulton et al., 2015; (e) 18 months(Modestino et al., 2019); (f) 2 years (Credit Building[Birkenmaier et al., 2014b]; Roder, 2016); (g) 3 years (Credit Building[Birkenmaier et al., 2014a]); and (h) 5 years(Smith et al., 2017) after intervention. ...
... Administrative data from the software is used for each of the four studies. With the exception of the 2012 data (reported inGrinstein-Weiss, Russell, et al., 2017), follow-up survey data, one immediately after filing the tax return, and a second 6 months later, were a secondary data source. The groups were not matched. ...
Background:
There is growing recognition that people need stronger financial capability to avoid and recover from financial difficulties and poverty. Researchers are testing financial capability interventions with adults, children, immigrant populations and other groups, but little is known about the effectiveness of financial capability interventions on financial behaviour and financial outcomes.
Objectives:
The purpose of this review is to inform practice and policy by examining and synthesizing evidence of the effects of interventions designed to improve financial capability. Financial capability interventions combine financial education and financial products and/or services. The research questions are: (a) What are the effects of interventions designed to improve financial capability on financial behaviour and financial outcomes? and (b) Does study(design), intervention (dosage, duration, type) or sample (age) characteristics relate to the magnitude of effect size?
Methods:
We conducted two identical rounds of electronic searches for two different time periods. In Round 1 searched for studies through May, 2017 and Round 2 searched from May, 2017 through May, 2020. For both rounds, we identified and retrieved both published and unpublished studies, including conference proceedings, through a comprehensive search that included multiple electronic databases, grey literature sources, organizational websites, government websites and reference lists of reviews and relevant studies. We also conducted forward citation searching using Google Scholar to search for studies citing the included studies. We also conducted a search on Google using key terms. We hand searched the table of contents of selected journals to identify potentially eligible reports not properly indexed. Finally, experts who were study or sub-study authors of prior studies were contacted in an attempt to obtain unpublished studies, studies in process and published studies missed in the database search.
Selection criteria:
To be eligible for this review, the intervention must have included a financial education component and a financial product or service. Studies must have also been conducted in any of the 35-member countries of the OECD, and included a financial behaviour or financial outcome. To meet the criteria for delivering financial education, interventions must have delivered information about: (1) a variety of general financial concepts and behaviours, or advice about financial behaviours); (2) a specific financial topic; (3) a specific product; and/or (4) a specific service. To meet the criteria for access to a financial product or service, interventions must have facilitated access to one or more of the following: (1) a child development account; (2) a retirement account through an employer; (3) a 'second chance' checking account; (4) a matched savings account; (5) a financial service, such as financial counselling or coaching; (6) a bank account; (7) an investment vehicle; or (8) a home mortgage loan product.
Data collection and analysis:
Electronic searches of bibliographic databases and searches of other sources identified a total of 35,484 hits. Titles and abstracts were screened for relevance and 35,071 were excluded as duplicates or deemed inappropriate. The full text of the remaining 416 potential studies was reviewed and screened for eligibility by two independent coders. We excluded 353 reports that were deemed ineligible and included 63 reports that met inclusion criteria. Of the 63, 15 reports were deemed duplicates or summary reports. Of the remaining 48 reports, 24 were unique studies (using unique samples) that were included in this review. Six of those 24 studies were large longitudinal studies that presented unique analyses (using different time points, subsamples, and/or outcomes). Thus, we extracted data from 48 reports, reporting data and analyses from 24 unique studies. At least two review authors who were not study authors independently assessed risk of bias in all included studies using the Cochrane Collaboration's risk of bias tool.
Results:
The review summarizes evidence from 63 reports from 24 unique studies, which included 17 randomized controlled trials and 7 quasi-experimental designs. In addition, 17 duplicate or summary reports were also located. This review identified several different types of previously evaluated financial capability interventions. Unfortunately, few interventions that were evaluated by more than one study measured the same or similar outcomes, thus there were not a sufficient number of studies of any of the included intervention types that could be pooled to conduct a meta-analysis. Therefore, evidence is sparse about whether participants' financial behaviours and/or financial outcomes are improved. While the majority of the studies used random assignment (72%), many of the studies had some important methodological weakness.
Authors’ conclusions:
There is a lack of strong evidence about the effectiveness of financial capability intervention. Better evidence is needed about the effectiveness of financial capability interventions to guide practitioners.
... 11 Indeed, it is the only time of the year when many can reasonably afford to divert money into savings. 12,13 Furthermore, households that deposit tax refunds into savings accounts have a reduced risk of material hardship-experiencing difficulty in meeting basic needs-in the six months following tax filing. 14 For these reasons, policies that encourage LMI consumers to set aside some or all of their tax refunds into savings accounts could mitigate the risk of hardship. ...
... 25 In the work described here, however, we heightened the urgency of the messaging, seeking to improve on those earlier attempts by, for example, explicitly describing the need for emergency savings rather than simply highlighting the necessity of a rainy day fund. 13 Finally, the third element of our approach is increasing participants' involvement, or interaction, with savings messaging. Heightened involvement can influence responsiveness to persuasion attempts, 38 but only in some circumstances (such as when people are processing information carefully). ...
... All eight treatments increased savings account deposits relative to the deposits of participants in the control condition (overall treatment Cohen's h = 0.09), although the 75% allocation target with no additional messaging condition was slightly more effective than the others (Cohen's h = 0.13). 13 The current project-which increased savings salience via choice architecture and persuasive messaging-shows comparable although slightly larger effects (overall Cohen's h = 0.14; for the most successful treatment, the Choice Architecture + Emergency Savings Message, Cohen's h = 0.16). ...
Tax refunds give many low-and moderate-income (LMI) households a rare opportunity to save for unexpected expenses. We conducted three experiments aimed at increasing tax-time savings by LMI consumers. In a large field experiment, the most effective intervention increased the average savings deposits by about 50%. Delivered as people filed taxes online, this treatment consisted of a choice architecture intervention (a presentation of action choices that emphasized options for putting money into savings), combined with a message highlighting the need to save for emergencies. Two follow-up experiments simulated the tax-time situation and parsed components of the intervention. The first showed that the choice architecture and messaging interventions increased savings deposits independently. The second, assessing individual elements of the choice architecture intervention, showed that the mention of a savings option did not increase allocations by itself, but a heavy emphasis on savings or the ability to easily put money into savings did increase allocations.
... Many households do not have the necessary savings to deal with unexpected shocks, such as a car breaking down or a family member becoming unemployed [1][2][3]. Consequently, many people suffer economic insecurity and are at risk for future economic problems [4]. The issue is further complicated by people's behavioural tendencies: they are more oriented towards the present than towards the future [5,6], prefer instant gratification over long-term benefits [7][8][9], underestimate a future rise in expenses compared to a rise in income, and underestimate the risk of unexpected expenses in the near future compared to those they experienced in the near past [10]. ...
... We set up a study to investigate financial forecasting behaviour on a household or personal level. Many people do not have the necessary savings to account for unexpected expenditures and income loss [1][2][3]. A number of factors complicate decision making surrounding financial aspects: biases such as present bias, hyperbolic discounting, and overoptimism skew financial forecasts. ...
Many people do not possess the necessary savings to deal with unexpected financial events. People's biases play a significant role in their ability to forecast future financial shocks: they are typically over-optimistic, present-oriented, and generally underestimate future expenses. The purpose of this study is to investigate how varying risk information influences people's financial awareness, in order to reduce the chance of a financial downfall. Specifically, we contribute to the literature by exploring the concept of 'nudging' and its value for behavioural changes in personal financial management. While of great practical importance, the role of nudging in behavioural financial forecasting research is scarce. Additionally, the study steers away from the standard default choice architecture nudge, and adds originality by focusing on eliciting implementation intentions and precommitment strategies as types of nudges. Our experimental scenarios examined how people change their financial projections in response to nudges in the form of new information on relevant risks. Participants were asked to forecast future expenses and future savings. They then received information on potential events identified as high-risk, low-risk or no-risk. We investigated whether they adjusted their predictions in response to various risk scenarios or not and how such potential adjustments were affected by the information given. Our findings suggest that the provision of risk information alters financial forecasting behaviour. Notably, we found an adjustment effect even in the no-risk category, suggesting that governments and institutions concerned with financial behaviour can increase financial awareness merely by increasing salience about possible financial risks. Another practical implication relates to splitting savings into different categories, and by using different wordings: A financial advisory institution can help people in their financial behaviour by focusing on 'targets', and by encouraging (nudging) people to make breakdown forecasts rather than general ones.
... In addition, although there is evidence that those who make estimates of their refunds are more likely to save portions of their refunds (Porto & Collins, 2017), there is no causal evidence that making such plans results in greater savings. In a large-scale experiment with TurboTax software, people allocated a larger portion of their refunds to be deposited into savings accounts when presented with savings-salient choice architecture (Grinstein-Weiss, Russell, Gale, Key, & Ariely, 2017;Grinstein-Weiss, Cryder, et al., 2017). In fact, the most successful treatment arm in the experiment included a message highlighting the need for emergency savings. ...
... In fact, the most successful treatment arm in the experiment included a message highlighting the need for emergency savings. However, in another study with TurboTax, there was no impact of messaging (e.g., for retirement savings or emergency savings), even though suggested anchors had positive effects on savings contributions (Grinstein-Weiss, Russell, et al., 2017). Taken together, these findings suggest that while messaging may be promising, choice architecture and reframing the savings choice could be more critical components influencing savings choices at tax time. ...
Financial decisions can have lasting consequences for consumer welfare and other important decisions. This review summarizes contemporary literature on financial decision making vis‐à‐vis the promotion of financial well‐being, outlining work on financial behaviors that contribute to financial well‐being, psychosocial determinants of financial well‐being, and the role of situational factors in financial well‐being. In addition to reviewing recent research, this article draws attention to some open questions in the field and proposes a trajectory for productive pathways of future research.
... It is thus not surprising that tax filing plays a significant role in financial lives of lower-income households. Prior research demonstrates that tax filing presents a unique opportunity for many lower-income households to boost savings (Beverly, Schneider, & Tufano, 2006;Tufano, 2011;Grinstein-Weiss, Cryder et al., 2017;Grinstein-Weiss et al., 2015;Grinstein-Weiss, Russell, Gale, Key, & Ariely, 2017;Roll et al., 2018), which may subsequently translate to improved capacity to withstand emergencies and reduce reliance on borrowing (Tucker, Key, & Grinstein-Weiss, 2014;Key, Tucker, Grinstein-Weiss, & Comer, 2015). ...
... Second, this work represents a substantial expansion of the experimental work linking the tax filing moment with financial security outcomes. While a large body of research has shown that low-touch behavioral interventions delivered in the online tax filing environment can increase the saving of the tax refund (Duflo, Gale, Liebman, Orszag, & Saez, 2006;Grinstein-Weiss et al., 2015;Grinstein-Weiss, Cryder et al., 2017;Grinstein-Weiss, Russell et al., 2017;Key et al., 2015;, less is known about whether debt-related interventions delivered at tax time can also be effective in improving financial behaviors and outcomes of LMI tax filers. In presenting evidence on the efficacy of delivering low-cost, low-touch, and scalable alternatives to traditional financial education approaches, this research will inform the design and implementation of messages that can easily be incorporated into many financial capabilityoriented settings, including financial technology applications, financial coaching services, and Volunteer Income Tax Assistance programs. ...
... Whether or not households have enough money set aside for emergencies is informed by various explanations for saving behavior and household savings. One line of inquiry identifies a link between financial knowledge and savings (Babiarz and Robb 2014;Hilgert et al. 2003;Lusardi 2008a;Woodyard et al. 2017) as well as motivational and behavioral factors (Carroll and Samwick 1998;Grinstein-Weiss et al. 2017. Other evidence points to the importance of access to financial services and incentives (Friedline et al. 2019;Mullainathan and Shafir 2009;Nam et al. 2013;Schreiner and Sherraden 2007). ...
... Manturuk et al. (2015) found that encouragement and opportunity to direct small amounts toward a savings account linked to prepaid debt cards via text messages helped individuals build an emergency fund. Messages encouraging lower-income online tax filers to save their refunds have shown success concerning savings deposits (Grinstein-Weiss et al. 2017). Tax-time savings deposits have also been found to lessen risk for material hardship (Grinstein-Weiss et al. 2016), suggesting saved refunds are being used as emergency resources. ...
Many U.S. households have insufficient savings to cope with income losses, expenditure shocks, and other financial emergencies, yet little research evidence explains why. Guided by Sherraden (2013) model of financial capability, we expand on prior research that examines the role of financial knowledge by incorporating additional factors and testing income interactions to explain a greater proportion of variance concerning whether or not households have money set aside for emergencies. We analyzed data from the 2009, 2012, 2015, and 2018 National Financial Capability Surveys and found that subjective financial knowledge, financial confidence, and savings account ownership, but not objective financial knowledge, were significant and consistent predictors of having an emergency fund. Savings account ownership was the strongest predictor, accounting for an increase in the probability of having an emergency fund of 25% to 29% across study years. Adding homeownership and ability to cover expenses to the models increased the proportion of variance explained by an average of 29%. Strategies to promote emergency savings should be multifaceted and include help from financial educators and counselors to create greater financial slack as well as programs and policies to increase access to short-term savings opportunities and incentives.
... Other financial education programs may focus at a deeper level of decision-making by helping consumers recognize overarching cognitive shortfalls which may generalize across a range of financial services categories. For example, financial education courses may help consumers recognize the effects of hyperbolic discounting as manifested in consumer tendency to prefer immediate consumption over saving for the long term (Grinstein-Weiss et al. 2017;Roll et al. 2019). Fox et al. (2005) conducted a systematic review of published studies on financial literacy programs using a range of metrics as program outcomes. ...
Past studies have examined the role of financial education on financial literacy, often with mixed results. While some studies have shown a positive effect, others have indicated null or even negative effects. Given that much public faith is given to financial education as a means for improving consumers’ financial wellbeing, a deeper understanding of the relationship between financial education and financial literacy is needed. A factor that may moderate this important relationship is cognitive style, which reflects the information processing strategies of consumers. At the two extremes of the cognitive style spectrum are analytical and intuitive consumers, and in the intermediate ranges are adaptive consumers who combine analysis and intuition to different degrees. Using a national panel of American consumers, the moderating role that cognitive style plays in this relationship is empirically examined. The findings indicate that while consumers with analytical and intuitive cognitive styles develop higher financial literacy levels as a result of financial education, the financial literacy levels for consumers with adaptive cognitive styles diminishes with financial education. The potential role of self-assessed investment knowledge in this relationship is examined and implications on curriculum design for financial education programs as well as related research needs are discussed.
... The effectiveness of automated saving services can be further increased by introducing an element of choice, such as a weekly option to double or quadruple savings accrued through a micro-investment service (Riitsalu and Uusberg, 2021). Messaging people to save for a specific goal can also increase saving rates (Grinstein-Weiss et al., 2017a), although with some mixed results (Grinstein-Weiss et al., 2017b). ...
Purpose
This study aims to investigate which messaging strategies employed in personalised newsletters could be used for improving the propensity of individuals to save or invest and secure their financial well-being.
Design/methodology/approach
The authors conducted a field experiment with 4,782 clients at an Estonian retail bank. For three months (after measuring baseline levels for a month), the participants received personalised monthly newsletters with either a praising or a scolding message based on comparing their recent investment decisions to their past decisions.
Findings
Their results suggest that newsletters could serve as an encouragement for those who already invest significant amounts each month and a reminder for those who have stopped regular investing for a month. The newsletters robustly increased investments in securities accounts for these groups.
Research limitations/implications
The authors contribute to the marketing literature by examining praise and scolding messaging strategies within the same channel and company, focussing on the individual's past behaviour. They raise several hypotheses to be tested in future randomised controlled trials (RCTs).
Practical implications
The authors’ results show the importance of investor behaviour analysis as the effectiveness of the newsletter intervention largely depended on the type of customer it was served to. This highlights the importance of personalisation.
Originality/value
The results show that a given message tends to influence only specific groups of investors. Identifying these groups is valuable information for messaging strategies.
... Michal Greenstein-Weiss et al. [20] performed a largescale experiment using behavioral effects. Taxpayers, who decided to return tax funds online, were divided into 2 groups -25% and 75%. ...
... This mitigates the problems of sustained willpower, as well as prospective feelings of loss in the present, typically engendered by the act of saving. These commitments may vary, in terms of their strength, in the sense that there may be high or low penalties for failing to fulfill the commitment (Karlan et al., 2016;Grinstein-Weiss et al., 2017). ...
The objective of this document is to understand the potential that voluntary savings has to increase pension coverage for low-income and independent workers in Chile, Colombia, Mexico, and Peru. It comprehensively reviews supply, demand, and institutional barriers to retirement savings, and presents possible cost-effective solutions to overcome these barriers. The framework of solutions proposed consists of behavioral tools, in addition to financial and technological innovations, with high potential for impact on the long-term savings of independent and low-income workers.
... Grounded in the financial capability framework, interventions to promote financial capability pair financial education and a facilitation of access to a mainstream financial product or service related to retirement savings (e.g., employer-provided retirement account, IRA, or Roth IRA). Financial capability interventions are also used to promote long-term financial well-being in earlier parts of the human life cycle, such as financial asset development for lower-income-employed adult populations and children (Grinstein-Weiss et al., 2015;Huang et al., 2014), credit building (Burke et al., 2019) and short-term savings (Grinstein-Weiss et al., 2017). Although varied in terms of populations served, financial education content provided, financial education delivery methods, and financial products or service provided, all financial capability interventions provide financial education and a particular product or service that can aid wealth creation. ...
This systematic review focuses on examining the effects of interventions that facilitate retirement savings through a financial capability approach, which combines financial education and financial access. Systematic review procedures were used to search for published and unpublished experimental studies in multiple databases and gray literature sources that met eligibility criteria. Four research projects published through May 2020 were eligible for the review. Results suggest that, thus far, there is no clear rigorous evidence that the interventions that use a financial capability approach to promote retirement savings improve individual financial behaviors or financial outcomes. Policy and practice implications are discussed.
... Prize-linked savings such as Commonwealth and the Michigan Credit Union League's Save-to-Win initiative uses savings deposits as lottery entries to capitalize on the excitement of playing lotteries. Refund-to-Saving (R2S) is an online tax-time saving initiative to encourage financially vulnerable tax filers to save all or part of their refunds (Grinstein-Weiss, Russell, Gale, Key, & Ariely, 2017). Based on the success of SaveNYC (Key, Tucker, Grinstein-Weiss, & Comer, 2015), the SaveUSA ini tiative offers financially vulnerable tax filers savings matches for amounts of refunds saved (Azurdia & Freedman, 2016). ...
Financial inclusion, the goal of financial access, broadly refers to the ability of all people in a society to access and be empowered to use safe, affordable, relevant, and convenient financial products and services for achieving their goals. Financial inclusion promotes household and societal financial well-being and requires access to an array of financial products and services such as savings accounts, credit cards, mortgage and small business loans, and small-dollar consumer loans. Despite the advantages, too many individuals and households lack financial inclusion and access by being unbanked, underbanked, and/or they are forced to use alternative financial services. Achieving financial inclusion will require participation from many different types of formal financial institutional actors, such as banks, credit unions, community development financial institutions, and national credit bureaus. Social work assists to build financial inclusion and access through practice innovations, research, and policy advocacy.
... Savings messages through the Refund-to-Savings initiative have been found to positively impact decisions to save all or part of one's refund Grinstein-Weiss, Russell, Gale, Key, & Ariely, 2017). However, these impacts were observed only among study participants who already own savings accounts and could allocate all or part of their refund to these accounts. ...
Being unbanked makes it difficult for low and moderate-income (LMI) households to manage finances, save, and access credit. We assessed effects of an online tax-time savings intervention on savings account openings in the 6 months following tax filing among a sample of 4,692 LMI tax filers. Treatment group participants had 60% greater odds of opening a savings account than control group participants ( p < .05). However, statistically significant treatment effects were found only for participants who filed early in tax season and only for 5 out of 18 specific interventions. Low-cost messages delivered at tax time can encourage early season LMI tax filers who expect larger refunds to open savings accounts. Findings lend additional empirical support for financial inclusion efforts.
... Piloted in 2012, the R2S Initiative examined the effects of anchoring and messaging on tax-time savings behavior among LMI tax filers (Grinstein-Weiss et al., 2017). Specifically, the pilot experiment randomly assigned 107,632 TTFE users to a control condition or one of eight intervention groups. ...
Refund to Savings (R2S) Initiative is a collaborative effort of Washington University
in St. Louis, Duke University, and Intuit, the makers of TurboTax. With the tools of behavioral economics, the initiative has constructed and tests low-touch, scalable interventions designed to encourage tax-time saving in an online tax preparation
environment. Specifically, R2S encourages low- and moderate-income (LMI) tax filers to deposit some of their federal tax refund into a savings account. This report details the results of our 2015 and 2016 experiments.
We found that, in 2015, a choice architecture making the option to deposit to savings more salient for tax filers, in combination with savings-focused messages, drove substantial increases in rates of depositing the tax refund to savings vehicles. In
2016, we attempted to separate the effects of choice architecture from the effects of messaging and found that choice architecture by itself increased tax-time savings deposits. The additional effects of messaging were minimal, but we found that messaging on emergency savings appeared to be more effective than messaging on the two other topics.
... Our results have important implications for policy and program design. There is growing interest among policymakers in leveraging tax time as a "magic moment" to encourage workers to make deposits in savings accounts or other savings vehicles like bonds (Grinstein-Weiss et al. 2016;Harris 2013;Tufano, Schneider, and Beverly 2005). Attempts to incentivize families to engage in more traditional savings behaviors at tax time should gauge their achievements cautiously. ...
The public safety net has increasingly functioned as a system that rewards work, but many low-wage workers now face a double bind: unstable incomes and volatile expenses. We ask how low-wage workers make resource allocation decisions under conditions of uncertainty by examining how they spend and save their tax refunds. Using data from in-depth interviews with a sample of 115 lower-income working families, we find that more than three quarters of families experienced an income or expense shock in the past three years. Although many had aspirations for upward mobility, the insecurity of daily life meant they devoted most of their refund dollars to creating a personal safety net to cushion against income and expense shocks. What appeared to be distinct types of allocations often had the same underlying rationale goal of improving a family’s economic security in the near term. By saving, purchasing durable goods, stockpiling household staples, and paying off debts to kin and creditors at tax refund time, families leveraged their tax refund dollars into multiple forms of self-insurance. Respondents held aspirations for upward mobility that correspond strongly with those of middle-class Americans, but they did not feel they had the luxury of setting aside resources for long-term mobility goals given the instability and insecurity of their work and family lives. Instead, they invested their refunds in more precautionary ways. What might be viewed as current consumption by outsiders was actually a form of in-kind investment that occurred outside the purview of the formal banking system.
... 80 Interventions that facilitate or encourage saving a portion of an individual's refund at the time of tax filing do increase savings. 81,82 But such interventions may be more effective if they include communications well in advance of tax season, because consumers often mentally allocate their anticipated refunds prior to filing. 83,84 One strategy would be for the IRS to remind tax filers who have received a refund in the past that they can directly deposit a portion of their refund into a savings account and then encourage them to make a concrete plan around how much of their future refund they would like to save. ...
... 80 Interventions that facilitate or encourage saving a portion of an individual's refund at the time of tax filing do increase savings. 81,82 But such interventions may be more effective if they include communications well in advance of tax season, because consumers often mentally allocate their anticipated refunds prior to filing. 83,84 One strategy would be for the IRS to remind tax filers who have received a refund in the past that they can directly deposit a portion of their refund into a savings account and then encourage them to make a concrete plan around how much of their future refund they would like to save. ...
... More appropriate programs may include those that promote very short-term savings goals. These may include tax-time savings and prize-linked savings, as well as those programs that provide equitable access to banking and financial products (Cole, Iverson, & Tufano, 2014;Grinstein-Weiss, Russell, Gale, Key, & Ariely, 2016;Sherraden, 2013). ...
Objective
Existing research on savings and liquid-asset accumulation is largely quantitative and focuses on descriptions of how income inequality leads to the ability or inability to save. What has been left out of this body of research is an in-depth exploration of the role family composition may play in the way that households accumulate liquid assets. The purpose of this research is to understand how lower and higher income single- and two-parent families characterize reasons for saving, obstacles to saving, and strategies to save.
Method
A diverse sample of 42 parents of kindergarteners were asked questions about household saving at 2 time points.
Results
Compared to other family types, lower income single mothers report little savings and aspirations toward very short-term savings horizons as a result of persistent income shortfalls. Unlike two-parent households, lower-income single mothers discussed their reasons for avoiding mainstream financial institutions and opting to use cash instead.
Conclusions
To alleviate economic inequality and improve households’ ability to withstand financial volatility, social work practice and policy should consider implementing interventions that are responsive to the unique experiences of poverty by family composition.
... Many types of savings intervention programs are frequently offered at VITA sites. However, evaluations of tax-time saving programs show them to have fairly small incremental effects on motivating savings behavior changes (Grinstein-Weiss, Russell, Gale, Key, & Ariely, 2016). ...
Solution-focused brief coaching, based on solution-focused brief therapy, is a well-established practice model and is used widely to help individuals progress toward desired outcomes in a variety of settings. This papers presents the findings of a pilot study that examined the impact of a video-based solution-focused brief coaching intervention delivered in conjunction with income tax preparation services at a Volunteer Income Tax Assistance location (n = 212). Individuals receiving tax preparation assistance were randomly assigned to one of four treatment groups: 1) control group; 2) video-based solution-focused brief coaching; 3) discount card incentive; 4) both the video-based solution-focused brief coaching and the discount card incentive. Results of the study indicate that the video-based solution-focused brief coaching intervention increased both the frequency and amount of self-reported savings at tax time. Results also indicate that financial therapy based interventions may be scalable through the use of technology.
Purpose: This systematic review examined the effects of tax-time saving interventions that promote saving with tax refunds from relevant experimental or quasi-experimental studies of interventions aimed toward low- and moderate-income adults delivered when filing U.S. income taxes. Method: A systematic review process was used to search for published and unpublished studies from sources through September 2021. Two reviewers screened studies, extracted data and assessed risk of bias, and effects on savings rate and amount were synthesized using robust variance estimation. Results: This review included 14 unique studies. Five studies reporting 13 effect sizes for savings amount found a small, statistically significant effect ( d = 0.06, 95% CI [0.05, 0.08]). Nine studies reporting 35 effect sizes found no statistically significant effect for savings rate (LOR = 4.11, 95% CI [0.42, 40.44]). Discussion: Results suggest some evidence that tax-time savings can be a relatively simple method for increasing the amount low- to moderate-income adults save.
Low-income households struggle to accumulate emergency savings, which increases economic vulnerability in the face of unexpected events like expensive car repairs. This vulnerability may be even greater among persistently low-income households, which might benefit most from building emergency savings using tax refunds. This study examined the effects of randomly assigned behavioral interventions that incorporated a choice architecture manipulation and savings-related messages aimed at encouraging refund saving and delivered through a free, online tax-filing software program. The study sample comprised 4,536 tax filers, including 1,235 with persistent low incomes. Using administrative tax data and data from a two-wave household financial survey, regression-adjusted treatment impacts were estimated using intent-to-treat analysis to examine whether filers had any of their tax refunds still in savings and how much of their refund they still had saved six months after filing their taxes. Results indicated directional but nonstatistically significant increases in these savings outcomes across three treatment groups for the full sample, yet statistically significant treatment effects among the persistently low-income subsample, effects that were moderated by the prefiling absence of emergency resources. These results suggested that tax-time savings interventions are most effective among low-income households with the greatest needs for emergency savings.
Tax refunds are an opportunity for lower‐income households to accumulate emergency savings so they have cash on hand to cover expenses when income is insufficient. Our field experiments testing different behavioral interventions to encourage refund saving via online tax filing show small effect sizes (0.12 to 0.14) and a low aggregate savings rate (12%) that might be increased were filers to receive financial incentives. We test a key provision of the Refund to Rainy Day Saving and Financial Security Credit Acts using a survey experiment, finding that hypothetical refund saving jumps from 16% with no financial incentive, to 71% and 80% with 25% and 50% matches, respectively, findings which are mostly insensitive to refund size. Our results suggest that public policies to provide greater financial support ‐ including stronger income supports ‐ will better prepare lower‐income households for financial emergencies than behavioral interventions to nudge refund saving. This article is protected by copyright. All rights reserved.
Purpose: This study’s aim is to review and synthesize the scientific evidence for financial capability interventions that combine financial education and financial products and services to affect financial behavior. Method: A systematic review process was used to search for, screen, and extract data from relevant studies. Following descriptive analysis, we calculated effect sizes. Results: After excluding duplicates, non-relevant and ineligible reports, this review included 24 unique studies. This review identified several different types of previously evaluated financial capability interventions. Few interventions were evaluated by more than one study that measured the same or similar outcomes. Therefore, evidence is sparse about whether financial capability interventions improved participants’ financial behaviors and/or outcomes. Conclusion: While each type of financial capability intervention has a unique evidence base, this lack of evidence across financial capability interventions points to the need to develop a more definitive evidence base for financial capability interventions about the financial outcomes.
MOOCs have created a breakthrough for learning and skill development among learners across all age groups. The purpose of this study is to explore the motives for the adoption and usage of Massive Open Online Courses in India among the Millennial generation. For the purpose of data collection, purposive sampling was used. Only those who have enrolled/registered and completed the MOOC courses were considered for the study. In-depth structured interviews were conducted with 30 Millennials born between 1981 to 1996. Content Analysis was used to analyse the qualitative data collected through the interviews. Findings reveal Nine Cs that have enhanced the MOOC adoption and usage like Career progression, Content, Challenge, Cognitive domain, Curiosity, Convenience, Certifications, Collaborative learning experience Capability, and Competency development. The results of this study will help in creating awareness about the factors triggering the MOOC adoption and how it can be improvised to enhance the learning experience.
Increasing the fully banked population is related to the availability of affordable bank accounts. This study investigates the factors that are associated with bank response to voluntary national bank account standards for an affordable transaction account. We also examine the degree to which account information is available from bank websites. Account feature data were collected from public bank websites and bank tellers (N=108) in a mid-western metropolitan area. Results suggest that most banks offer an account that meets the majority of the standards. On average, bank websites are missing information about eight (44%) of the voluntary standards. There is weak evidence to suggest that bank asset size is associated both with the number of standards met and the numbers of standards about which a viewer cannot assess from information on their website. Practice and policy implications of the voluntary standards on the availability of affordable transaction accounts are discussed.
In 2015, the U.S. Treasury Department launched my RA, a no-fee retirement account designed for people who lacked employer-sponsored retirement options. We report findings from two behavioral field experiments intended to motivate interest in using the tax refund to open and fund my RAs directly through the tax-filing process. These experiments, administered to more than 100,000 low-income tax filers in 2016, embedded persuasive messages in emails sent to filers and directly within online tax-filing software. We find that interest in my RA was generally very low, although interest and enrollment intentions varied depending on the framing of the program's benefits.
This book is written for leading researchers and academic scientists, comprising of
students and Faculty members of Academic Institutes, as well as corporate practitioners
who have participated, contributed and value added immensely to the Conference.
The book showcases recent research related to the areas of Business Research and
Innovation. The book captures the efforts of the researchers to exchange and share their
experiences and research results, and is a modest initiative by the Editors to appreciate
research talents and to motivate research spirit among students, research scholars and
academicians.
The scope of the book covers the domains of Finance, Marketing, Operations & Information
Systems Management, Business Innovation, Entrepreneurship, Organizational Behavior
and Human Resource Management. Along with research and innovation, the book
attempts to cover deliberations on recent challenges, and trends.
The federal Earned Income Tax Credit (EITC) provides substantial financial assistance to low‐ and moderate‐income workers and has been shown to reduce poverty and encourage employment. Many U.S. states have also implemented their own EITCs to supplement the federal tax credits. Leveraging unique administrative and survey data and employing a difference‐in‐differences approach, this study investigates how changes in state EITC benefits between 2012 and 2016 impacted the levels of material and medical hardships in states that expanded or enacted state credits. We find that small changes in state EITC levels can alleviate medical hardship, but not most other types of hardship, especially when states experience a greater benefit increase or implement new state EITCs. Our research points to the limitations of using relatively modest tax credits to offset many of the economic challenges faced by low‐ and moderate‐income households.
Tax filing in the U.S. often has substantial implications for the debt burdens of low- and moderate-income (LMI) households. The tax refund—often the largest payment LMI households receive in a year—provides these households with an opportunity to reduce their debt, while tax liabilities can lead them to take on additional debt. Though paying down debt is among the most common uses of the tax refund, households often do not optimally allocate their debt payments. We assess whether offering simple financial guidance can help households meet their debt obligations by administering a field experiment that provided debt management tips to LMI tax filers after tax filing. Four treatment groups saw one of four tips, while a fifth treatment group could select which of the four tips was best suited to their financial situation. Results from a follow-up survey found no effects of the intervention on reported rates of following the tips or on the amount of debt held. However, we do find that the tips reduced the incidence of holding unsecured debt by 5 percentage points (p<0.05). The primary drivers of these effects were tips advising participants to prioritize paying their smallest debt balance or their highest cost debt.
For many low- and moderate-income (LMI) households in the U.S., the receipt of the tax refund marks one of the few times during the year when they can build savings. We present findings from a large-scale field experiment designed to encourage LMI tax filers to save their tax refund. The experiment tested combinations of behavioral strategies to promote savings including (1) asking filers at the start of tax preparation to pre-commit to saving their refund, and (2) choice architecture manipulations that emphasized directly depositing their refund into savings accounts or savings bond purchases. The four intervention conditions had a positive impact on the rate of refund deposits into savings accounts, increasing the deposit rate between 42% and 64%. However, the intervention conditions had minimal effects on the rate of bond purchases. The primary driver of increased savings deposits was the manipulation of the choice architecture. By comparison, savings pre-commitments had a more modest effect on savings deposits, on average. The impact of a pre-commitment on savings deposits varies over the course of the tax season, however, with early tax filers being much more responsive to pre-commitment than were later tax filers.
Most people seek potential situations to satisfy their desires by spending money. What happens if the buying behavior turns into an uncontrollable action and produces financial problems to the individuum? Current literature distinguishes between the primary and secondary types of compulsive buying behavior. This paper doesn't focus on the explanation of the psychiatric approach but the secondary type, the temporary propensity is in the center of the subject of interest. A better understanding of narratives beyond compulsive buying may help to identify this episodically changing behavior's background mechanism. This study aims to develop an understanding of overspending by diving deep in academic literature. Besides introducing Kahneman, Thaler, and Pinker's central concepts, combining different keywords (overspending, buying behavior, compulsive buying, family budget) might shed light on the involved disciplines by identifying the top journals and articles on the individual and social level. This study presents a conceptual framework that introduces the interpretation of chosen keywords in different fields and reveals the topic's transdisciplinary nature.
Este texto se presenta como una guía de investigación para estudiantes de posgrado, profesores de metodología de investigación, investigadores en carrera y grupos y centros de investigación de las áreas de negocios, administración, mercadeo y contaduría, cuyo objetivo es esclarecer el conjunto de temas y métodos empleados por la comunidad científica internacional de esos campos del conocimiento. La construcción de los capítulos se sustenta en revisiones sistemáticas de la literatura y bibliometrías, a partir de publicaciones recientes de alto impacto, las cuales fueron seleccionadas de Scopus y Web of Science. De manera general, los resultados señalan que i) la literatura de alto impacto se produce en Estados Unidos, Reino Unido y Alemania; ii) existen ámbitos de análisis, contextos de problematización y campos de aplicación variados para la investigación en estas áreas de interés; iii) a pesar de que la organización es el foco de la investigación en estas áreas, en el tiempo reciente se ha enfatizado en su relación con el entorno nacional e internacional y el estudio de las personas en ese ámbito; y iv) la presencia de la teoría económica sigue siendo vigente como simiente de la literatura de impacto en estas áreas.
This article considers estimation of a Two-Limit Tobit model with generalized Box–Cox transformation and unknown censoring thresholds. The maximum likelihood estimates of the censoring thresholds are the smallest and largest elements of the order statistic of the transformed dependent variable for the uncensored subsample. Conditional on the estimated censoring thresholds and the parameter of the generalized Box–Cox transformation, the model is a standard Tobit model. If the dependent variable is scaled by the geometric mean of its absolute values for the uncensored subsample, then currently available software for estimation of Tobit models may be used in conjunction with a grid search over the Box–Cox parameter to determine the globalmaximum likelihood estimates. The advantage of the models proposed in this article is that: 1) use of estimated censoring thresholds serve to directly eliminate the understatement of tail probabilities that can result from use of fixed thresholds, and 2) use of the generalized Box–Cox transformation allows greater flexibility in the shape of the distribution used to model quantitative variation in the uncensored subsample, as well as greater flexibility in the tail probabilities of the censored subsample.
In 2017, the Israeli government implemented a universal child development account programme – the Saving for Every Child Program (SECP) – which establishes a personal savings account for every Israeli child and provides monthly deposits until the child turns 18. The SECP has the potential to provide substantial assets when children reach adulthood, but the benefits depend on parents’ investment choices. The unique programme’s nature presents opportunities to learn from its implementation. This paper provides a comprehensive overview of the SECP, its legislative history, early findings from its implementation, and recommendations that may improve programme participation and outcomes across population groups.
Low‐ and moderate‐income households often struggle to save, but the annual tax refund represents a prime opportunity for these households to save toward their financial goals or build their emergency savings. This paper presents the results of a randomized, controlled experiment embedded in a free tax‐preparation product offered in 2013 to low‐ and moderate‐income households. The experiment involved approximately 470,000 filers and assessed the impact of behavioral interventions on their savings behaviors. The results show that filers exposed to the treatments, which involved the established behavioral‐economics techniques of anchoring, choice architecture, and persuasive messaging, were more likely than a control group to save their tax refund and, on average, saved more of the refund. A follow‐up survey of these tax filers found that the treatments were associated with saving more of the tax refund six months after filing. The findings also show that anchors encouraging filers to deposit certain amounts are more effective than persuasive messaging emphasizing savings.
Families are more likely to save if they can commit to savings before funds are in-hand (and subject to spending temptations). For low- and moderate-income U.S. families, an important savings opportunity arises annually, during income tax season. We study a group of low-income individuals in Tulsa, Oklahoma, who, at the time of tax filing, were encouraged to save parts of their federal refunds. Those who agreed directed a portion of their refund to a savings account, and arranged to have the rest sent to them in the form of a check. Eligible individuals could also open low-cost savings accounts. We document the demand for these services, the characteristics of those who sought to participate, the savings goals of those who participated, the immediate savings generated by the program, and the disposition of savings a few months after receipt. This pilot study suggests that there may be demand among low-income families for a refund-splitting program that supports emergency needs as well as asset building, especially if a basic savings product is available to all at the time of tax filing.
Updated March 25, 2001
A revised version of this paper appears as "How Families View and Use the EITC: The Case for Lump-sum Delivery." National Tax Journal 53(4) (part 2): 1107-1134. For more information see www.ntanet.org.
We analyze ethnographic data on 42 families? perceptions and uses of the EITC, including the decision to use the lump sum or advance payment form. A behavioral life cycle (BLC) model lends a theoretical framework and a description of family financial situations provides context. Parents discuss and exhibit a strong preference for a lump sum combined tax refund and EITC over the credit?s advance payment option. We argue that the preference aligns with the BLC model and is rational given scarce time, money and personal energy. We conclude with implications and hypotheses for quantitative investigation of labor supply and well being issues.
One way to make judgments under uncertainty is to anchor on information that comes to mind and adjust until a plausible estimate is reached. This anchoring-and-adjustment heuristic is assumed to underlie many intuitive judgments, and insufficient adjustment is commonly invoked to explain judgmental biases. However, despite extensive research on anchoring effects, evidence for adjustment-based anchoring biases has only recently been provided, and the causes of insufficient adjustment remain unclear. This research was designed to identify the origins of insufficient adjustment. The results of two sets of experiments indicate that adjustments from self-generated anchor values tend to be insufficient because they terminate once a plausible value is reached (Studies 1a and 1b) unless one is able and willing to search for a more accurate estimate (Studies 2a-2c).
Self-control, mental accounting, and framing are incorporated in a behavioral enrichment of the life-cycle theory of saving called the behavioral life-cycle hypothesis. The key assumption of the behavioral life-cycle theory is that households treat components of their wealth as nonfungible, even in the absence of credit rationing. Specifically, wealth is assumed to be divided into three mental accounts: current income, current assets, and future income. The temptation to spend is assumed to be greatest for current income and least for future income. Considerable empirical support for the behavioral life-cycle theory is presented, primarily drawn from published econometric studies. Copyright 1988 by Oxford University Press.
Standard economic theories of saving implicitly assume that households have the cognitive ability to solve the relevant optimization problem and the willpower to execute the optimal plan. Both of the implicit assumptions are suspect. Even among economists, few spend much time calculating a personal optimal savings rate. Instead, most people cope by adopting simple heuristics, or rules of thumb. In this paper, we investigate both the heuristics and the biases that emerge in the area of retirement savings. We examine the decisions employees make about whether to join a savings plan, how much to contribute, and how to invest. Saving for retirement is a difficult problem, and most employees have little training upon which to draw in making the relevant decisions. Perhaps as a result, investors are relatively passive. They are slow to join advantageous plans; they make infrequent changes; and they adopt naive diversification strategies. In short, they need all the help they can get. We discuss the possible role of interventions aiming to improve retirement decision making. Fortunately, many effective ways to help participants are also the least costly interventions: namely, small changes in plan design, sensible default options, and opportunities to increase savings rates and rebalance portfolios automatically.
This paper discusses the discounted utility (DU) model: its historical development, underlying assumptions, and "anomalies"--the empirical regularities that are inconsistent with its theoretical predictions. We then summarize the alternate theoretical formulations that have been advanced to address these anomalies. We also review three decades of empirical research on intertemporal choice, and discuss reasons for the spectacular variation in implicit discount rates across studies. Throughout the paper, we stress the importance of distinguishing time preference, per se, from many other considerations that also influence intertemporal choices.
In 2009, the Federal Reserve Board implemented a survey of families that participated in the 2007 Survey of Consumer Finances (SCF) to gain detailed information on the effects of the recent recession on all types of households. Using data from the 2007-09 SCF panel, we highlight the variation in households' financial experiences by examining the distribution of changes in families' balance sheets. Further, we use information on changes in families' saving, investing, and spending behavior to consider the potential longer-term consequences of the current recession on households' finances and decisions. Most families experienced a decline in wealth between 2007 and 2009, but many families saw only small changes on net, and others saw substantial increases in their wealth. This pattern of gains and losses typically holds within demographic groups. Changes in families' wealth over the period appear to reflect changes in asset values (particularly the value of homes, stocks, and businesses) rather than changes in the level of ownership of assets and debts or in the amount of debt held. On the whole, families appear more cautious in 2009 than in 2007, as most families reported greater desired buffer savings, and many expressed concern over future income and employment.
Theories about poverty, held both by social scientists and by regular folks, typically fall into one of two camps: those who regard the behaviors of the economically disadvantaged as calculated adaptations to prevailing circumstances, and those who view these behaviors as emanating from a unique "culture of poverty" that is rife with deviant values. The first view presumes that people are highly rational, hold coherent, well-informed, and justified beliefs, and pursue their goals effectively, with little systematic error and no need for help. The second view attributes to the poor a variety of psychological and attitudinal shortcomings, presumed to be endemic, that render the views of the poor misguided and ill informed, their behaviors impulsive and lacking, and their choices fallible, and that leave them in need of paternalistic guidance. Both camps are likely to capture some important elements some of the time. There are, no doubt, important circumstances in which people-the poor included-are methodical and calculating, and other circumstances in which they are fallible or misguided. But both camps fail to explain important phenomena. We propose an alternative perspective, one largely informed by recent behavioral research. According to this perspective, the behavioral patterns of the poor may be neither perfectly calculating nor especially deviant. Rather, the poor may exhibit fundamental attitudes and natural proclivities, including weaknesses and biases, that are similar to those of people from other walks of life. One important difference, however, is that in poverty the margins for error are narrow, so that behaviors shared by all often manifest themselves in the poor in more pronounced ways and can lead to worse outcomes (see Bertrand, Mullainathan, and Shafir 2004, 2006). Whereas the "rational" view assumes that the poor are doing as well as they can and ought to be left to their own devices, the "culture of poverty" perspective is motivated by the impulse to change how the poor function. In contrast, the central gist of the "behavioral" perspective is that much of the time the poor are not functioning optimally, nor are they any more in need of behavioral change than everyone else. Instead, it is the interaction of fundamental behavioral proclivities with the context in which they function that produces the particularly destructive circumstances in which the poor often find themselves. According to this behavioral view, people who live in poverty are susceptible to many of the same impulses and idiosyncrasies as those who live in comfort, but whereas people who are better off function in the midst of a system-composed of consultants, reminders, cooperative employers, "no-fee" options, incentive awards, and automatic deposit-that is increasingly designed to facilitate their decisions and improve their outcomes, people who are less well off typically find themselves without easy recourse to such "aids" and often are confronted by obstacles-institutional, social, and psychological-that render their economic choices all the more overwhelming and their economic conduct all the more fallible. In what follows, we explore some insights provided by a behaviorally more realistic analysis of the economic conditions of the poor. Our perspective draws on empirical research on judgment and decisionmaking and is supplemented by lessons from social and cognitive psychology. We first review the psychological insights and then consider their implications for a variety of financial products and services that feature prominently in the financial context of the American poor. Of course, insights generated by experimental research and empirical observation need to be carefully tested and evaluated before they can be relied on to shape policy. Even when an intervention succeeds in shaping some intended outcomes, there is always the possibility that other, unforeseen patterns will emerge. Bearing that in mind, we propose some guidelines for thinking about the future design and regulation of financial services.
It is shown how, in regular parametric problems, the first-order term is removed from the asymptotic bias of maximum likelihood estimates by a suitable modification of the score function. In exponential families with canonical parameterization the effect is to penalize the likelihood by the Jeffreys invariant prior. In binomial logistic models, Poisson log linear models and certain other generalized linear models, the Jeffreys prior penalty function can be imposed in standard regression software using a scheme of iterative adjustments to the data.
Laboratory and field studies of time preference find that discount rates are much greater in the short run than in the long run. Hyperbolic discount functions capture this property. This paper presents simulations of the savings and asset allocation choices of households with hyperbolic preferences. The behavior of the hyperbolic households is compared to the behavior of exponential households. The hyperbolic households borrow much more frequently in the revolving credit market. The hyperbolic households exhibit greater consumption income comovement and experience a greater drop in consumption around retirement. The hyperbolic simulations match observed consumption and balance sheet data much better than the exponential simulations.
This article explores savings outcomes for participants in the $aveNYC tax-time matched savings program compared with a group of New York City tax filers who were not offered the program. $aveNYC was administered at Volunteer Income Tax Assistance sites during the 2008–2010 tax seasons. The program offered taxpayers the opportunity to open a savings account with their tax refund and receive a 50% match on their initial deposit. The study's primary outcome is savings held by respondents 6–11 months after receipt of matching funds. We compare participants in the 2009 program cohort to a comparison group on the following outcomes: level of savings, having nonzero savings, and having enough savings to cover one or two months of expenses at current consumption levels. We find significant differences on savings levels, the presence of any savings, and the likelihood of having savings to meet one month's expenses.
Poor Choices
Two categories of reasons for why poor people make economically unsound choices, such as obtaining a payday loan at an extraordinarily high rate of interest, reflect, first, the environment: Poor people are more likely to be living in poor neighborhoods with higher rates of crime and lower rates of social services. Second, they reflect the individual: People are poor in part because of their own psychological dispositions toward impatience and impulsiveness. For both cases, obtaining causal evidence in controlled experiments has been challenging. Shah et al. (p. 682 ; see the Perpective by Zwane ) propose a third category of reasons whereby being poor exerts a bias on cognitive processes and provide evidence for it in laboratory experiments performed in scenarios of scarcity.
This paper examines households’ financial fragility by looking at their capacity to come up with $2,000 in 30 days. Using data from the 2009 TNS Global Economic Crisis survey, we document widespread financial weakness in the United States: Approximately one quarter of Americans report that they would certainly not be able to come up with such funds, and an additional 19% would do so by relying at least in part on pawning or selling possessions or taking payday loans. If we consider the respondents who report being certain or probably not able to cope with an ordinary financial shock of this size, we find that nearly half of Americans are financially fragile. While financial fragility is more severe among those with low educational attainment and no financial education, families with children, those who suffered large wealth losses, and those who are unemployed, a sizable fraction of seemingly “middle class” Americans also judge themselves to be financially fragile. We examine the coping methods people use to deal with shocks. While savings is used most often, relying on family and friends, using formal and alternative credit, increasing work hours, and selling items are also used frequently to deal with emergencies, especially for some subgroups. Household finance researchers must look beyond precautionary savings to understand how families cope with risk. We also find evidence of a “pecking order” of coping methods in which savings appears to be first in the ordering. Finally, the paper compares the levels of financial fragility and methods of coping among eight industrialized countries. While there are differences in coping ability across countries, there is general evidence of a consistent ordering of coping methodsInstitutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
In 2009, the Federal Reserve Board implemented a survey of families that participated in the 2007 Survey of Consumer Finances (SCF) to gain detailed information on the effects of the recent recession on all types of households. Using data from the 2007-09 SCF panel, we highlight the variation in households' financial experiences by examining the distribution of changes in families' balance sheets. Further, we use information on changes in families' saving, investing, and spending behavior to consider the potential longer-term consequences of the current recession on households' finances and decisions. Most families experienced a decline in wealth between 2007 and 2009, but many families saw only small changes on net, and others saw substantial increases in their wealth. This pattern of gains and losses typically holds within demographic groups. Changes in families' wealth over the period appear to reflect changes in asset values (particularly the value of homes, stocks, and businesses) rather than changes in the level of ownership of assets and debts or in the amount of debt held. On the whole, families appear more cautious in 2009 than in 2007, as most families reported greater desired buffer savings, and many expressed concern over future income and employment.
In this paper we present evidence from high-frequency data collections dedicated to tracking the effects of the financial crisis and great recession on American households. These data come from surveys that we conducted in the American Life Panel – an Internet survey run by RAND Labor and Population. The first survey was fielded at the beginning of November 2008, immediately following the large declines in the stock market of September and October 2008. The next survey followed three months later in February 2009. Since May 2009 we have collected monthly data on the same households. This paper shows the levels and trends of many of these data which summarize the experience and expectations of households during the recession.We find that the effects of the recession are widespread: between November 2008 and April 2010 about 39 percent of households had either been unemployed, had negative equity in their house or had been in arrears in their house payments. Reductions in spending were common especially following unemployment. On average expectations about stock market prices and housing prices are pessimistic, particularly long-run expectations. Among workers, expectations about becoming unemployed have recovered somewhat from their low point in May 2009 but still remain high. Overall the data suggest that households are not optimistic about their economic futures.
This article describes a pilot program encouraging low-income workers to have their tax refunds directly deposited into low-cost bank accounts. Although the program did not lead to substantial saving in the short-term, it did seem to facilitate account ownership among the unbanked and to serve as a bridge to other financial services and products. Early lessons for the design and evaluation of related programs are discussed.
This article described three heuristics that are employed in making judgements under uncertainty: (i) representativeness,
which is usually employed when people are asked to judge the probability that an object or event A belongs to class or process
B; (ii) availability of instances or scenarios, which is often employed when people are asked to assess the frequency of a
class or the plausibility of a particular development; and (iii) adjustment from an anchor, which is usually employed in numerical
prediction when a relevant value is available. These heuristics are highly economical and usually effective, but they lead
to systematic and predictable errors. A better understanding of these heuristics and of the biases to which they lead could
improve judgements and decisions in situations of uncertainty.
Despite decades of research, little is known about the contours of material hardship and how the social processes underlying specific domains of hardship are similar and different. We use qualitative interview data to examine five different domains of material hardship: housing, bill-paying, food, medical, and clothing hardships. While mothers use social program participation, reliance on social networks, and individual strategies to mitigate hardships, the dominance of these strategies and their specific applications differ across hardship domains. These results complement recent research that identifies each domain of hardship as unique and suggest that domain-specific hardship mitigation approaches are necessary.
Exponential growth bias is the pervasive tendency to linearize exponential functions when assessing them intuitively. We show that exponential growth bias can explain two stylized facts in household finance: the tendency to underestimate an interest rate given other loan terms, and the tendency to underestimate a future value given other investment terms. Bias matters empirically: More-biased households borrow more, save less, favor shorter maturities, and use and benefit more from financial advice, conditional on a rich set of household characteristics. There is little evidence that our measure of exponential growth bias merely proxies for broader financial sophistication. Copyright (c) 2009 the American Finance Association.
Economic security is the protection from hardship causing economic losses. Such losses can occur due to unemployment, medical emergencies, and other unforeseen events. To measure how well prepared families are for these events, we calculate a series of middle class security indicators, specifically the share of families who have enough financial wealth to weather an unemployment spell, those who can cover a medical emergency, those can handle both unemployment and a medical emergency and those who can sustain an emergency that requires three months of income. Based on data from the Federal Reserve, the Bureau of Labor Statistics, and the Agency for Healthcare Research and Quality, we find that economic security steadily improved in the 1990s, but sharply declined after 2000. Within 2-3 years, all gains of the 1990s were erased due to a debt boom fuelled by weak income growth and sharp price increases.
We provide evidence from field experiments with three different banks that reminder messages increase commitment attainment for clients who recently opened commitment savings accounts. Messages that mention both savings goals and financial incentives are particularly effective, whereas other content variations such as gain versus loss framing do not have significantly different effects. Nor do we find evidence that receiving additional late reminders has an additive effect. These empirical results do not map neatly into existing models, so we provide a simple model where limited attention to exceptional expenses can generate undersaving that is in turn mitigated by reminders.
Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2296 .
This paper was accepted by Teck-Hua Ho, behavioral economics.
Some individuals borrow extensively on their credit cards. This paper tests whether present-biased time preferences correlate with credit card borrowing. In a field study, we elicit individual time preferences with incentivized choice experiments, and match resulting time preference measures to individual credit reports and annual tax returns. The results indicate that present-biased individuals are more likely to have credit card debt, and have significantly higher amounts of credit card debt, controlling for disposable income, other socio-demographics, and credit constraints.
This article extends the emerging body of life course research on poverty by empirically identifying the incidence, chronicity, and age pattern of American poverty and how these dimensions have changed during the period 1968-2000. Using the Panel Study of Income Dynamics, we construct a series of life tables that estimate the risk of poverty for adults during their 20s, 30s, 40s, 50s, 60s, and 70s, and compare these estimates for Americans in the 1970s, 1980s, and 1990s. Our empirical results suggest that the risk of acute poverty increased substantially, particularly in the 1990s. This observed increase was especially pronounced for individuals in their 20s, 30s, and 40s; for all age groups with respect to extreme poverty; and for white males. On the other hand, the risk of chronic poverty declined during the 1990s (as measured by the percentage of the poor who experienced five or more years of poverty within a 10-year interval). The results in this article tell a very different story than the Census Bureau's yearly cross-sectional rates, which have shown little overall change in the U.S. poverty rate during this 30-year period. In contrast, a life course approach reveals a rising economic risk of acute poverty for individuals, one that is consistent with recent observations and research suggesting that a growing number of Americans will eventually find themselves in an economically precarious position.
A common problem in models for dichotomous dependent variables is “separation,” which occurs when one or more of a model's covariates perfectly predict some binary outcome. Separation raises a particularly difficult set of issues, often forcing researchers to choose between omitting clearly important covariates and undertaking post–hoc data or estimation corrections. In this article I present a method for solving the separation problem, based on a penalized likelihood correction to the standard binomial GLM score function. I then apply this method to data from an important study on the postwar fate of leaders.
It is shown how, in regular parametric problems, the first-order term is removed from the asymptotic bias of maximum likelihood estimates by a suitable modification of the score function. In exponential families with canonical parameterization the effect is to penalize the likelihood by the Jeffreys invariant prior. In binomial logistic models, Poisson log linear models and certain other generalized linear models, the Jeffreys prior penalty function can be imposed in standard regression software using a scheme of iterative adjustments to the data.
The Federal Earned Income Tax Credit (EITC) affords cash-strapped and credit-constrained working families the opportunity to increase their purchasing power and savings potential. Mixed methods were used on a sample of 237 rural working mothers who participated in a multi-state study. Approximately two thirds of those eligible claimed the EITC. They stated the tax credit was used to pay bills and loans, improve access to transportation, purchase various consumer durables and nondurables, establish savings and build assets, engage in leisure activities, and make human capital investments. Use of the EITC within the context of the Behavioral Life Cycle Theory, implications for financial practitioners, and suggestions for future research are discussed.
We analyze a randomized experiment in which 14,000 tax filers in H&R Block offices in St. Louis received matches of zero, 20 percent, or 50 percent of IRA contributions. Take-up rates were 3 percent, 8 percent, and 14 percent, respectively. Among contributors, contributions, excluding the match, averaged $765 in the control group and $1100 in the match groups. Taxpayer responses to similar incentives in the Saver's Credit are much smaller. Taxpayers did not game the experiment by receiving a match and strategically withdrawing funds. Tax professionals significantly influenced contribution choices. These results suggest that both incentives and information affect behavior. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
This paper analyzes the impact of automatic enrollment on 401(k) savings behavior. We have two key findings. First, 401(k) participation is significantly higher under automatic enrollment. Second, a substantial fraction of 401(k) participants hired under automatic enrollment retain both the default contribution rate and fund allocation even though few employees hired before automatic enrollment picked this particular outcome. This "default" behavior appears to result from participant inertia and from employee perceptions of the default as investment advice. These findings have implications for the design of 401(k) savings plans as well as for any type of Social Security reform that includes personal accounts over which individuals have control. They also shed light more generally on the importance of both economic and noneconomic (behavioral) factors in the determination of individual savings behavior. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
We examine the effects of presentation and information on the take-up of financial subsidies for retirement saving in a large randomized experiment carried out with H&R Block. The subsidies raise take-up and contributions with larger effects when the subsidy is characterized as a matching contribution rather than an equivalent-value tax credit (or cash back), and when filers are informed before the tax season about the subsidy. The results imply that both pure incentives and the presentation of those incentives affect consumer choices. (JEL D14, H24, H31, J26)
This paper reports the results of a 2007 experiment testing if specific process simplification can foster increased take-up rates for savings products, particularly by low-to-moderate income (LMI) households. Tax refund recipients at certain H&R Block tax preparation offices were given the option to purchase U.S. Savings Bonds with their tax refunds, augmenting the tax-site savings options offered by Block. Those who received the savings bond offer were substantially more likely to purchase a savings product on-site than those who didn't, even after controlling for client demographics. Much of this take-up was directed at intra-family gifting, or asset building on behalf of children.
The neo-classical economics view that behavior is driven by - and reflective of - hedonic utility is challenged by psychologists' demonstrations of cases in which actions do not merely reveal preferences but rather create them. In this view, preferences are frequently constructed in the moment and are susceptible to fleeting situational factors; problematically, individuals are insensitive to the impact of such factors on their behavior, misattributing utility caused by these irrelevant factors to stable underlying preferences. Consequently, subsequent behavior might reflect not hedonic utility but rather this erroneously imputed utility that lingers in memory. Here we review the roles of these streams of utility in shaping preferences, and discuss how neuroimaging offers unique possibilities for disentangling their independent contributions to behavior.
Workers in a wide variety of jobs are paid based on performance, which is commonly seen as enhancing effort and productivity
relative to non-contingent pay schemes. However, psychological research suggests that excessive rewards can, in some cases,
result in a decline in performance. To test whether very high monetary rewards can decrease performance, we conducted a set
of experiments in the U.S. and in India in which subjects worked on different tasks and received performance-contingent payments
that varied in amount from small to very large relative to their typical levels of pay. With some important exceptions, very
high reward levels had a detrimental effect on performance.
When the poor succeed in building up a few assets, they often find themselves disqualified from badly needed government programs. Confusing rules about IRAs and 401(k)s plus conflicting state regulations make retirement saving particularly challenging.
We study rare events data, binary dependent variables with dozens to thousands of times fewer ones (events, such as wars,
vetoes, cases of political activism, or epidemiological infections) than zeros (“nonevents”). In many literatures, these variables
have proven difficult to explain and predict, a problem that seems to have at least two sources. First, popular statistical
procedures, such as logistic regression, can sharply underestimate the probability of rare events. We recommend corrections
that outperform existing methods and change the estimates of absolute and relative risks by as much as some estimated effects
reported in the literature. Second, commonly used data collection strategies are grossly inefficient for rare events data.
The fear of collecting data with too few events has led to data collections with huge numbers of observations but relatively
few, and poorly measured, explanatory variables, such as in international conflict data with more than a quarter-million dyads,
only a few of which are at war. As it turns out, more efficient sampling designs exist for making valid inferences, such as
sampling all available events (e.g., wars) and a tiny fraction of nonevents (peace). This enables scholars to save as much
as 99% of their (nonfixed) data collection costs or to collect much more meaningful explanatory variables. We provide methods
that link these two results, enabling both types of corrections to work simultaneously, and software that implements the methods
developed.
Life-Cycle Shocks and Income. FRBSF Economic Letter 2011–08, March 14. San Francisco, CA: Federal Reserve Bank of San Francisco. <http://www.frbsf.org/economic-research/publications/economic-letter/2011/march/life-cycle-shocks-income/>
- Kenneth A. Couch
- Mary C. Daly
- Colin Gardiner
Economic Security at Risk: Findings From the Economic Security Index. Report, July. New Haven, CT: Yale University, Institute for Social and Policy Studies. <http://economicsecurityindex.org/upload/media/Economic_Security_Index_Full_Report.pdf/>
- Jacob S. Hacker
- Gregory A. Huber
- Philipp Rehm
- Mark Schlesinger
- Rob Valletta
Insufficient Funds: Savings, Assets, Credit, and Banking Among Low-Income Households
- Sendhil Mullainathan
- Eldar Shafir
No Slack: The Financial Lives of Low-Income Americans
- Michael S Barr
Barr, Michael S. 2012. No Slack: The Financial Lives of Low-Income Americans. Washington, DC:
Brookings Institution Press.
Coming Up With Cash in a Pinch: Emergency Savings and Its Alternative
- Stephanie Leah Chase
- J Michael Gjertson
- Collins
Chase, Stephanie, Leah Gjertson, and J. Michael Collins. 2011. Coming Up With Cash in a
Pinch: Emergency Savings and Its Alternatives. CFS Issue Brief 6.1. Madison: University of
Wisconsin-Madison, Center for Financial Security. http://www.cfs.wisc.edu/briefs/ChaseGjertson
Collins2011_CashBrief.pdf/.
What Motivates Low Income Earners to Save Money? EARN Research Brief
- Leena Im
- Camille M Busette
Im, Leena, and Camille M. Busette. 2010. What Motivates Low Income Earners to Save Money? EARN
Research Brief, January. San Francisco, CA: EARN Research Institute. https://www.earn.org
/static/uploads/files/1_-_What_Motivates_Low_Income_Earners_to_Save_Money.pdf.
Internal Revenue Service. 2012. Internal Revenue Service Data Book, 2012. Publication 55B. Washington, DC: Internal Revenue Service. http://www.irs.gov/pub/irs-soi/12databk.pdf.
Internal Revenue Service. 2013. More than 122 Million Returns e-Filed in 2013. IR-2013-94.
http://www.irs.gov/uac/More-than-122-million-Returns-eFiled-in-2013/.
How Households Expect to Cope in a Financial Emergency
- Lynette A Kerstin Rawlings
- Gentsch
Rawlings, Lynette A., and Kerstin Gentsch. 2008. How Households Expect to Cope in a Financial
Emergency. Opportunity and Ownership Facts 9, March, Washington, DC: Urban Institute.
http://www.urban.org/sites/default/files/alfresco/publication-pdfs/411621-How-Households-Expect-to-Cope-in-a-Financial-Emergency.PDF/.
A Balance Sheet at 30 Months: How the Great Recession Has Changed Life in America. Pew Social and Demographic Trends Report
- Paul Taylor
- Rich Morin
- Rakesh Kochhar
- Kim Parker
- D'vera Cohn
- Mark Hugo Lopez
- Richard Fry
- Wendy Wang
- Gabriel Velasco
- Daniel Dockterman
- Rebecca Hinze-Pifer
- Soledad Espinoza
Taylor, Paul, Rich Morin, Rakesh Kochhar, Kim Parker, D'Vera Cohn, Mark Hugo Lopez, Richard Fry,
Wendy Wang, Gabriel Velasco, Daniel Dockterman, Rebecca Hinze-Pifer, and Soledad Espinoza.
2010. A Balance Sheet at 30 Months: How the Great Recession Has Changed Life in America.
Pew Social and Demographic Trends Report June 30. Washington, DC: Pew Research Center.
http://www.pewsocialtrends.org/files/2010/11/759-recession.pdf/.
Life-Cycle Shocks and Income. FRBSF Economic Letter 2011-08
- Kenneth A Couch
- C Mary
- Colin Daly
- Gardiner
Couch, Kenneth A., Mary C. Daly, and Colin Gardiner. 2011. Life-Cycle Shocks and Income. FRBSF
Economic Letter 2011-08, March 14. San Francisco, CA: Federal Reserve Bank of San Francisco.
http://www.frbsf.org/economic-research/publications/economic-letter/2011/march/life-cycleshocks-income/.
Economic Security at Risk: Findings From the Economic Security Index
- Jacob S Hacker
- A Gregory
- Huber
Hacker, Jacob S., Gregory A. Huber, Philipp Rehm, Mark Schlesinger, and Rob Valletta. 2010.
Economic Security at Risk: Findings From the Economic Security Index. Report, July. New
Haven, CT: Yale University, Institute for Social and Policy Studies. http://economicsecurity
index.org/upload/media/Economic_Security_Index_Full_Report.pdf/.
Huber Philipp Rehm Mark Schlesinger Rob Valletta 2010 Economic Security at Risk: Findings From the Economic Security Index
- Jacob S Hacker
- A Gregory