Getting from R to D Cutting Edge Research

Getting from “R” to “D”: Cutting Edge Research for Product & Market Development Jonathan Zinman Department of Economics Dartmouth College September 20, 2007 1

Where’s the “I” Going to Come From? • Academic research as source of inspiration – Substantive innovation • Academic research as a discipline – Process innovation 2

My Perspective/Approach “R”: scientific standard • Robust • General • Learn something about the “whys” of consumer behavior “D”: double bottom line standard 3

My Perspective/Approach • Economic research at the intersection of economics/psychology/decision sciences • Beyond Ec 101 – Not homo economicus – More like homo anomalous – But basic models still powerful • Challenge is to integrate the right sort of realism with the general – Economic methods still powerful 4

Plan for Today I. • • • II. • • Innovation from research Lessons from “behavioral retail finance”, and how they’ve been applied. Examples of taking R to D Stuff you can grab off-the-shelf Innovation through research GYO: organic innovation Done strategically, systematically, scientifically 5

Big Substantive Takeaway • Design matters for consumer decision making • There is no “neutral” architecture – Baggage carousel example – Think about analogies in your customer environment 6

Design Matters • The environment, context you create (or neglect) is going to affect (potential) member decisions – Shaping/nudging vs. teaching – “Libertarian Paternalism” (Sunstein & Thaler) • Must engage design: no benign neglect • Academic research is a source of inspiration/guidance 7

Design Matters: Product Presentation Example #1 • “R”: defaults have huge effects on behavior – 401 k: Are you opted out or opted in? – Opting in has huge effects on participation – Default portfolio “sticks” • “D” – Firms that want to increase participation change default to opt-in – Policy changes now too 8

New “D” on Defaults • How do I change the default? – To promote saving? – To encourage enrollment? – To encourage financial planning? 9

Design Matters: Product Presentation Example #2 • “R”: Advertising content can have huge effects – Large relative to price in our work – No “neutral” direct mailer – But hard to predict ex-ante what types of content spur demand • “D”: theorize, test, refine, retest – Direct mail discipline – What the leading FIs do 10

Design Matters: Product Presentation Example #3 • “R”: choice overload – Not just about target marketing – Also that too much choice demotivates • “D”: tailor menus, limit choices – How strike the right balance? Test. – But err on side of few choices • E. g. , in our research 1 did much better than 4 11

2 more speculative examples • “R” is there • Just starting to test some “D’s” 12

Design Matters: Product Presentation Example #4 • “R”: people systematically underestimate the cost of intertemporal tradeoffs – These are biases in perceptions of costs and benefits, not biases in preferences or expectations – People underestimate interest rate on shortterm installment debt when shown monthly payments – People underestimate future values from saving (compounding problem) 13

Design Matters: Biased Cost/Benefit Perceptions • “D”? ? (speculative here) – Make future values vivid (don’t lean on annual yields, particularly for long-term products) – Credit disclosures matter • Steal customers by “debiasing” those duped by competing lenders – Your new savings customers might be borrowing now • With the right pitch, will they switch? 14

Design Matters: Product Presentation Example #5 • “R”: people are inattentive, procrastinate, impulsive – They end up regretting their financial decisions and worrying they don’t save enough • “D”: make it easy – Impulse saving? – Fine line with product development… – Other ways of changing front end… 15

Design Matters: Product Development Example #1 • “R”: limited attention to saving • “D”: make it easy – “Keep the change” – Mortgage saving 16

Design Matters: Product Development Example #2 • “R”: saving requires commitment that’s in short supply. – Easier to spend/borrow than save • “D”: provide products with commitment – SMART – SEED – Customized spending/borrowing limits 17

Design Matters: Product Development Example #3 • “R”: commitment/self-control problems more generally: – Weight – Exercise – Smoking – Calling grandma • “D”: commitment contracts – Templates designed & enforced by 3 rd-party – “Bet on yourself” 18

Recap So far: I. Research (and applications) you can grab off the shelf Now: II. Doing your own “R”. Real research you can bank. 19

What is “R”? • Systematic experimentation • Identify something you think will work based on theory, practice, market research • Test it – Can build in features that will reveal why it works (or doesn’t) • Gold-standard testing: Randomized-control trials – Think “treatment” & “placebo” for financial decisionmaking • Refine it • Retest 20

That Sounds Like a Lot of Work • Actually not in direct mail especially; other direct marketing • But yes in other spaces: – Product presentation in-branch – Product development 21

Should I Do It? • Payoffs over years, not quarters • Benefits to learning why things work and don’t are even longer-term – Doing right by your customers may only pay off over long haul – Is doing right by my customers a source of comparative advantage 22

Is R to D for me? Key question: Does R to D create comparative advantage? 23

Is R to D a Source of Comparative Advantage? • My half-baked assessment is that answer is “yes” for many CUs • Large CUs vs. other large FIs – Longer horizon (less quarterly pressure)? – More of a double bottom line? – If yes then testing whether and why innovations work should pay off 24

R to D and Comparative Advantage • Small/mid CUs vs. community banks – Scale matters for this type of process (the tyranny of sample size) – CUs better at cooperating to reach scale? 25

Why Not Just Grab Off the Shelf? • First-mover advantage • Context can matter – What works over there might not work over here – “R” just starting to get a handle on when and why context is critical • Process and productivity transformation… 26

Experimentation is its Own Reward • It’s a process innovation • Use to cultivate a learning organization – Lever for leveraging better use of existing information, resources – Increase productivity, morale – Discovery is fun and rewarding 27