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Getting from “R” to “D”:Cutting Edge Research for

Product & Market Development

Jonathan ZinmanDepartment of Economics

Dartmouth CollegeSeptember 20, 2007

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Where’s the “I”Going to Come From?

• Academic research as source of inspiration– Substantive innovation

• Academic research as a discipline– Process innovation

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My Perspective/Approach

“R”: scientific standard

• Robust

• General

• Learn something about the “whys” of consumer behavior

“D”: double bottom line standard

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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

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Plan for Today

I. 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

II. Innovation through research• GYO: organic innovation• Done strategically, systematically,

scientifically

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Big Substantive Takeaway

• Design matters for consumer decision making

• There is no “neutral” architecture– Baggage carousel example– Think about analogies in your customer

environment

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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

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Design Matters:Product Presentation Example #1

• “R”: defaults have huge effects on behavior– 401k: 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

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New “D” on Defaults

• How do I change the default?– To promote saving?– To encourage enrollment?– To encourage financial planning?

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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

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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

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2 more speculative examples

• “R” is there

• Just starting to test some “D’s”

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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 short-term installment debt when shown monthly payments

– People underestimate future values from saving (compounding problem)

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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?

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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…

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Design Matters:Product Development Example #1

• “R”: limited attention to saving

• “D”: make it easy– “Keep the change”– Mortgage saving

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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

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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 3rd-party– “Bet on yourself”

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Recap

So far:

I. Research (and applications) you can grab off the shelf

Now:

II. Doing your own “R”. Real research you can bank.

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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 decision-

making• Refine it• Retest

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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

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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

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Is R to D for me?

Key question:

Does R to D create comparative advantage?

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Is R to D a Sourceof 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

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R to D andComparative 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?

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Why Not Just GrabOff 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…

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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