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BeFi Web Seminar for January 30, 2007
Motivating Consumer Financial BehaviorThrough Choice-Set Characteristics
by Sheena S. IyengarProfessorColumbia Business School
© B
eFi F
orum
200
7
Motivating ConsumerMotivating ConsumerFinancial BehaviorFinancial Behavior
Through Choice-SetThrough Choice-SetCharacteristicsCharacteristics Sheena S. Iyengar
Columbia University Business School
About MeAbout MeEducation PhD in Social Psychology, Stanford University -
1997 Undergraduate: University of Pennsylvania
BS Economics, Wharton School of Business - 1992 BA Psychology, College of Arts & Sciences – 1992
Awards and Honors Presidential Early Career Award Full Grant, Citigroup Behavioral Sciences
Research Council Invited Fellow, Institute for Advanced Studies,
Princeton
My Research InterestsMy Research Interests
What are the consequences whenpeople face choice sets with increasingnumbers of options?
How does it affect people’s
Decision qualitySatisfaction with choices made
Choice Then and NowChoice Then and Now
Increase in Options andIncrease in Options andCombinations of OptionsCombinations of Options
New York Stock Exchange
0
500
1000
1500
2000
2500
3000
3500
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
Num
ber
of C
om
panie
s L
iste
d
Number of Mutual Funds
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
6 Jams6 Jams
24 Jams24 Jams
6 JAMS
24 JAMS
Number of people whoACTUALLY BOUGHT
More Choice: AppealingMore Choice: AppealingBut DebilitatingBut Debilitating
Graphics source:Simon Fraser,Fidelity International
What if choosers are givenWhat if choosers are givenincentives for choosing?incentives for choosing?
Consider retirement savingsprograms in which notchoosing is financially
detrimental
Vanguard DataVanguard Data
Individual-Level Characteristics
63% maleGender distribution
12%Max out rate
42 yrsMean age
$47,430Median annual income
$3,848Average contribution71%Participation rate
793,794Number of employees
Vanguard DataVanguard Data
90% offer between 6 and22 funds2-59 Funds Offered
316 offer Defined Benefitplans
647 Plans
Plan-Level Characteristics
18 offer more than 30funds
47 match in companystock only
124 include companystock as an option
The Effect of Choice onThe Effect of Choice onSavings BehaviorSavings Behavior
50%
55%
60%
65%
70%
75%
80%
2 5 8 11
14
17
20
23
26
29
32
35
38
41
44
47
50
53
56
59
# Funds Offered
Pre
dic
ted
Part
icip
ati
on
-2
0
2
4
6
8
10
%Percent Change in Allocation
+ 10 Funds = + Money Market+ 10 Funds = + Money Market
Allocation toCash Funds
Probability ofAllocating More
than 50%
0
2
4
6
8
10
1 2
%Percent Change in Allocation
+10 Funds =+10 Funds =+ Money Market & Bond+ Money Market & Bond
Allocation toCash &
Bond Funds
Probability ofAllocating More
than 50%
-14
-12
-10
-8
-6
-4
-2
0
%
Percent Change in Allocation
Allocation toEquity Funds
Probability ofAllocating to Equity
Funds
+10 Funds = - Equity+10 Funds = - Equity
Asset AllocationAsset Allocation
Participants generally allocated theircontributions to 3 or 4 funds,regardless of the number in their plan
Allocated evenly between plans – the“conditional 1/N rule”
Allocation to equities did not increasewith number/proportion of equity fundsin plan
Huberman and Jiang, Journal of Finance April 2006
Choosing From 3 GamblesChoosing From 3 Gambles
Thank you for participating in the experiment. For compensation, pleaseselect one of the gambles below. The experimenter will then flip a coin.Should the coin land on “heads,” you will receive the amount specified inthe left column. Should the coin land on “tails,” you will receive theamount specified in the right column. Please check off the desiredgamble and the experimenter will proceed to flip the coin.
If the coinindicates “tails”
If the coin indicates“heads”
Please place acheck next to thedesired option
$3.50$8.75
$0.00$13.50
$5.00$5.00
Choosing From 11 GamblesChoosing From 11 Gambles
$5.00$5.00
$7.75$4.50
$11.25$1.50
$0.00$13.50
$3.50$8.75
$3.00$9.50
$0.50$12.50
$10.00$2.50
If the coinindicates “tails”
If the coinindicates“heads”
Please place acheck next to thedesired option
$2.00$10.50
$1.00$11.75
$8.25$4.00
Effect of Choice Set Size onEffect of Choice Set Size onGamblingGambling
0
10
20
30
40
50
60
70
80
Sure Bet Risky Gamble
Gam
ble
Ch
osen
by P
art
icip
an
ts (
%)
Low Choice High Choice
3 Gambles, 6 Payoffs Each3 Gambles, 6 Payoffs Each
$8.50
$7.00
$0.00
If thediefalls on2, youreceive
$0.75
$0.75
$0.00
If thediefallson 3,youreceive
$0.00
$8.75
$10.00
If thediefallson 4,youreceive
$4.25
$1.25
$10.00
If thediefallson 5,youreceive
$5.50$9.75
If thediefallson 6,youreceive
If thediefalls on1, youreceive
Pleaseplace acheck nextto thedesiredoption
$1.50$9.25
$10.00$0.00
Thank you for participating in the experiment. For compensation, pleaseselect one of the gambles below. The experimenter will provide you witha die. You will cast the die and, depending on how the die falls, receivethe amount of money indicated in the table below. Please check off thedesired gamble.
11 Gambles, 6 Payoffs11 Gambles, 6 PayoffsEachEach
$0.75
$7.75
$8.50
$1.50
$1.50
$8.00
$7.50
$0.00
$2.00
$5.50
$1.50
If thediefalls on2, youreceive
$4.50
$2.00
$5.50
$1.50
$6.50
$0.00
$0.75
$0.00
$6.75
$0.00
$9.25
If thediefalls on3, youreceive
$8.75
$9.25
$8.50
$2.50
$9.75
$0.00
$6.75
$10.00
$7.50
$8.50
$0.75
If thediefalls on4, youreceive
$4.50
$3.25
$0.00
$9.50
$7.00
$2.75
$1.00
$10.00
$5.75
$0.75
$8.75
If thediefalls on5, youreceive
$4.75$1.00
$10.00$0.00
$6.50$5.50
$8.75$9.75
$0.50$3.00
$10.00$3.25
$2.50$3.25
$2.00$3.75
If thediefalls on6, youreceive
If thediefalls on1, youreceive
Pleaseplace acheck nextto thedesiredoption
$8.50$1.25
$9.75$4.25
$1.25$7.00
0
10
20
30
40
50
60
Low Choice High Choice
Ga
mb
le C
ho
se
n b
y P
art
icip
an
ts (
%)
Preference for the BinaryPreference for the BinaryGambleGamble
Branching OutBranching OutFuture research need not be limited to401(k) plans, but could include
Mutual funds
Lending
Insurance
Credit cards
Further DirectionsFurther DirectionsConsumer Choice Over Time
Does choice overload have a persistent ortemporary effect on participation rates?
What effect does increasing or decreasing thenumber of funds in a plan have on consumerbehavior?
Data requirements: Multi-year data oncustomers’ decisions, ideally longitudinal
Further DirectionsFurther DirectionsOption Presentation
As the number of options rises, whichattributes remain/become predictive ofconsumer choice? Order of presentation Clarity Similarity or distinctness from other options
Data requirements: Choice data linkedto arrangement and characteristics ofchoice-set items
Further DirectionsFurther DirectionsOptimal Number of Options
What number of options results in the highestconsumer participation?
How does this number vary by Domain (e.g. mutual funds vs. insurance policies vs.
insurance policies) Customer (e.g. age, expertise) Time horizon (e.g. short-term vs. mortgage loans)
Data requirements: Data on a variety ofproducts/services, or could be addressedthrough field studies and questionnaire data
Further DirectionsFurther Directions
Multiple-Domain Choice Interaction
How do choices in one domain (e.g.mutual funds) affect choices made inanother (e.g. insurance policies)?
Are people consistent across domainsin their responses to choice?
Data requirements: Data fromproviders of comprehensive financialservices
Questions?Questions?
Contact InformationContact Information
ss957@columbia.edu
Phone: (212) 854 8308
siyengar@london.edu
Switchboard: +44 (0)20 70007000Direct line: +44 (0)20 7000 8931Extension: 8931
Uris Hall 714Columbia University Business School3022 BroadwayNew York, NY 10027
Organizational Behaviour A303London Business SchoolRegent's ParkLondon NW1 4SAUnited Kingdom
Until June 2007 Permanent
http://www.columbia.edu/~ss957
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