Swedroe: Peers Can Change Financial Behavior

April 12, 2019

Results

Following are some of the summary stats of the participants in D’Acunto, Rossi and Weber’s study.

“The average client is 30 years old, with a standard deviation of seven years, indicating Status users are rather young. The average credit score is 728, higher than the average US credit score of 687. Thirty-eight percent of users are homeowners, which is below the US average, in line with the fact our sample is, on average, younger than the US average consumer. The average client earns approximately $90,000 per year, with a large standard deviation of $61,000, suggesting our sample spans individuals with varying levels of income. The majority of the Status users have a positive net worth. The average assets are $42,462, whereas the average debt—including credit-card debt—equals $29,971.”

Following is a summary of their findings:

  • Users who spend more than their peers reduce their spending significantly, whereas users who spend less keep constant or increase their spending. On average, users who overspend relative to peers reduce their seasonally adjusted spending by $237 per month around the adoption of the app. Users who underspend increase their seasonally adjusted spending by $71. Apparently, receiving bad news about spending relative to peers looms more than receiving same-size good news.
  • Users’ distance from their peers’ spending affects the reaction monotonically in both directions. The further the user is from the peers’ spending, the stronger the convergence of the users to peers’ spending. A 1-standard-deviation increase in the distance from peers’ spending for the overspenders is associated with an almost 10% drop in monthly spending in the two months after adoption of the app.
  • Users’ reaction is asymmetric—spending cuts are three times as large as increases.
  • Lower-income users react more than others. The reaction is seven times as great in the bottom-income quartile versus the top quartile.
  • Discretionary spending drives the reaction in both directions, and especially cash withdrawals, which are commonly used for incidental expenses and anonymous transactions.
  • There is no dissipation of the effect or any reversal of users’ choices after the first reaction.
  • The changes in spending were of high statistical significance.

The authors concluded their findings “suggest users find the crowdsourced information Status diffuses valuable and relevant, and learn from it.” They added: “FinTech apps thus can provide a cost-effective and vivid, salient way to transmit financial literacy and financial information to households and affect their choices.”

Behavioral Finance Usefulness

Behavioral finance is my favorite subject matter. Behavioral economists continue to find valuable uses for their research on human behavior, nudging people to do the right thing through such mechanisms as changing default options, limiting choices and providing information on peer behaviors.

For those individuals who have had trouble saving sufficiently for their retirement, these findings provide hope that behaviors can change when we are informed of peer spending behavior. For financial advisors with clients who have had trouble saving sufficiently, there is now a tool that is readily available that might nudge spending patterns in the right direction.

P.S. I just finished reading Daniel Crosby’s “The Behavioral Investor,” which I highly recommend. You can find my list of the best baker’s dozen of behavioral finance books here.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 130 independent registered investment advisors throughout the country.

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