Swedroe: Peers Can Change Financial Behavior

April 12, 2019

Behavioral finance is the study of human behavior. There is extensive literature on how that behavior leads to investment errors, including the mispricing of assets. This is one reason Princeton psychology professor Daniel Kahneman was awarded the Nobel Memorial Prize in Economic Sciences in 2002.

The field also provides us with other important insights from which behavioralists have learned ways to change behaviors for the better. For example, in their book “Nudge,” Richard Thaler and Cass Sunstein described the following real-life experiment in tax compliance.

Groups of Minnesota taxpayers were given four kinds of information. Some were told their taxes went to various public works. Others were threatened with information about the risks of noncompliance. A third group was given information about seeking help filing returns. And the fourth group was only told that over 90% of Minnesotans already fully complied with the law.

Only one of these “interventions” led to an increase in compliance. Can you guess which one?

It seems many people are more willing to violate the law because of the misperception that the level of compliance is low. When informed that most actually comply, they become much less likely to cheat—the likelihood of an outcome, good or bad, can be increased by just drawing attention to what others are doing. In other words, we can nudge people to do the right thing.

As one example of the success of nudging, simply by changing the default for donating body parts upon death from having to agree to unless you decline, donation rates increased dramatically, saving lives.

As another example, Thaler found that employees in 401(k) plans are likely to increase their savings rates by committing to it automatically when they receive a raise. That’s why the default at Buckingham Strategic Wealth is to increase by 1% a year the percent of your salary that goes into your 401(k) account, to a maximum of 12%. We are nudging people to do the right thing.

Crowdsourcing & Spending Behavior

Francesco D’Acunto, Alberto Rossi and Michael Weber contribute to the literature with their February 2019 study “Crowdsourcing Financial Information to Change Spending Behavior.” They began by noting that low savings limit the wealth accumulation of U.S. households, who often reach retirement holding inadequate financial resources to maintain their preretirement lifestyle.

They also noted that, although consumption is sometimes conspicuous, the overall spending of peers is mostly unobserved. Thus, households know little about the prevailing savings rates of those with similar incomes and demographic characteristics.

Their study focused on whether individual consumption patterns could be nudged in the right direction by providing consumers with the spending patterns of peers. Would simply learning about others’ spending, and indirectly through peer pressure (individuals might obtain disutility from learning they behave worse than their peers), alter choices in a favorable way?

To study the effects of providing households with crowdsourced information about peer spending, the authors provided a free-to-use fintech application (app) called Status. Status is marketed as an app that improves savings decisions by providing accessible information about peers’ spending.

“Upon subscribing to the app, users provide a set of demographic characteristics, which include their annual income, age range, homeownership status, location of residence, and location type. Status also obtains credit scores via credit reports. Using transaction-based data from a large sample of US consumers, Status computes the average monthly spending of consumers with similar characteristics as the users (peers). Moreover, users link their credit, debit, and other financial accounts to the app. Using users’ past and present transactions from their own financial accounts, Status computes users’ own recent average monthly spending. Status then produces easy-to-grasp graphics that compare the evolution of the users’ monthly spending with the evolution of the peers’ spending.”

Users obtained simple and immediate feedback on whether their spending is higher, similar or lower than peers’ spending.


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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