When Americans receive a tax refund it is an incredible opportunity to put aside money to save because that money is typically not already allocated to other expenses. How can we get Americans to save more of their tax refund rather than increasing discretionary spending?
Hypothesis: Prior behavioral research has shown that people are likely to make better long-term decisions if they pre-commit to a decision before they have to face the consequences of that decision. We predicted that using a commitment device, which gets people to commit to saving before they even received their tax refund, would increase the amount of saving.
Experiment: We partnered with Digit, a financial technology company which works to encourage saving. In our control condition, we sent a message to the user asking what percentage of their tax refund they would like to save, at the time Digit detected that they received the tax refund in their checking account. In our treatment condition, we sent a message before the user received their tax refund, asking what percentage they would like to save once they receive it. In both cases, Digit automatically saved the self-reported percentage when the funds were deposited into the users’ checking account.
Results: We found that those in the treatment condition saved 15% of their tax refund on average while those in the control condition only saved 10% on average. Furthermore, by excluding those who didn’t save at all from the data we found that not only did more people save in the treatment condition, but also those who did so saved a greater portion of the refund.
Application: Commitment devices are a great way to make use of present bias for our own advantage. In the context of financial well-being, a commitment device is particularly useful for ensuring that we think more about long-term savings and less about our current discretionary spending. If you can pre-commit to saving later on and make the implementation process automatic, you’re far more likely to actually end up saving than if you wait to decide until the moment the money is sitting in your hand.