The Role of Random in Addressing America’s Savings Problem


America has a savings problem. The most recent U.S. Financial Health Pulse for 2019 found that 47% of people in America do not have enough savings to cover the recommended three months of living expenses. Even worse, 12% of people have less than one week of living expenses saved.

This lack of cushion has serious implications for a person’s ability to weather financial shocks. It also places an enormous amount of stress on a person that can impact other parts of their lives.

We believe the problem is rooted in the way the human brain operates within our current consumption and savings environment and resulting product design. Here at Common Cents Lab, we focus on helping companies and employers build products that take advantage of human tendencies in order to naturally produce better outcomes.

Since 2016, we’ve conducted 106 unique projects and experiments with 67 organizations reaching more than two million low- to moderate-income (LMI) people. By the end of next year, we expect to reach at least 125 unique projects with 85 organizations.

Now, as part of the BlackRock Emergency Savings Initiative alongside Financial Health Network and Commonwealth, we are able to test our assumptions around the human brain and savings by helping brands and employers like Etsy, Mastercard, Uber, UPS, and others build better savings tools.

As we help develop and test these ideas for better savings tools, we’re going to be asking ourselves: “How can we apply Behavioral Economics to make savings products as easy, attractive, and motivating as possible?”

For example, can we improve savings rates by asking people to commit to saving money before they actually have it – testing a technique called pre-commitment? Or could we test mental accounting – the idea that people treat money differently based on where it comes from and where it’s going – to ask people to designate an income stream like cash tips or a windfall such as a tax return to savings?

But the key word in all of this is test.

The Common Cents Lab approaches behavioral economics and our work with partners in the Emergency Savings Initiative like a medical or pharmaceutical trial approaches their research.

At Common Cents Lab, we use Randomized Controlled Trials (RCTs) that feature control and test groups to determine whether our new idea or intervention worked in the way we expected it to and is worth the investment to implement further. RCTs are conducted in a way that allows us to pinpoint with confidence which intervention or product feature led to a desired outcome.

To illustrate, if we want to help people save part of their tax refund, we could work with a financial institution to set up tests for different product ideas, including:

  1. Recommend to one group of people that they save part of their refund
    (Control group)
  2. Ask one group of people to pre-commit to save a portion of their tax refund
    (Test group 1)
  3. Have one group of people send postcards to themselves that will arrive around the same time as their refund, reminding themselves to save part of the money
    (Test group 2)

We can then see how many people ended up saving a portion of their tax refund for each test, and if the number of savers was different in each group. The partner then has actionable results upon which they can base a change in their product or service.

Importantly, as the name RCT suggests, people from that financial institution would be randomized to one of the different groups. That means that the researcher or financial institution does not control who gets put in each group – each person will end up in one of those three groups by chance, in order to remove any bias or any other potential explanation for the difference in savings rates.

While RCTs often require a lot of attention to detail and can sometimes take more time to run properly, they are the “gold standard” in Behavioral Economics and truly the best way to confidently say whether an idea worked and by how much. Perhaps the highest recognition of the value of RCTs was in the award of the Nobel Prize in Economics to Kremer, Banerjee, and Duflo for their work in tackling global poverty using RCTs in 2019.

We look forward to working with BlackRock, Commonwealth, Financial Health Network, and the Initiative’s corporate partners to test new ways to help people save. Together, we can reverse the trend in America’s savings habits and help millions of people build emergency savings cushions that will lead to better overall financial health.