|Photo Credit: Jan Chipchase|
Perhaps the most cited triumph of behavioral economics – that marriage of economics and psychology that has put terms such as “nudge” and “fast versus slow thinking” into the popular lexicon – is the automatic opt-in. For example, more people donate organs if they are automatically put on the organ donor list. And far more people contribute to retirement accounts when they are automatically enrolled by their employer. The power of the default option is part of why 401(k) plans are so popular in the United States. Savings programs that automatically enroll people by default, or that define a default savings amount, generally seem to help people save. By contrast, when employees must make an active decision to opt in, overall rates of savings are much lower.
Along with other aspects of financial inclusion – ubiquitous ATMs, reliable and accessible financial information – default savings programs seem to be the province of rich countries. But recently, the world has seen a dramatic drop in the numbers of unbanked citizens due to the spread of mobile banking, particularly in East Africa. The number of people with phones is far higher than the number of people who have easy access to traditional bank branches, especially among the rural poor. Until now, however, no one (to our knowledge) has tested whether mobile banking can facilitate default savings programs.
This is exactly what our team set out to do in Afghanistan. For the past few years, we have been testing financial inclusion products with Roshan, the country’s leading mobile communications provider (and largest taxpayer). Our recent investigations have focused primarily on the power of the default and the automatic opt-in. We were interested in understanding whether such innovations could work in a developing-country context, and also exploring whether low levels of savings is due to forces we see in the West (such as aversion to complex decisions and a tendency to procrastinate) or those particular to poor and unstable countries (distrust of banks among citizens, low amounts of cash on hand).
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IMTFI is pleased to have been able to partially support this research. To read more about the study, view the working paper. “Mobile-izing Savings with Automatic Contributions: Experimental Evidence on Dynamic Inconsistency and the Default Effect in Afghanistan.”[pdf]