Francesca Johnston is a behavioral science master’s student at the London School of Economics. She joined us in this episode to continue the theme of behavioral design, applied to fintech:
This topic was started in S2E10 by David Fanner of Ogilvy:
The focus in this interview was applications of behavioral design to finance and included discussion of UK fintech hero Plum (https://withplum.com/). Notes about some of the topics raised follow.
Hyperbolic discounting and delayed discounting are the same thing. Premise of latest book by Dr Grace Lawden from LSE: https://www.amazon.co.uk/Think-Big-Small-Steps-Future/dp/0241420164/ref=sr_1_1?dchild=1&keywords=grace+lordan&qid=1622051681&s=books&sr=1-1
This author states that the most effective behavior change means is medium term, not long term: 5 years.
Peak-end effect: https://en.wikipedia.org/wiki/Peak%E2%80%93end_rule
Memories are built based on our biases, they can be distorted by: duration, neglect, forecasting bias, spotlight effect (https://thedecisionlab.com/biases/spotlight-effect/).
Bandwagon effect: https://en.wikipedia.org/wiki/Bandwagon_effect
Episodic future thinking messaging by NatWest: contrasting yesterday, today and tomorrow’s versions of the self: https://www.moreaboutadvertising.com/2021/03/natwest-strikes-an-optimistic-note-with-thepartnerships-new-tomorrow-begins-today-line/
Lloyds: got their customers to draw how they felt about their money. Consistent patterns between people about what was drawn and what this meant about their finances.
This relates to how looking at aged images of your future self helps to reduce the effect of delayed/hyperbolic discounting discussed by HBR: https://hbr.org/2013/06/you-make-better-decisions-if-you-see-your-senior-self. Here also is a study: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3949005/.
Monzo: Designing good mental health into the way we bank: https://www.designcouncil.org.uk/news-opinion/monzo-designing-good-mental-health-way-we-bank
Plum: an app for your financial health and wellbeing: https://withplum.com/
Prospect theory is composed of loss aversion, anchoring and the probability effect: https://en.wikipedia.org/wiki/Prospect_theory. It is about how humans make decisions where there is a degree of uncertainty, such as investing.
Loss aversion: https://en.wikipedia.org/wiki/Loss_aversion
Anchoring: https://en.wikipedia.org/wiki/Anchoring_(cognitive_bias)
Losses are felt twice as much as equivalent gains: https://milfordasset.com/insights/investors-feel-losses-twice-much-gains
We have been using algorithms via computers for about 60 years now. We trust algorithm based decisions more than those from humans, such as dating apps (https://hbr.org/2015/02/heres-why-people-trust-human-judgment-over-algorithms, https://www.sciencealert.com/this-is-when-people-start-to-trust-algorithms-more-than-humans).
Lunch effect: judges just before lunch sentence more people: https://www.nytimes.com/2011/08/21/magazine/do-you-suffer-from-decision-fatigue.html
Automatic enrollments/effortful opt outs/default settings of the Plum app are those that most benefit you, such as saving the money you would otherwise have spent on transport/coffee because you stayed home on a rainy day. Avoid letting the user think about or fiddle with things. Since Plum knows the user’s payday, money is automatically taken out so she never sees it, and saved or investing in accordance with the plan. The app is used to show how much the person would make based on planned deposits - an interactive compounding outcome display.
Similar concepts are employed by Nudge: https://www.nudge-global.com/
Google’s response to “investment is”: https://www.google.com/
WHAT WE DO
We solve the mathematical problem of causing an enormous increase in one's bank account balance through human effort. The podcast therefore has two themes, mathematics and human behaviour. Together, behavioural investing. We take a first principles approach by summarising scientific studies and interviewing psychology and mathematics researchers. This will show us the first principles. We will then reason from these first principles to the best strategy to cause optimal human investing behaviour.
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S3E1 🔥 Behavioral Design in Fintech with Francesca Johnston