How to use behavioural design brilliantly
Behavioural design is the process of using psychological insights into how people think and act irrationally, to design better products and services.
Sounds good, right? But…er… what does that actually look like?
In my last post, I explained why we should aim to design people’s financial behaviour, rather than designing financial products. Even if you agree with that idea, it can be hard to understand what it looks like in practice.
In this post, I’ll give three examples of fintech apps using behavioural design, and explain the psychological principles underpinning each design. To do this, I’ll be talking about “cognitive biases”, which is the term psychologists and behavioural economists alike use to describe irrational quirks in our minds.
You can build a killer feature that plays off just one cognitive bias, but often you get more powerful results when you combine several biases.
Example 1: Acorns’s “Found Money” feature + loss aversion
Cognitive bias: loss aversion
Loss aversion describes the way that it’s more painful to lose something than it is pleasurable to gain something. Finding a £20 note on the ground is great, but realising you’ve dropped one or run it through the washing machine feels worse.
Researchers have investigated this bias in experiments in which they gave two different people a different object of relatively low value (for instance, a mug or t- shirt). Then they asked each person how much they’d sell their own item for, and how much they’d pay for the other person’s item. They found that people would charge more for the item they already owned, and that they’d lose through selling, than they would pay to gain the other person’s item.
Although we rationally understand that saving is about keeping money rather than losing it, it does feel a little like losing out. Our current selves are giving up money in favour of our future selves, and this can trigger our loss aversion response.
How Acorns uses this bias
Acorns is a savings app that makes great use of the principles of loss aversion to increase the amount people save. One of their advisors is Schlomo Benartzi, a leading behavioural economist, so I have an inkling where they got this idea from.
In Acorns’ ‘Found Money’ feature, retailers give app users cashback when they spend using a card they’ve linked to their Acorns account. This doesn’t sound very revolutionary – but the key difference is what happens to that cashback.
The money from cashback goes straight to people’s savings. It does not sit in their main account, or get included in their main balance, even for a second. As a result, people never experience the feeling of loss caused by ‘gaining’ the cashback money, only to immediately ‘lose’ it when it’s transferred to their savings account.
So users get all the good feeling of getting something for nothing, and none of the bad feelings of missing out. These good feelings get associated with saving, balancing out the feelings of loss saving typically evokes, incentivising people to continue saving.
Example 2: Stepladder’s savings clubs + commitment effects + social norms
Cognitive bias: commitment effects
Commitment effects are a cluster of different phenomena connected to what happens when you state an intention to do something. Even when you just say it to yourself (“I will start running regularly”), you increase your chance of actually following through. When you make a more specific intention (“I will go for a run 3 times a week”), or you say it in front of another person, the likelihood increases even more. Say it to someone whose opinion really matters to you and the effect is bigger still.
One of the classic experiments to test this relates to voting. When people are phoned up the day before an election and asked if they intend to vote, they’re more likely to make it to a polling booth than people who don’t get that phone call. The person on the other end of the phone doesn’t nag or try to persuade them to vote – they simply ask whether they already intend to. When the caller responds by stating an intention to vote, that is enough to increase the chances they’ll do it.
Cognitive bias: social norms
Humans are social creatures, and we like to fit in with the crowd (although not too much!) That means that the behaviour of other people exerts a powerful pressure on us. We want to fit in with the ‘social norms’ of whatever group we’re part of, or want to be part of.
Social norms interact with commitment effects in an interesting way. When we see lots of people around us making commitments and sticking to them, we feel the pressure to do so ourselves. This is especially true when these other people represent something we aspire to be/do ourselves.
How Stepladder users these biases
Stepladder is a variation on a ‘rotating savings club’. In these clubs, every member puts in a fixed amount of money each month. Every month, a random draw takes place to decide who takes home all the money that month. Once you’ve taken home the pot once, you can’t get it again, but you do have to keep contributing every month.
Stepladder offers its users a rotating savings club specifically designed to help first-time buyers raise deposits for a house or flat. It adds some extra security and safety to make sure no one loses out if someone leaves the club.
When you sign up to Stepladder, you’re put into a group with people who have similar financial goals. You all make a commitment to yourself and to each other to save a fixed amount each month, and then each month you see all the other members living up to their commitments.
If you fail to contribute one month, you break the social norms of the group – and it’s a group of people who have been keeping up their end of the bargain for months or for years. And these people are just like you! They’re first-time home buyers, and some of them have even already purchased their first place.
That’s a pretty powerful mix of social norms and commitment effects. This mix contributes to Stepladder savers being more likely to reach their savings goals faster, because they’re far less likely to skip a month.
Example 3: Qapital’s 52 Week Rule + loss aversion + commitment effects + time discounting
Cognitive bias: time discounting
Money in the future is worth less to us than money in the present. In the present we can do all sorts of fun stuff with money – and we can get really upset if we lose that money. But the future is a hazy place and it’s hard for us to get really worked up about gaining or losing money that feels so far off.
Research has shown this again and again, including in the studies I mentioned in my last post. In these studies, people who are offered $50 today, or $100 in one year’s time almost always go for the $50. However, if you offer them $50 in 12 months’ time, and $100 in 13 months, pretty much everyone goes for the $100.
It’s a one month delay and a 100% increase in the money in both cases. But because the first choice includes the chance to get the money today, our 'time discounting' bias leads us to prefer immediate rewards and disregard the benefits of waiting.
How Qapital uses these biases
The 52 Week Rule is pretty simple: in week 1, you save $1, and every week after that you increase the amount by an extra dollar. Week 2: $2. Week 10: $10… all the way up to week 52, when you save $52. In the end, it adds up to $1,378 saved in a year.
Qapital’s banking app lets you automate the 52 Week Rule, so the right amount gets automatically transferred to your savings each week. In effect, you make a commitment at the start of the year and the app helps you follow through. But even without that help, the fact you’ve signed up to this programme is enough to increase the likelihood you’ll stick to it. That’s the commitment effect in action.
Loss aversion comes into play too, in combination with time discounting. Although $52 is a lot of money to ‘lose’ to our savings in a week, we only commit to doing that in a year’s time. Today, all we need to give up is $1. Because future money is worth less to us than today’s money, that’s an easy commitment to make – time discounting works in our favour. Because the amount we save goes up by only $1 a week, each week we only feel like we’re ‘losing’ a tiny bit compared to the previous week. The loss and therefore the bad feelings coming from loss aversion are minimised.
Finally, one more kind of loss aversion is used to keep people sticking to the 52 Week Rule. Let’s say it’s week 30 and your wallet is feeling a bit empty. You could skip saving this week and have an extra $30 to play with… but you’ve got a winning streak of 29 weeks in which you stuck to your savings commitment. It hurts a surprising amount to 'lose' that streak.
Qapital blends these three cognitive biases together in a really cleverly designed feature that helps their users save a nice chunk of money and – more significantly – build up a savings habit.
These three apps are doing a great job of helping people save by using the weird, irrational quirks of human brains and cognitive biases, as a positive influence. Just like Plum, they help transform people from non-savers/sporadic savers, into people who regularly put money away. By working with the way people actually think, rather than fighting against it, they change what people do and even how they see themselves.
These kinds of transformations are incredibly powerful, and can make the difference between a moderately successful product and one with legions of passionate fans. If making that shift sounds like something you’d like to do in your business, we’d be happy to help.
You can see more examples of behavioural design and learn how to use them with 11:FS Pulse.