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Katy Milkman: A lot of the psychology
in this space really relates to sort of how I relate to my past
self and my future self.
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Thinking about that carefully
led us to want to use the fresh start effect, or this
motivation, to try to propel
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people to save more for
retirement, to think more about future me, to pursue those
goals. And so we thought fresh
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start moments would be an ideal
time, because people have that extra motivation to pursue goals
and to think about the future
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and to feel disconnected from
past failings. Welcome to <i>The Ripple Effect</i>, the
podcast that takes you on a
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journey through the minds of
Wharton faculty. I'm your host, Dan Loney, and in each episode,
we'll be diving deep into the
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inspiration behind the
groundbreaking research that Wharton professors have
conducted and exploring how
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their findings resonate with the
world today. - The decision to
head into retirement
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not always an easy one.
People consider this option to have to bring in
a variety of factors, including,
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will they have enough savings?
Especially since people are living longer right now. This is
an area of research focused on
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by our guest here today, Katy
Milkman, who's a Professor of Operations, Information and
Decisions here at the Wharton
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School. Katy, great to talk to
you again, as always. Thanks very much for your time.
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Thanks for having me. I think I'll start out with like—
when you— when people think about
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the decision to make retirement,
obviously, all these factors come in, but from the research
you've done and people you've
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talked with, is it a harder
process to make some of these decisions now than maybe it was
a few decades ago?
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Yeah, things have changed a lot. So we
now live in a society, in the US, where it's common to work
for an employer who offers you
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what's called a defined
contribution plan instead of a defined benefit plan. So it used
to be, basically, that you would
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be guaranteed some amount of
income for the rest of your life if you worked for an employer.
That's a defined benefit, even
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after retirement. And there's
been a major shift over the last 30 or 40 years towards giving
people the opportunity to
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contribute a defined amount and
maybe have an employer match to a retirement fund, but then the
income they'll have in
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retirement is a function of how
much they choose to save, whether they potentially dip
into those funds prior to
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retiring. And there's no
guarantee, because it depends, really, on the performance of
those assets. So it's a really
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different world, and it has led
to not great results, honestly, in terms of the retirement
income people have to live on
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who've worked their whole
careers. A lot of people are ending up working longer or
living less comfortably than
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they would have liked because of
this new era. That's my— my takeaway. Though, I should say
I'm not an expert on either
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defined contribution or defined
benefit plans, but that's my rough understanding of the
change. And then the work I do
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with my collaborators really
focuses on, okay, in this current era where defined contribution
plans have become so common,
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it's a big challenge to convince
people to save. We have to make sure people are saving an
adequate amount, and we face a
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lot of biases when we're trying
to make that pitch. And one of them is present bias, the fact
that we tend to be more attuned
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to the instant gratification we
get from, say, spending a paycheck now, than saving it for
later. We focus more on the here
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and now. That's what present
bias means, and undervalue future everything. Future me.
Whatever money I'll have in the
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future, it's worth less to me. I
think, you know, that's forever away, and I don't value it as
much. And so that's a major
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bias. It's something I teach my
MBA students about. And given that we're fighting that uphill
battle when we're trying to
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convince people to save for
future— essentially future me, we try to use a lot of
psychological insights to— to
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propel people to save what
they'll need. Well, part of this discussion, as you
just mentioned, is around
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savings being one of the big
factors. And you research this through this idea of a fresh
start.
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Give us an idea of what
it is. Yeah. So this is a topic I've studied
with my former Wharton PhD
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student, Hengchen Dai of UCLA.
And Hengchen and I look at this idea that not only at the
beginning of a new year, but
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there are lots of moments in our
lives that we feel motivated by the sense that we have a clean
slate or a fresh start. So we're
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most familiar with New Year's
resolutions as part of the fresh start effect. At the start of
every new year, we think, "Oh,
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it's a clean, it's a new
year. It's a new me. I can achieve more." And we set
these resolutions. But we have
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actually documented that this
phenomenon of feeling like we have a fresh start and and are
more motivated to make change
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arises at lots of other moments
too. At every birthday, on Mondays, at the start of a new
month, following the celebrations
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of any kind of sort of major
event that feels like the start of a new cycle. So all sorts of
new beginnings give us that
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fresh start feeling, which
increases our motivation to pursue our goals and makes us
feel more disconnected from past
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failures. Because we can say,
"That was the old me, and this is the new me." So a lot of— a lot
of the psychology in this space
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really relates to sort of how I
relate to my past self and my future self. Thinking about that
carefully led us to want to use
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the fresh start effect, or this
motivation, to try to propel people to save more for
retirement, to think more about
00:05:17
future me, to pursue those
goals. And so we thought fresh start moments would be an ideal
time, because people have that
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extra motivation to pursue goals
and to think about the future and to feel disconnected from
past failings.
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So when you say fresh start
moments, you mean what exactly? Yeah. So a fresh start moment is a
moment that's the beginning of a new
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cycle in our life or on our
calendar, and they can be personal, right? I might feel
that I have a fresh start on my
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birthday, or maybe right after a
promotion at work, or after the birth of a child. Those are all
major turning points in a
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person's life. We— we tend to
think about our lives like we're characters in a book, and we're
living through these chapters.
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And the chapter breaks are not
linear, necessarily, right? When you move to a new community, you
take a new job, those are
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chapter breaks too. But these
chapter breaks at the start of a new year or a new season or a
new month or a Monday or a
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birthday, those are also small
fresh starts, or sometimes big fresh starts, that make us more
motivated to pursue our goals.
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And so employees were receptive
to— to this, and looking at this kind of moment in their life as a fresh
start and a great way to kind of
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maybe head down a different,
different path in their lives? So what we did to explore that
is we ran an experiment with
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thousands of employees who were not
yet saving for retirement, or who were saving but at a very
low rate, a rate that was well
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below what they would need to
save to have a comfortable retirement. We partnered with
four different organizations and
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sent mailings to employees who
were in these categories. Non- savers, or a small number of
very low savers. And we tried to
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use this insight about fresh
starts to increase the likelihood that people would
save. What we did is we sent
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mailings that invited people,
certainly if they were up for it, to start saving right away.
But we know that people like to
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procrastinate on anything that
sounds difficult, like starting towards a savings goal. So we
also invited them an opportunity
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to delay. We said, "You could
also, if you don't want to save now, start saving on this future
date." And what we randomized in
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our experiment is, some people
the future date was a fresh start date, and for some people
it wasn't. So for instance, if
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you had a birthday, Dan, coming up
in two months, we might flip a coin and decide, are you going
to be invited to start saving
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now or after an upcoming
birthday, or after your next birthday? That would be what
your mailing might say in one
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condition. Or— and this is what's
kind of really tightly controlled about it— we would
say, "Would you like to start
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saving now or in two months?" So
actually, in both cases, it's exactly the same offer. But in
one case, we've tied it to your
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birthday, which makes it more
clear that this is an opportunity we think you might
want to align with that fresh
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start moment. And we tried this
with several fresh start dates. We tried aligning New Year's, so
inviting you to start saving
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after a new year. We invited you
to start saving after the start of spring, and we invited you to
start saving after a birthday.
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So you'd just get one of these
offers. It was random assignment in this trial, but we tested all
of those different Fresh Start
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opportunities. And we tested it
against just inviting people to save at an equivalent time
delay. Or we also tried some
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dates that don't feel so much
like fresh starts, just as sort of— we think of them as placebos.
So Valentine's Day. It's a— it's
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also a day that is sort of
notable on the calendar that we can label. But nobody typically
thinks of Valentine's Day as a
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fresh start moment, unless— you
know, if you met the love of your life, then maybe for you,
it's meaningful. - Right. - But for most
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people, that's not a day that
feels like the beginning of a new cycle in life. So we ran
this experiment, and what we
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found is that when we invited
people to begin saving after a fresh start date, and we compare
what happened to people's
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savings rates who were invited
to save now at an equivalent time, but without that fresh
start date call out, we see
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more savings, significantly more
savings, over the next eight to nine months. We look at savings
rates, and we see, depending
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on how you model it, a 20 to 30%
increase in the next eight months savings among the
population that is invited to
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start saving after a fresh start
date. So this does seem to motivate more people. It doesn't
lead them to decline saving now,
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and it increases the total
number of people who are saving, leading to this higher savings
rate over the subsequent months.
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And I think it's also interesting,
because you mentioned in the paper that we tend to make
decisions, in many cases, that
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don't help us in the long term.
So I guess by doing this, and maybe there's a little bit more
immediacy to it, that maybe to a
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degree, we're also changing
behaviors as well. That's right, we are— we're— we
are changing behavior by getting
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people to recognize this
opportunity is one that's aligned with their goals and
sort of— and seeing, yeah,
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actually, I do want to start
saving following my birthday. That— that sounds exactly like
the right moment to do this. Or
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yeah, at the start of spring
really does feel like a moment when I should be upping my
savings contributions. But if
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I'd asked you, "Do you want to
start saving next month?" which happens to be the start of
spring, but I haven't called
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your attention to it, you don't
have that same resonance, and you don't make the same
decision. So it's changing
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behaviors. It's changing long-
term outcomes for people by increasing their savings rates.
And we think that's a really
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important insight. And the more
we can leverage these kinds of moments that people see as fresh
starts to increase savings or
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any other goal-directed
behavior, the better. You've also done research that
looks at the component of peer
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information in retirement savings
decisions. Tell us about that. Yeah. So this was another
randomized, controlled trial, also inviting
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people who were either non-
savers or low savers to save. So there's a pattern here. These
are projects— and there's a— I
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should also say there's a common
co-author on both of these. John Beshears of Harvard Business
School is a fantastic
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researcher, does a lot of work
on retirement savings, and was involved in both of these
projects. And so that's— that's
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the other common variable. We,
in this case, partnered with one big company that had a lot of
employees who had been part of a
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union, and as a result of their
union bargaining, they had not been automatically enrolled in
the— the savings program, the— the
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contribution program that they
had on offer. So it's a 401(k) plan, where you put a portion of
every paycheck into this plan,
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and you get a tax benefit when
you do so. That money is not taxed, it's put in before taxes.
So lots of people were not
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saving, because if you're not
automatically enrolled, they had to take steps to start saving,
and a lot of people don't bother
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to do that. So we tested this
both with those union employees whose union had not negotiated
for them to be automatically
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enrolled, as well as a non-union
population. But the non-union, non-savers, were different
because they had— they had
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intentionally opted out of
savings. So they're— there's sort of selection bias, if you
will. That's our nerd term for
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saying they're slightly
different populations. So that effect that you saw play
out, was it similar for pretty
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much everyone across the
company? So, it wasn't. It actually turned
out to matter what— which
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population they were in. And what
we were testing was whether or not telling them about how many
of their peers were already
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saving, or were already saving
at a higher rate, whether or not that might increase their
savings likelihood. So we tried
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actually two things. One, we
varied whether or not they got a mailing that told them about the
high number of their peers who
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are already enrolled and
encouraged them to follow suit. And then the other thing we did
is that we varied what number
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they saw. So we were never
deceptive, but we randomly assigned people to either find
out about the savings rate of
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peers in their five-year age
cohort— so you know, if you're in, you know, age 40 to 45, you
might find out about others age
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40 to 45, or in their 10-year age
cohort. So if they were age 44 they could also see the 40 to 50-
year age bucket instead of the
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40 to 45 age bucket. What that
did is it meant we had some variation in the number people
saw, so we could test not only
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what's the impact of finding out
how many of your peers are saving, but also, what is the
impact on finding out a slightly
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different number when you hear—
when you learn that your peers are saving, right? So when
you're in the 40 to 45 age
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bucket, you might find out 75%
of other 40 to 45-year-olds are saving. But if you saw the 40 to
50 age bucket, you might find
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out that, you know, 80% of folks
in that group are saving. So you see a different number. So we
have these two ways we can look
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at what's the impact of peer
influence. One, finding out that lots of peers are saving and
two, what's the actual number
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you see? And how does that
matter? And what was really, I will say, surprising, given what
we know about how influenced we
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are by our peers, is that in
this study, what we found is a backfire effect. Meaning, for— and
specifically among union
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employees. So this was the group
we expected to be most malleable because they hadn't previously
made an active decision about
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retirement. They just passively
not signed up. This group, when they saw a peer comparison and
learned, hey, you know, 75% of
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your peers are saving. That
reduced the likelihood that they chose to save. In addition, when
we look at the specific number
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they saw, we see the higher the
number they observe, randomly assigned, the less likely they
are to save. And again, this is
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two things that go against what
we normally expect to see in terms of peer effects. Because
one, when I find out everybody
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else is doing something and the
majority of other people are doing it, I normally decide to
do it too, at a higher rate.
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- Right. Right. - And two, the higher the
number of my peers doing something, the more likely I am
to want to join. But we see the
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opposite in both cases. So this
was really puzzling. We don't see this among people who
weren't members of the union, so
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they hadn't actively opted out.
There, we don't see any effect. But we wanted to dig into this
backfire effect. And I want to say,
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first of all, I still feel that
we don't know for sure what happened. But our best
explanation at this point, based
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on additional analyzes we ran,
is that it seems to be sort of an upward social comparison
reaction, where people are
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feeling like they could never
possibly catch up, because it's driven by lower-income members
of the population. So when we do
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a median split on earnings and
look at people who are below median earners in all the
different states around the
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country where this company has
employees who received our mailings, we see that the effect
is really driven by the lower-
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income folks. And that leads us
to conclude, potentially, this is driven by that sense that I
can never catch up. So you know,
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the idea of social norms is, I
want to keep up with the Joneses, so I'm going to try to
do what the Joneses are doing.
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But if you feel you can't
possibly keep up with the Joneses because their income is
so much higher and they're
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already way ahead of you on so
many dimensions, it may just be demotivating to hear, yeah, they
bought another luxury car, and
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they saved more for retirement,
and so on. And it may make you feel that it's hopeless. And so
that's our guess as to what
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happened in this particular
study. And it was very disappointing, but also useful
to know.
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So is there kind of a next logical
step that you would like to take, having learned all this
and done this research about,
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you know, deeper understanding
about retirement decisions? Well, the answer to everything
right now, Dan, is AI. You know,
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that's the answer to everything
we want to do next. So a lot of the work that my collaborators
and I are talking about in the
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space of behavior change is
related to, how can we use these large language models to
incorporate some of the best
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behavioral insights we know into
dialogs to help people make better decisions? So that's the
next natural step. And certainly
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the LLMs that we train to try to
help support people's retirement savings ambitions will be armed
with the knowledge from this
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research that, you know, it may
not be as effective as we thought to use social norming,
particularly on low-income
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consumers, when we're trying to
encourage them to save more for retirement, and that it can be
effective to leverage fresh
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start dates as moments when
people feel it's appropriate and optimal to begin saving.
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Katy, always great to talk to you
and discuss your research. Thanks very much.
- Always great to be here.
00:17:16
Thank you so much for the great questions and the opportunity. Thank you. Katy Milkman, who's a
Professor of Operations,
00:17:22
Information and Decisions here
at the Wharton School. Thank you for listening to <i>The
Ripple Effect</i>. We hope you found this
00:17:27
episode informative and
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so that we can continue to bring
00:17:34
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