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Can betting against yourself online help you save money?

July 20, 2014 at 10:43 AM EDT  | Updated: Jul 18, 2014 at 12:00 AM
Behavioral science is behind a host of new online applications that nudge people into making better decisions on everything from health care to saving money.
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KARLA MURTHY: Like many Americans, Barbara Nordin, a freelance editor and writer in Charlottesville, Virginia often procrastinates.

BARBARA NORDIN: I knew that professionally I needed a website. And I, had the domain name, I, you know, made lists of what I put on it for eons…

KARLA MURTHY: But in 2012, she learned about an online program that would push her to get the project done – or else she would lose $50 dollars. It’s an example of behavioral economics at work, according to Dean Karlan, a Yale University economist.

DEAN KARLAN: It’s about realizing that you’re going to respond to incentives. If you don’t like the way you’re going to respond, you can change those incentives. You can change the price of things by being a bit self-aware and thinking ahead.

KARLA MURTHY: Understanding how people respond to incentives is central to behavioral economics, a field which looks at the psychology behind economic decisions. This new science is being used to help people – nudge them – on everything from making better healthcare decisions to maximizing energy efficiency.

But one of its biggest uses is in improving people’s financial choices. An area in which many Americans don’t excel. The personal savings rate is less than half of what it was a generation ago. And an estimated 56 million Americans have virtually no retirement savings.

JOSH WRIGHT: Financial education has actually had not great results in terms of getting people to change behavior.

KARLA MURTHY: Josh Wright is the executive director of Ideas42, a nonprofit that works with companies, foundations, and governments to apply lessons from behavioral economics. He points to a study that showed how committing to save more, not even today, but in the future, dramatically increased retirement savings.

JOSH WRIGHT: One of the interesting things about people’s financial lives is, they usually know what they wanna do or they have an intention to save more or spend less– get greater control over their finances. And a lot of it has to do with following through on those desires and intentions. And there’s a lot that behavioral science can do along with technology to help us help people help themselves, really, to do what they wanna do.

KARLA MURTHY: And new businesses have taken some of these insights to heart. Washington D.C.-based HelloWallet provides financial computer software, including budgeting and retirement tools for employees of big companies across the country.

STEVE WENDEL: So we serve manufacturers and we serve who are putting ketchup in the Heinz bottles, as well as we serve investment bankers. And quite the range in between.

KARLA MURTHY: Steve Wendel is a behavioral researcher and principal scientist at HelloWallet. He got his PhD in political science studying voter behavior and he’s written a book about using behavioral economics to create products that appeal to consumers.

KARLA MURTHY: What is a scientist doing at a personal finance software company?

STEVE WENDEL: So I help identify, “what are the behavioral obstacles that people face?” Come up with ideas on how to help them identify those obstacles. And then, I test them. Test and see, “Does this actually help? Does this actually put more money in the bank account over time? So bottom line… are we helping people?

KARLA MURTHY: One test Wendel devised looked at the effect of competition on financial behavior by creating peer comparisons.

STEVE WENDEL: We said, “Okay. We’ll have one version where all you get is your current score, one version where you get nothing, and another version where you get this peer comparison.” So you see not only your score, but you see how other people like you are doing.

KARLA MURTHY: It turns out that people who were shown the peer comparison saved hundreds more in a one month test. So, does knowing that score or what your neighbor’s score is help everyone–

STEVE WENDEL: No. No, there really– there is no silver bullet in the behavioral world. Thing we always remember is that people are different. Our experiences are different. And so our goal with HelloWallet is to adapt to the individual, meet them where they are.

KARLA MURTHY: But it’s not all about providing positive incentives – or carrots – when it comes to helping people make better decisions. StickK.com is an internet company co-founded by economist Dean Karlan in 2007. And provides a stick or negative incentive to influence behavior.

It’s one of a handful of companies, including Beeminder and HealthyWage that provide an online platform to turn goals into what are known as commitment contracts.

With StickK, users put money on the line for any goal, from trying to lose weight to saving more money each week. And can designate a referee to oversee their progress.

JORDAN GOLDBERG: Basically what the research showed is, hey, money talks. And when you’ve got your money on the line and you put your money where your mouth is you’re much more likely to achieve your goal.

KARLA MURTHY: Jordan Goldberg co-founded StickK with Karlan and another professor when he was an MBA student at Yale. He says the financial stick makes long-term goals easier to reach.

JORDAN GOLDBERG: So we are literally raising the price of your vice (your poor behavior) raising the price of failure so that you’ll make the right decision today.

KARLA MURTHY: If you fail to meet your goal, you lose the money. It goes to someone you’ve designated, an anonymous charity, or you can choose an anti-charity… a cause that you don’t believe in.

JORDAN GOLDBERG: So for instance if you’re pro-gun control and you don’t succeed we send your money to the NRA and vice versa.

KARLA MURTHY: Barbara Nordin chose an anti-charity when she used StickK to motivate her to build her own website. Her choice: a political PAC she doesn’t support.

BARBARA NORDIN: Stickk.com has helped me over and over again just thinking, I do not want so and so to get my $50 dollars.

KARLA MURTHY: Nordin has become an avid StickK user – creating goals for everything from keeping up with chores to writing more each day.

KARLA MURTHY: Why couldn’t you do that on your own, what was stopping you from doing that, and how did Stickk really make you do it?

BARBARA NORDIN: It was always so easy to just put it off a little longer, whatever the excuse was. Stickk.com raises that kind of accountability to a formal, money on the line kind of level. Of course, you don’t have to put money on the line. But my feeling is like, what’s the real point if there’s not a real stick involved.

KARLA MURTHY: Stickk co-founder Dean Karlan and a fellow economist know just what she’s talking about. They once agreed to each pay the other half a year’s salary if they regained weight they had previously lost.

So half the income, that’s like thousands of dollars?

DEAN KARLAN: Yeah, we wanted to make it so that it was painful. It had to be. Otherwise– otherwise if you fail– there’s no risk that you fail, and you just kinda of strike it up to, kind of, the cost of an expensive dinner or an– or even a vacation. But it had to be enough bite that we knew that we would do it– and that it would be painful. But it couldn’t be so much money that we couldn’t physically write the check.

KARLA MURTHY: His friend did eventually regain the weight, and paid Karlan $15,000 dollars

DEAN KARLAN: And it surprised a lot of people, but he, you know– I– I made him pay. And he paid.

KARLA MURTHY: So is that kind of the key to the way StickK works? I mean, that it has to be painful enough for each individual person?

DEAN KARLAN: That– that is exactly the idea. The key to– the key to StickK really is one of being self-aware. What is the right amount that is enough that you’ll be honest with yourself if you fail– be able to pay it if you fail, but enough so that it’ll actually motivate you to change?

KARLA MURTHY: While Karlan is no longer involved with StickK, he still regularly incorporates insights from behavioral economics into his everyday life…

DEAN KARLAN: When we order dessert, “I just want one bite. You eat the rest. But I want one bite, no more. If I– ask for a second bite, I owe you $100.”

KARLA MURTHY: Devising ways to motivate change… whether to drop more pounds or to save more money.