How Peer Pressure Could Help Boost Savings

In the depths of the Great Recession, Majd Maksad, a data analyst was examining reams of data on Americans’ finances as an analyst for Citi, when he made a surprising observation. Even as many economists, pundits and individuals credited the financial crisis and its aftermath for ushering in a new era of greater frugality and leading to what many heralded as a healthy deleveraging of household balance sheets, Maksad didn’t see that in the data. Instead, around 2010, his analysis showed continued spending. And while there was deleveraging, Maksad found that it was driven largely by writing off bad debts through foreclosures and personal bankruptcies, not necessarily personal choice.

“It wasn’t a change in behavior that was occurring,” Maksad says. “And that raised the question: ‘How do you get people to change behavior?’”

The next natural question, perhaps for a data scientist became: what if everyone could have the benefit of such transparency? Could seeing what other people in a similar situation were actually doing help you make better choices? The culmination of that effort, along with his business partner Korash Hernandez, is the website Status Money, launched last fall, aiming to match individuals to an appropriate, deidentified peer group based on several factors including income, geography and age to compare their finances.

The notion that promoting social norms can encourage all kinds of desired behavior, from reducing energy costs to even voting has been observed for some time. But spending and saving patterns are so specific to where we live, our profession, age, etc., one challenge is to find a truly similar peer group. Then there are the financial privacy and transparency questions — how do you find a large enough group to be able to spot patterns and comparisons? If you are a teacher in your 30s, living and working in the Boston area, how much do other people in similar circumstances spend on rent? Or on entertainment and restaurants? What about savings? What are their interest rates? And if you could really take a close look at what was really happening, would that change your own choices?

A first look at the behavior of early users suggests that comparing to peer groups (a minimum of 5,000 people) could have a significant influence on such choices. This review of over 6,000 Status Money users between September 2017 and April 2018, showed a decline in spending by a substantial $600 a month, according to an analysis conducted by Professor Michael Weber at the University of Chicago Booth School of Business and Professors Alberto Rossi and Francesco D’Acunto at the Smith School of Business of the University of Maryland. The magnitude of the spending cuts surprised even the researchers.

“I was not expecting this much of an effect,” Rossi says. Granted, this is an initial glimpse into how behavior may change, and the researchers intend to continue studying to see what the effect may be longer term and as the site grows. It’s also not clear at this point whether the savings is then being invested or used to reduce debt. But the potential for making significant gains toward long-term goals is promising, particularly since unlike cutting back on energy savings, this could have a larger effect on an individual or household’s budget, they say.