BID® Daily Newsletter
Apr 9, 2007

BID® Daily Newsletter

Apr 9, 2007

COOKIES IN THE BRANCH


Things can get really crazy when human beings are involved, particularly when it comes to trying to guess which cookies people will choose to eat from the plate in the branch. Consider that Economics 101 teaches us that people make choices to maximize their welfare because they behave rationally. Behavioral economics, meanwhile, looks inside the human brain for answers as to why the first premise is a bunch of hooey. In short, people do not act rationally, but rather make biased decisions. In fact, people will often make decisions that run counter to their best interests. Studies show that when faced with multiple choices, about 96% of the time people will become overwhelmed and as a result will select whatever "default" choice is provided. In study after study, regardless of the structure or makeup of the default selection, the vast majority of people will choose it. Scientists say default options are overwhelmingly popular because people seek inertia. Once they make a decision, such as allocating money into certain deposit accounts, they will tend to stick with the choice even if the market and circumstances change significantly. Take the results of a recent study in behavioral economics conducted in a major U.S. city. In it, testers approached 500 people and asked half of them if they would drive 10 minutes to a store if it meant the would save $5 on a small purchase. The vast majority of the responders indicated they would definitely do so. The other half of the group was asked the same question, except the $5 savings was on an expensive purchase. Interestingly, that group overwhelmingly rejected the idea, saying they would not drive the 10 minutes to save such a small amount of money. Remember, the questions were very nearly identical, yet they resulted in a significantly different result. At no time did either group ask for more money to make the drive and both stayed within what the scientists call their "behavioral boundaries." For bankers, there are many conclusions that can be drawn from this experiment and others like it. By putting the bank's product or service in the proper context through marketing, customers can be successfully influenced by the craziest things. One thing bankers should know is that people tend to be overly optimistic. They want to save more money, but they have a hard time putting desires into action because of procrastination and other factors. As an example, by convincing customers to commit in advance to allocating a portion of their income toward retirement, behavioral tests show clients will increase total savings by as much as 18%. People want to save more - they just need a little guidance from their friendly banker. In addition, banks that post their CD rates next to their savings account rates can create more awareness and perspective for the customer. By offering a "default" option commonly selected by a customer in a given category (such as a small business), the bank stands a much better chance of tapping into the customer's subconscious. At the very worst, hopefully it helps some bankers gain insight into why some customers eat the chocolate chip cookies and why others choose Double Dutch.
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