People don’t always act in their best self-interest.
They know they should save more for retirement, but never actually increase their contributions to a retirement plan. They know they should work out in the morning before work, but hit snooze when the alarm goes off at 6 a.m.
The team at ideas42 — a nonprofit consulting firm cofounded in 2008 by MIT Sloan professor Antoinette Schoar and two colleagues from Harvard and Princeton — understands that, and wants to help people make decisions that will ultimately benefit them.
The New York-based firm works with companies, governments, and educational institutions to help them reach their goals. This encompasses everything from increasing degree completion at universities to developing a financial product that addresses the needs of low- to moderate-income employees to encouraging water conservation in Costa Rica.
What connects all these projects is that they are designed based on a thorough understanding of behavioral science. By applying that knowledge, ideas42 tackles problems in health, education, consumer finance, criminal justice, international development, and government efficiency.
Why behavioral science matters
Most policies, programs, and services that people use don’t take into account that often times people don’t do what is best for them. But behavioral science helps us understand why people act in certain ways — and can help organizations design services that are more effective.
When it comes to behavioral science, context matters. Organizations need to create an environment that will help people make the choices that are best for them. “By using behavioral and psychological concepts, we can help people make better decisions and show institutions how to set up a choice architecture to help people make those better decisions,” said Schoar, who is on the board of ideas42. “There are ways to create products, services, and protocols that make it easier for people to adhere to what they should be doing.”
In fact, how products and services are designed can make a bigger difference than monetary incentives do when it comes to nudging people to make better choices.
Take, for instance, teaching financial literacy to small businesses and households in emerging markets. Financial institutions were spending billions of dollars on in-depth, well-designed programs to do this, but they were having a limited impact.
Schoar, along with her colleagues, realized this was because the programs were too complicated for peoples’ lives — they didn’t have the time to implement what they were learning.
The team at ideas42 designed a curriculum that, instead of teaching a vast amount of financial knowledge, conveyed a few key heuristics for financial planning, such as separating household and business finances and imparting key rules of thumb for managing businesses.
“Upfront you might have thought that this would be suboptimal, but once you understand the behavioral limitations and cognitive problems of overload, then you find that these rules of thumb made a big difference in peoples’ businesses. The in-depth programs were too complicated and time consuming so never were applied in the real world,” Schoar said.
The curriculum, which was debuted in the Dominican Republic, has such a positive impact that ideas42 is working with the International Finance Corporation and the World Bank in India and the Philippines to refine the program using mobile and online technology. The goal is to push the curriculum to a much larger group of people at a lower cost.
Moving to scale
Ideas42 is partnering with Mathematica Policy Research and the U.S. Department of Labor Chief Evaluation Office to encourage federal employees to save for retirement and the unemployed to continue their job search. It is also working with the William and Flora Hewlett Foundation Cyber Initiative and New America’s Cyber Initiative to bolster cybersecurity by better understand the human behavioral factors affecting our online security. Ideas42 has dozens of programs like these underway worldwide that place behavioral concepts at their core. Through its work, the team has learned a number of important lessons since starting the organization.
First, it realized that once it really understood a problem and conceived of a solution, it is often scalable beyond its original scope. However, transferring the solution to a new organization is not turnkey and often requires “training, a demonstration, and a repeat demonstration,” Schoar said.
Second, while academics were at the center of ideas42’s creation, they aren’t necessary for its day-to-day operations. “Once you start, you don’t need a researcher overseeing all the projects. An intelligent staff is often much better because they are good managers and have a professional attitude towards the work,” Schoar said.
A side benefit of this has been the ability to hire undergraduate and master’s students to be part of ideas42. “The idea of behavioral economics is something that the younger generation is embracing. It is a tool in their toolkit,” Schoar said. “It is neat to see something like this become more mainstream and accepted.”