Over the past ten to fifteen years, a substantial body of research has documented the fact that individuals' saving, borrowing, and consumption behavior is often at odds with the predictions of standard economic models. For example, voluntary commitment devices and default options, which should not affect saving in a fully rational, forward-looking model, have been shown to have large impacts on savings decisions. To explain these findings, economists have developed models in which individuals have time inconsistent preferences (display a different degree of patience depending on whether they are making a short-run or long-run decision) and self-control problems.
In Getting to the Top of Mind: How Reminders Increase Saving (NBER Working Paper 16205), researchers Dean Karlan, Margaret McConnell, Sendhil Mullainathan, and Jonathan Zinman explore another potential reason for this discrepancy - limited attention.
The authors develop a simple model to illustrate the potentially important role of attention. In their model, individuals have regular expenses that occur every period as well as lumpy expenses that occur only periodically, like school or car registration fees. Individuals may fail to pay attention to an upcoming lumpy expenditure, causing them to save less and borrow more than they would in a standard, forward-looking model.
The authors' model generates two testable predictions. First, savings reminders will cause individuals to pay more attention to upcoming lumpy expenditures and thereby increase their saving. Second, reminders that draw attention to a particular goal or opportunity will be particularly effective because individuals are more likely to pay attention to a reminder that is more salient to them.
Importantly, models in which an individual suffers from time-inconsistency or self-control problems would not generate the same predictions. In those models, the decision to save little towards or borrow to meet a lumpy expenditure is made consciously and is in fact the best decision, given the individual's preferences. In these models, reminders will not affect saving.
Limited attention models may help to explain several well-known phenomena. First, the tendency of defaults to be "sticky" could occur because the individual stops paying attention once the default has been implemented. Second, "mental accounting" (such as having different accounts for different spending categories and constraining spending based on the funds in each account) could be related to attention, as labeling an account may increase the likelihood that individuals pay attention to that expenditure item. Finally, limited attention can generate behavior that looks like time-inconsistent preferences.
To test the main predictions of their model, the authors run three experiments with banks in the Philippines, Peru, and Bolivia. Each experiment involved a group of individuals who responded to a marketing offer to open a goal-oriented savings account. These individuals were randomly assigned to either receive a savings reminder or not. Reminders were delivered by text message in the Philippines and Bolivia and by letter in Peru (due to low cell phone prevalence).
The authors' key finding is that clients who received reminders saved 6 percent more and were 3 percentage points more likely to reach their savings goal than those who did not receive reminders. Results were relatively similar across the three countries.
In the Peru experiment, the authors test whether reminders associated with the respondent's specific reason for saving (given at the time of opening the account) are more effective. The authors randomly assigned respondents to receive either a generic reminder or one that mentioned their specific reason for saving. Specific reminders increased saving by 16 percent relative to receiving no reminder, while generic reminders had no significant effect on saving.
To further explore the salience of reminders, the authors randomly assigned some respondents in the Peru experiment to receive one jigsaw piece of a photo of their goal each time they made a deposit, while others received either a photo of their goal or a pen at the time of sign up. The authors found no effect of the jigsaw treatment on saving, suggesting that the standard letter reminder was more effective.
Finally, the authors test whether reminders are more effective for respondents who exhibit time-inconsistent preferences, which they elicit using standard questions. They find some support for the notion that reminders are more effective on time-inconsistent individuals.
In conclusion, the authors find that reminders are most effective "when they focus on a particular future goal set by the client (e.g., a future expenditure to be purchased with a targeted savings amount), and on the means toward achieving that goal (making the next deposit)." They note "our results open up the possibility that phenomena attributed to unstable time preference may in fact be due to limited attention, but more work is needed to address this possibility rigorously."
The authors gratefully acknowledge financial support from the Bill and Melinda Gates Foundation, CGAP, the Ford Foundation, the Center for Retirement Research at Boston College, Netspar, and the National Science Foundation.