Wanna boost your savings account? Get a buddy to prod you along. According to a new study, higher interest rates have little or no effect on how much a person saves. But when a peer group is involved and participants monitor each other’s progress, savings seems to shoot through the roof.
We’re accustomed to hearing about how peer pressure is powerful in a negative way. But the idea that peers are watching (and judging) our every move can also do some good. It all depends on the context. In a working paper for the National Bureau of Economic Research entitled “Under-Savers Anonymous: Evidence on Self-Help Groups and Peer Pressure as a Savings Commitment Device,” researchers wanted to find out what forces, if any, might help people to save more money.
Participants in the study—2,687 low-income micro-entrepreneurs in Chile—were randomly divided into three groups: 1) a self-help treatment group, in which individuals could publicly announce their savings progress (or lack thereof), and savings was monitored every week; 2) a control group given access to a basic savings account, with an interest rate of 0.3%; and 3) a group with high-interest savings accounts, yielding a 5% return on their money.
Guess which group saved more? Logic would dictate that participants in the latter category should have saved the most—since they had the most to benefit by saving. Yet it was the folks who were being watched by their fellow savers who wound up leading the pack by a large margin. The study reports:
Participants assigned to the Peer Group Treatment deposit 3.5 times more often into the savings account, and their average savings balance is almost twice that of the control group.
Higher interest rates, on the other hand, didn’t seem to cause savers to change their behavior much at all. After reviewing the data, researchers concluded that participants didn’t “respond to the interest rate at all, neither in terms of amount saved, nor by reallocating their savings (for those who had a pre-existing lower-interest account).”
Social forces—peer pressure, in this instance—seem to have more power to change behavior than plain old monetary incentives. In other words, it looks like we care more about what other people think about us than we do about socking more money away in our savings accounts.
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But maybe this isn’t exactly the way things work. In another part of the study, researchers arranged for one group of participants to be sent weekly text messages with updates on one’s savings progress. Such messages resulted in far more saving compared to the control group, and also in nearly as much saving as those who’d been attending the peer group treatment meetings. Therefore, according to the researchers:
These results suggest that while peer groups can provide a highly effective commitment device, neither in-person meetings nor peer pressure seem to be indispensable features, and regular accountability and follow-up seem to play an important role. Modern technology — in the form of text messages or other feedback devices – may therefore render the accountability mechanism of self-help peer groups more scalable and potentially attractive to larger and different populations.
A previous study involving text messages and saving showed that participants in a study who received regular messages reminding them of goals boosted savings substantially. Some of the messages were threatening ultimatums—one read: “If you don’t frequently deposit into the Gihandom Savings account, your dream will not come true”—but no matter if savings reminders were negative or positive, they seemed to work equally well.
The takeaway is that we’re far more likely to save when someone (or something) is prodding us along and keeping tabs on our progress. A trusty friend is ideal. But in lieu of that, a cell phone will probably do the trick.