23 July 2019

Don’t Compare Your Savings to That of Your Peers

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Showing people how their retirement finances stack up against those of peers doesn’t motivate them to save more and, in some cases, can actually backfire—that is, discourage people from participating in a 401(k) altogether—according to a paper I recently published in the Journal of Finance in collaboration with researchers from Harvard University and the University of Pennsylvania’s Wharton School.

Such results are surprising, considering peer-comparison strategies are being used successfully in other domains to get people to change their behavior. The findings also raise questions about whether financial companies are on the right track in creating tools that allow customers to see how much others are saving. Part of a movement known as social-norms marketing, the tools are based on the idea that much of human behavior is influenced by what people consider to be “normal,” so if you can correct misperceptions about what normal behavior is, you can motivate the underperformers to move closer to the norm.

The strategy seems to work in certain situations. Some utilities, for example, have managed to persuade customers to conserve electricity by showing them how their energy use compares with that of neighbors. Why then, might social-norms strategies fall flat when it comes to retirement savings? It could be that learning that your peers are ahead of you financially is much more demoralizing than, say, learning that you use more energy than your neighbors. And when people are demoralized, they tend to disengage from a problem rather than address it.

A surprise 

To study the issue, my co-authors ( John Beshears, David Laibson,and Brigitte Madrian of Harvard, and Katy Milkman of Wharton) and I teamed up with a company that wanted to encourage its employees to save more for retirement. The company sent about 1,400 workers who weren’t participating in its 401(k) plan a simplified enrollment form that let them start contributing 6% of their pay to the 401(k) just by checking a box, signing, and mailing the form back.

The key twist was that different workers received different versions of the form. Some were randomly chosen to get a form that revealed the fraction of co-workers in their age group who already were contributing to the 401(k). Others got a form without this information. We then compared the behavior of those who received peer information to those who didn’t.

We went into the study thinking that peer information would increase savings, but we found no robust evidence that it did. And for the subset of nonsavers that we thought would be most susceptible to peer influence—those who weren’t subject to 401(k) automatic enrollment—peer information actually discouraged them from joining the plan. Most of the people in this group weren’t opposed to saving; rather, they simply hadn’t gotten around to joining the plan. Yet peer information reduced subsequent enrollment rates in this group by a third—from 9.9% to 6.3%.

A vulnerable group 

So why didn’t peer pressure work? We considered whether the problem was that the peer information moved beliefs in the wrong direction. That is, maybe employees learned that fewer of their co-workers were saving than they thought, so not saving felt more in line with the norm. But if employees were surprised at how few of their co-workers were saving, peer information should have had a more positive effect among those who saw that a higher fraction of their co-workers were saving. It didn’t. In fact, the higher the peer group’s savings, the more peer information reduced enrollment.

In the end, we concluded that peer information most likely reduced savings because it left the laggards feeling too discouraged. Imagine finding out that not only are you way behind on your financial goals, but nearly everybody around you is way ahead of you. It’s easy to see how you might want to avoid thinking about the problem altogether.

In our study, the negative effects of peer information were concentrated among those with low salaries, which is consistent with previous studies showing that negative information typically has a stronger effect on low-status individuals. Researchers have theorized this is because low-status individuals have higher background levels of stress, which makes them more vulnerable to depression in response to setbacks, defeats and humiliations.

In sum, while it may be helpful to learn what your peers are doing in areas not so intimately tied up with self-worth and identity, when it comes to saving for retirement, it might be best to avoid comparisons with others.

Click here to access the full article on The Wall Street Journal.

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