How Good Design Can Guide People To Smarter Money Decisions
Article by Jon Stein
BETTERMENT’S JON STEIN ON HOW TO CREATE A SITE THAT COUNTERACTS OUR COMPULSION TO MAKE IRRATIONAL FINANCIAL CHOICES.
Great design can be thanked for bettering lives–from beautiful buildings that help people coexist in big cities, to environmental solutions that clean air and water, down to everyday objects like an ergonomic task chair or just a really good pen. In other words, it solves big problems, and if there’s ever a sector that’s hungry for a redesign, it’s financial services.
According to a recent survey, 49% of Americans aren’t saving enough for retirement. Data from the Employee Benefit Research Institute indicates that 56% of all workers have less than $25,000 in the bank. An article in Barron’s reports that young people are reluctant to buy cars, purchase homes, or start families while saddled with mammoth student loan debt.
How did we get to this sad place? Financial illiteracy, behavioral biases, poorly designed products, and misaligned interests are all to blame for America’s woes, made all the more prominent by a global recession. But I believe the onus is on entrepreneurs to design and build products that align company and customer interests, anticipate irrational behavior, and incorporate guardrails against potentially damaging financial decisions.
The behavioral economist Richard Thaler says fear and anxiety are reasons why people aren’t doing enough with their money. Paralyzed by uncertainty, they do nothing, which is disastrous for their long-term goals. Simply being too busy or overwhelmed by an abundance of options are other contributing factors to investing inertia, behavioral experts believe.
At Betterment, we’re obsessed with understanding the effect of human behavior on financial decisions. It’s why we have behavioral safeguards built into our product as a way to help people stay on track. To counteract behavioral biases–such as inertia, irrational decisions, or market timing–we follow these principles: