Submit to Peer Pressure, Double Your Savings

ATM friends
ATM friends

By Jill Krasny

A fascinating new working paper by Felipe Kast, Stephan Meier and Dina Pomeranz explores the idea of whether peer pressure is effective at motivating people to ramp up their savings.

We've seen this trend evolve rapidly over the years with the onslaught of commitment devices and web tools like ING's CompareMe, which lets savers see how their entire financial picture stacks up against peers.

Sometimes this kind of pressure works, sometimes it doesn't, so the researchers decided to find out for sure.

Conducting a randomized field experiment with 2,682 micro entrepreneurs, the researchers assigned 196 groups to one of three types of savings accounts: basic savings with a real annual interest rate of 0.3%; an account similar to the basic account but tied to a support group that checked members' savings progress once every week; and an account with a 5% real interest rate that researchers claimed to be the best on the market.

Tracking the groups for a year turned up surprising results: The groups randomly assigned to the self-help group made almost four times as many deposits as the people who weren't. This held especially true in the first few months when groups were initially formed. And though self help group's activity tapered off over time, the researchers found their number of deposits was "still 3.5 times higher compared to the control group." What's more, they almost doubled their average savings balance.

Wrote the researchers:

"The effect is particularly strong if the peers know each other well, i.e. they have experienced past interactions and expect future interactions. If peer pressure is the main factor driving the impact of self-help peer groups, then physical meetings may be key to the success of peer groups. At a minimum, the behavior of an individual has to be observed by at least one other peer."

But that's not the only reason peer pressure works. As the researchers said, "(self help groups) provide information, trigger a competitive trait to win or function as a reminder ... that observing others who stick to their plan can be motivating."

H/T Freakonomics

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