Learnings from the lab: Understanding context through environmental immersion

Background

To better understand financial decision making among low-and- moderate income Americans, we spent two weeks performing immersive qualitative research in Fresno, California, one of the poorest counties in California, with 26% of people living below the poverty line.

In performing this research, we conducted over 50 qualitative interviews with low-and-moderate income Americans. This research included: grocery store shopping trip follow-alongs and interviews; in-home visits and interviews; qualitative interviews with managers of small businesses; undercover visits to used-car dealerships; one day of debt collection follow-along; a behavioral audit of an auto loan collections center; an audit of a religious-based financial training program; purchase and use of money orders; visits to several payday lenders, including taking out, extending, and repaying a payday loan; and informal discussions with members of the community.

Over 60% of these interviews focused primarily on the themes of: how people talk (or don’t talk) about finance, income and expense volatility, and financial automation and control.

We also performed a variety of community service activities, including: three presentations on behavioral science life hacks, volunteering at a summer camp for low income children, delivering a financial coaching session, and conducting mock interviews with thrift store employees on work-for-welfare programs.

Key Insights

We used a combination of immersion and semi-structured interviews to understand the lives and financial decision-making of primarily low income individuals. At the start of every interview, participants filled out the form below. This started a conversation and provided a baseline to compare across our research.

Results

While the results of our qualitative interviews are not meant to be conclusive or statically rigorous, they did provide meaningful insights into the lives and challenges of low-to-moderate income individuals. We compiled our findings across three themes:

1. How people talked (or didn’t talk) about their finances

2. How people cope with income and expense volatility

3. How people make the trade-off between automation and control of their finances

4. How people buy a used car

Some of these findings replicate seminal insights found in behavior science. Others may surprise you.

**Talking (or not talking) about finances **

People often don’t discuss their finances because:

1. They know others might be worse off than they are. There is a fear that if money is discussed, other people who are in a worse financial situation may ask them for money.

2. Their finances are seen as a reflection of other life choices. Some people did not want to discuss finances because it would highlight their personal priorities and choices. These priorities may reflect life decisions that family and friends disagreed with (e.g. drug/alcohol abuse, smoking, etc.).

3. There is a sense of hopelessness. There was often a sense that there is no purpose to discussing finances since their financial situation won’t change. One respondent stated “I was poor yesterday, I’m poor today, and I’m going to be poor tomorrow.” When users did discuss their finances it was often with just one or two close confidents. There was fear of “letting too many people know” about their financial situation. People seemed more open to discussing problems when they are framed as an issue that can be solved (e.g. a friend is making a financial mistake that can be remedied).

**Coping with income and expense volatility **

Many people had creative self-hacks to manage their financial volatility, including:

1. Matching their income and expenses. Many people first paid their rent and bills when they received their paychecks (often using money orders), then used the rest of their money until their next paycheck.

2. Working just-in-time side jobs. Side jobs/hustles were largely only done when a person had low funds rather than in a preemptive way.

3. Anticipating windfalls. Tax refunds are a significant windfall which some people use as forced savings. People would penny pinch until tax season and then breathe easier, get caught up on loans, make larger purchases, or take trips.

4. Mentally budgeting each paycheck. People who are paid twice a month may mentally account for each paycheck differently and use each paycheck for different purposes.

**Making the automation vs. control trade-off **

We noted a couple of interesting habits that happen when LMI consider automating their savings and expenses.

1. Automatic savings are not mentally accounted for as earnings. Automatic withdrawal for savings has such a powerful effect that people can forget that the money was even earned. As a result, they don’t mentally account for this money as part of their paycheck.

2. Minimum credit card payment as the default. People’s assumed default for credit card payment is often the card’s minimum payment. Those with a balance may pay that amount or use that amount as an anchor to adjust their payments.

3. Expense variability reduces automation. When bills are variable, automating often feels too risky. This effect gets further exacerbated if a checking account reference point is $0.

4. Hassles beginning to automate. The hassle of going through a one-time automation can dissuade people from automating, even when they would like to.

We noted a couple of interesting habits that happen when LMI consider automating their savings and expenses.

1. Auto salespeople have no built-in sales incentive to ensure a car buyer can repay a loan. They often take pride in being able to get a buyer into any car on the lot, regardless of a buyer’s ability to pay for the car.

2. Once on a car lot, price negotiations are often based on monthly payment amount. This obscures the total cost of the car, as well as the interest rate and the length of the loan. Auto salespeople use a variety of tactics which range from anchoring a potential buyer to an expensive car to outright modification of the loan application document.

These insights have helped inform our work. We are building a new auto loan calculator to help consumers understand the true cost of buying a car, including gas, insurance and maintenance costs. In addition, we are working with Beneficial State Bank to change their auto loan payments schedules, allowing consumers to time their payments to when they get their paycheck.