Dina Pomeranz's interest in helping people build a savings cushion for difficult economic times emerged during a summer internship in Cameroon, where a woman she lived with shared how worried and anxious she was about her financial future.
"She told me how she woke up often at night, fearing that if she lost her job, she couldn't pay her children's school fees or pay for a doctor," says Pomeranz, an assistant professor in entrepreneurial management at Harvard Business School.
“How can we understand what projects work to alleviate poverty and to support microentrepreneurs?”
That experience planted a seed for Pomeranz's future research: how to promote financial savings among "microentrepreneurs" such as food cart owners, street vendors, and cosmetics saleswomen, whose income is low and often fluctuates.
Having effective tools to save not only would help them create a safety net for emergencies, but also would reduce financial stress and improve their quality of life.
"In the private sector, a lot of startups fail, and the market provides a signal about whether the product is viable," says Pomeranz, whose research focuses on how government policy affects companies and entrepreneurs in emerging markets. "With governmental and nonprofit ventures, it's generally harder to see which initiatives work and which are ineffective at achieving their goals. That is what drives me to do this research. How can we understand what projects work to alleviate poverty and to support microentrepreneurs in their endeavors? That's the bigger picture."
In 2008, Pomeranz's research team began interviews with microentrepreneurs in Chile that led to a 2012 working paper, Under-Savers Anonymous: Evidence on Self-Help Groups and Peer Pressure as a Savings Commitment Device. Pomeranz wrote the paper with Felipe Kast of Pontificia Universidad Católica de Chile and Stephan Meier of Columbia University.
Pomeranz explains that in Chile, many lack access to the automatic deposits and savings plans that facilitate savings for workers in more economically developed countries. But they do have something else: each other.
"Peer groups are often used as a commitment device to achieve personal goals, but there has been little empirical evidence evaluating their effectiveness and analyzing what aspects lead to their success," Pomeranz says.
To study them, the researchers formed groups of microentrepreneurs in Chile that were modeled on self-help groups like Weight Watchers to explore how participants could motivate each other to save more money each week.
Three types of savings accounts were created for this experiment: a basic savings account with a standard 0.3 percent real interest rate, similar to the highest available alternative in the Chilean market; a basic account combined with meetings in a self-help peer group; and a high-interest account. The third option, a high-interest account, offered a 5 percent real interest rate, compared to the standard 0.3 percent, and was announced as "the best option in the market" for saving. Groups were randomly assigned to one of the three savings options and managed by the Chilean microfinance organization Fondo Esperanza.
Which Group Would Save More?
A total of 2,687 people (196 groups) were included in the experiment. (The average age of the participants was 44, and they had about nine years of education.) Prior to the study, 68 percent of the participants did not have a savings account. The peer groups met weekly, and during these meetings, group members could publicly announce their weekly savings goal. At subsequent meetings, members showed deposit slips to verify how much they had saved. Those who showed proof of savings received a sticker in a booklet. Those who collected enough stickers received a diploma as a nonmonetary award.
Here's what the researchers found after testing all three methods: Participants in the self-help peer group deposited 3.5 times more often into the savings account, and their savings balance was almost twice that of participants in the control group (those with just a bank account and no peer support).
Surprisingly, the higher-interest rate option had little impact on savings, neither with the amount saved nor by inspiring participants to move over savings from preexisting accounts. "Our survey evidence suggests that many microentrepreneurs wanted to keep money in a separate account earmarked for a special purpose," Pomeranz says. Most also didn't understand the increase in the interest rate, despite the bank's explicit explanation of the benefits.
“Any area of regular activity for which people tend to procrastinate is where it could work”
The Impact Of Text Messages
Having established that self-help peer groups encouraged greater savings, there was another question to answer: Why? Were members motivated by public goal setting? Regular feedback? Shame at not meeting targets?
The researchers suspected increased accountability might be a prime factor and developed a follow-up experiment to determine if physical meetings were essential for holding people accountable for their goals. Could the same effect be accomplished remotely? To find out, the research team designed a text message experiment among 873 people with cell phones a year after members opened their accounts.
To replace in-person peer group meeting, the members were randomly offered one of two feedback text message services. In one service, feedback messages were sent to the phones of both the participant and a savings buddy of his or her choosing. This message included a dose of peer pressure: "Congratulations! Last week you made your weekly deposit, and we just informed your Savings Buddy of your achievement." The savings buddy received this email: "Good news, last week [Joe] made his weekly deposit. Thanks for being his Savings Buddy!"
If the participant failed to make a deposit, a different text was sent: "Unfortunately, last week [Joe] did not make his weekly deposit. Thanks for being his Savings Buddy!"
The second feedback service notified participants that they'd made their weekly deposit and told them how their deposit share compared to those with similar savings accounts. "Congratulations! Last week you made your weekly deposit. [Six] percent of other participants similar to you made a deposit." The difference was that these messages weren't received by anyone else, so "there was no savings buddy exerting pressure," Pomeranz says. (A third control group didn't receive text messages.)
Surprisingly, the researchers found that weekly follow-up text messages proved to be about 80 percent as effective as in-person meetings—neither in-person meetings nor peer pressure were critical to to the success of self-help peer groups. Furthermore, a text message coupled with peer pressure by a real-life savings buddy had no larger effect than a text message that simply informed participants of their own achievement and the success rate of others.
"It could be that text feedback or getting a message that cheers you on saying 'Yeah, I did it and I can do it again!' is enough to encourage people to make a deposit," Pomeranz says. Also, the effect of the text messages did not decline over their three-month duration, unlike the enthusiasm for saving within peer groups, which waned over time. She says this may have been a matter of convenience: People automatically received text messages, but had to continue to make the effort to attend meetings. The feedback message service is less costly in terms of time and money for both the participants and the savings institution.
Phone For Savings
The research is useful for banks that want to add simple text incentives to customers, for example, or for self-employed entrepreneurs who want to save, but lack the time or inclination to attend meetings.
And cell phones are a simple way to reach many people. "Given the astonishing growth rate of cell phone use in developing countries, this is a channel that can potentially reach millions of people and may be attractive to a wider and different population than the one that is willing to come together for regular meetings," the paper concludes.
The ideas from this research are applicable in many areas, ranging from weight loss, work-out routines, or disease management to environmentally friendly behavior or reaching goals at work, Pomeranz says. "Any area of regular activity for which people tend to procrastinate is where it could work."