A recent study found that high interest rates are not enough to get people to save more. What does work, however, is peer pressure: the social imperative to fit into a crowd.
Healthy peer pressure
Your mother used to warn you against submitting to peer pressure with quips like, “If your friends jumped off a cliff would you follow them?” However, that same urge to conform can be channeled in a healthy way — namely into motivating you to save more money.
That is the conclusion of a study by the National Bureau of Economic Research with the cumbersome title, “Under-Savers Anonymous: Evidence on Self-Help Groups and Peer Pressure as a Savings Commitment Device.”
Methodology of the study
For the study, 2,687 low-income micro-entrepreneurs were randomly separated into three groups. One of the groups became a savings self-help group, in which participants shared their savings successes and failures on a weekly basis. The second group, the control, were given a savings account with 0.3 percent interest. The third group were given high-yield savings accounts that paid 5 percent interest. Each group was tracked for a year.
How it played out
Logic says those with the high-yield accounts would save the most. But this is human nature we are dealing with, so logic has little bearing. Those in the self-help group, who were encouraged to save by peer pressure, stuck the most away for a rainy day.
According to the study:
“Participants assigned to the Peer Group Treatment deposit 3.5 times more often into the savings account, and their average savings balance is almost twice that of the control group.”
Those with the high-yield accounts, who should have saved the most, showed little or no change in their normal saving behavior.
Seeking peer motivation
Consumers seeking similar kinds of motivation to spend less and save more may want to try Spenders Anonymous meetings. Or, there are web tools, such as ING’s CompareMe, that allow members to see how their financial picture looks when stacked up against others.
More powerful if acquainted
However, the study found that the effect is even more powerful if the the peers are acquaintances, and not just profiles on a screen.
The study read:
“The effect is particularly strong if the peers know each other well, i.e. they have experienced past interactions and expect future interactions.”
So, it’s easier to save if you are being prodded by a sympathetic other or others. And in the best case scenario, those others are people you know and care about.