May I Offer You a Precommitment?

Perry Wright, Senior Behavioral Researcher, Common Cents Lab at Duke University

In previous issues, I shared how we at Common Cents Lab work with industry partners. Together we use behavioral science to improve personal financial outcomes of their low to moderate income users. In those installments, I discussed how understanding user intentions and deploying thoughtful defaults can help users bridge the intention-action gap.

Today, we can explore a powerful tool for offering plan participation: pecommitment. And we’ll learn how professionals in the retirement space can use this tool to guide users toward healthier financial lives over time.

What is precommitment? In behavioral science, precommitment involves an individual committing in advance to a specific action at a specific time, trading away one’s future flexibility for an action that the present-self isn’t quite ready to perform but knows is beneficial.

Take, for example, the option to Auto-Increase retirement savings. Plan participants are presented with a contribution that is attractive today and make a precommitment to increase contributions over time. Precommitment’s ability to reserve the hard stuff for the future makes plan participation more accessible today, and Auto-Increase provides that new participant with an implicit recommendation that increasing contributions over time is the right thing to do.

Through a recent series of studies related to Auto-Increases, researchers gave us even more insight into how to better implement precommitment to serve users.

The researchers tested how offering users both now and precommit options at the same time influenced future-oriented decisions compared to offering those options separately.

What they found was that simultaneously offering users options to save now or delay saving offered no consistent benefit to adoption, and in some cases decreased adoption. But by contrast, offering users the option to save now, followed by an option to precommit only after a user has declined the save now option, actually increases adoption.

These researchers theorize that this is the result of precommitment’s ability to imply importance and urgency. Users simultaneously offered options to both start now and delay may infer that taking action is not urgent since both options are presented as equals. Users offered the option to precommit after having declined to take an action may infer that taking action is urgent enough to warrant alternative options for taking action now.

Why does precommitment work? Precommitment works for a couple of reasons, as echoed by this research. First, precommitment leverages our bias toward the present by promising to reserve hard or unattractive actions for the future. I may not want to contribute to my retirement at a sufficiently high rate today, but today I feel like I will be willing to do more a year from now. Think of it a little but like a way to make the best from our instinct to procrastinate—we get to put off doing the hard thing but obligate ourselves to the thing we know we should be doing at a specific time in the future.

When that time comes, we aren’t necessarily thrilled about it, but we knew it was the right thing then just as we do now, and so we are likely to go through with it. Second, offering users precommitments implicitly increases the perceived importance and urgency of an action. Professionals in the retirement space can use this perception to better guide users today toward healthier financial lives over time by creating formal structures based on user precommitments.

What does precommitment do? On its own, precommitment often increases depth more than breadth. That is, non-savers aren’t likely to magically become savers because you offered them a precommitment option to save. But savers offered precommitment mechanisms are likely to increase the degree of participation after making that precommitment.

How has Common Cents Lab used precommitment? We ran a field study with a savings fintech to see how precommitment would influence users’ willingness to save tax refunds. In the experiment, half of users were prompted to save a portion of their tax refund at the time it was deposited into their accounts; the other half of users were prompted months in advance to precommit to save a portion of their theoretical future tax refund.

The study measured differences in both the percent of users who chose to save and the amounts they chose to save across these conditions.

What happened was that the same percentage, about 10%, of users elected to save a portion of their tax refund, regardless of when they were prompted (at the time of receipt or months earlier).

But the interesting differences were found in the degrees of saving between the two groups: users who were prompted to save at the time of receipt saved a respectable 17% of their tax refunds, while users who had precommitted to saving months earlier saved an incredible 27% of their tax refunds. Precommitment increased the depth of the action but not the breadth of the action.

Final tips:

For many people, saving for retirement is a challenging negotiation between our bias toward the present and our intellectual knowledge that we should be contributing toward our future needs. We tend to put an unrealistically high value on the here and now and an unrealistically low and inconsistent value on the future.

Professionals in the retirement space can help users overcome this challenge by offering products that emphasize present ease or make it feel as though a saver is losing less today.

Are your products or services taking present-bias into account? Would leveraging precommitment at strategic moments of onboarding increase the depth of participation levels? You may serve plan participants well by being thoughtful about how their instinct to put certain things off or hesitancy to make a decision can align with their desire to meet their financial goals if you give them a well-designed way to do both.

Stay tuned for more! / Perry

Perry Wright is a Senior Behavioral Researcher at Duke University's Common Cents Lab, using behavioral science to create solutions that aim to increase the financial well-being for low- to moderate-income people living in the United States and abroad. The Common Cents Lab is funded by the MetLife Foundation and supported by BlackRock as part of BlackRock's Emergency Savings Initiative. For more information and to connect directly, you can reach Perry by email here.

This piece was featured in the September 8, 2022, edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.