Save
What a savings experiment in Kenya can teach us about money
When people living in a Nairobi slum were asked to save about $1 a week, the results “changed a lot” of how a leading behavioural economist thinks about money.
What a savings experiment in Kenya can teach us about money
When people living in a Nairobi slum were asked to save about $1 a week, the results “changed a lot” of how a leading behavioural economist thinks about money.
Professor of psychology and behavioural economics at Duke University, Dan Ariely said this week that the savings experiment he conducted in the Kibera slum in Kenya revealed the importance of positive reinforcement in a world where spending is visible but saving is not.
Speaking at the Association of Superannuation Funds Australia conference on 29 November, Mr Ariely explained that as part of the experiment, people were asked to save 100 shillings – the equivalent of $1 — each week for 24 weeks.
Some people were simply asked to deposit money into an account with the popular Kenyan mobile phone-based money transfer service, M-Pesa. Others received a weekly text reminder to save 100 shillings and another group received the text reminder, but the text was composed as if it were written and sent by the account-holder’s child.
Another group was told that if they saved 100 shillings, they would be matched an extra 10 per cent at the end of the week. The fifth group were offered a 20 per cent match at the end of the week.
The sixth and seventh groups were given the 10 and 20 per cent matches at the beginning of the week. If they failed to save the full 100 shillings, a corresponding amount of the match was taken back.
The last group were given a coin that had 24 numbers etched on it and every week the saver was asked to scratch a number in one direction for success and the other way for if they didn’t save the full amount.
At the end of the 24 weeks, the results found that by simply providing the account, “people started saving”.
However, with a weekly reminder people saved more. Those with a 10 and 20 per cent match at the end of the week saved more again and those with the match at the beginning saved even more.
The effect of having the text send as if it came from their child was akin to having the savings match offered at the beginning of the week.
However, he said the coin was the “big surprise of the study” as it “basically doubled savings” compared to all other groups.
He explained: “When you do experiments in the third world, you really need to walk around a little bit and get a better sense of what's going on.
“So I walk around [Kibera] and I see a father buying funeral insurance for a week.”
He explained that funerals are very expensive in Kenya and can be worth up to two years' income.
“This father got funeral insurance for a week which means it will only provide cover if he dies in the next seven days. These are very poor people, they only have small amounts of money...and he takes the certificate and he gives it to his son.
“As he's doing this, I think to myself, imagine a family of somebody who is very poor that is diverting money into savings or insurance.”
“Think about the breadwinner that gets positive reinforcement from their family every time they bring money in. All of a sudden you're diverting money into something that nobody sees. What kind of positive reinforcement do you get?”
He explained that the coin was an idea of saying “it’s not less, it’s just different. Here’s a reminder in the home that money is still around.”
Continuing, he said that this showed not only the importance of positive reinforcement but also just how difficult it can be to save money in a world where others’ spending is extremely visible.
“Think about the following: a thousand years ago, how did we save? We saved in goats, livestock. When we saved in goats it had the really nice feature that you could come home at night from work and you could see how many goats your neighbour has and we could compete on who has more goats.”
However, upon the advent of money and later digital money, visibility shifted to spending.
“Is it any wonder that we may pay disproportionate attention to the thing that is visible?”
In terms of preparing for retirement, Mr Ariely said this also means savers are often unable to predict their required retirement income in a “meaningful way” and that this in turn means advisers and planners should consider taking on a more “paternalistic” role.
That includes instructing clients about what is acceptable and excessive spending and encouraging them to cut down on extra spending by getting off the “hedonic treadmill” fuelled by new purchases.
RELATED ARTICLES
Expenses
Expert tips to secure your financial safety net
New Zealanders are known for their "she'll be right" attitude, but when it comes to handling unexpected bills, being prepared is crucial. Read more
Expenses
Australians continue to opt for free VPNs, ignoring potential privacy risks
Australians, alongside citizens of Sweden, South Korea, and Mexico, are increasingly choosing to use free Virtual Private Networks (VPNs), despite the potential threats to their privacy. Read more
Expenses
Rooftop solar in childcare centres could cut energy bills by millions
The analysis conducted by Parents for Climate has revealed that the installation of rooftop solar and batteries in early childhood education and care (ECEC) centres could lead to savings of up to $130 ...Read more
Expenses
Corporate Traveller identifies key strategies for business travel savings
Flight Centre Travel Group's Corporate Traveller, a premier service provider for managing SME travel, has shared several effective strategies that enabled their business clients to significantly ...Read more
Expenses
Price no longer the prime factor for energy bills
Many Australians are intrigued but unconvinced when it comes to greening their energy bill. Read more
Expenses
1 in 2 Aussie pet owners spends on their pets more than themselves
Does owning a pet eat into your monthly budget? You’re not alone. Read more
Expenses
The real reason Sydney’s petrol prices are so high
Sydney fuel prices may seem like they’re soaring, but a recent study indicates that they may be cheaper than you think. Read more
Expenses
Morrison backs big pharma, turns back to developing countries
Big pharma is currently fighting to maintain intellectual property protections over COVID-19 vaccines, with Australia refusing to act despite having no pharmaceutical companies. Read more
Expenses
Expert tips to secure your financial safety net
New Zealanders are known for their "she'll be right" attitude, but when it comes to handling unexpected bills, being prepared is crucial. Read more
Expenses
Australians continue to opt for free VPNs, ignoring potential privacy risks
Australians, alongside citizens of Sweden, South Korea, and Mexico, are increasingly choosing to use free Virtual Private Networks (VPNs), despite the potential threats to their privacy. Read more
Expenses
Rooftop solar in childcare centres could cut energy bills by millions
The analysis conducted by Parents for Climate has revealed that the installation of rooftop solar and batteries in early childhood education and care (ECEC) centres could lead to savings of up to $130 ...Read more
Expenses
Corporate Traveller identifies key strategies for business travel savings
Flight Centre Travel Group's Corporate Traveller, a premier service provider for managing SME travel, has shared several effective strategies that enabled their business clients to significantly ...Read more
Expenses
Price no longer the prime factor for energy bills
Many Australians are intrigued but unconvinced when it comes to greening their energy bill. Read more
Expenses
1 in 2 Aussie pet owners spends on their pets more than themselves
Does owning a pet eat into your monthly budget? You’re not alone. Read more
Expenses
The real reason Sydney’s petrol prices are so high
Sydney fuel prices may seem like they’re soaring, but a recent study indicates that they may be cheaper than you think. Read more
Expenses
Morrison backs big pharma, turns back to developing countries
Big pharma is currently fighting to maintain intellectual property protections over COVID-19 vaccines, with Australia refusing to act despite having no pharmaceutical companies. Read more
More articles
OUR PLATFORMS AND BRANDS
- Accountants Daily
- Accounting Times
- Adviser Innovation
- Australian Aviation
- Broker Daily
- Cyber Daily
- Defence Connect
- Fintech Business
- HR Leader
- Independent Financial Adviser
- Investment Centre
- Investor Daily
- Lawyers Weekly
- Money Management
- Nestegg
- Property Buzz
- Real Estate Business
- Smart Property Investment
- SMSF Adviser
- Space Connect
- Super Review
- The Adviser
- Wellness Daily
- World of Aviation
EVENTS AND SUMMITS
- Accountants Daily 30 Under 30 Awards
- Adviser Innovation Summit
- Australian Accounting Awards
- Australian Aviation Awards
- Australian Broking Awards
- Australian Defence Industry Awards
- Australian Law Awards
- Australian Space Awards
- Australian Space Summit
- Better Business Summit & Awards
- Broker Daily Business Awards
- Corporate Counsel Summit & Awards
- Cyber Security Summit & Awards
- Defence Connect Budget Lunch
- Defence Connect DSR Summit
- Fund Manager of the Year Awards
- ifa Excellence Awards
- ifa Future Forum
- Investor Daily ESG Summit
- Lawyers Weekly 30 Under 30 Awards
- Lawyers Weekly Women in Law Forum
- New Broker Academy
- Partner of the Year Awards
- REB Awards
- Reinnovate
- SME Broker Bootcamp
- SMSF Adviser Technical Day
- Super Fund of the Year Awards
- Women in Finance Awards
- Women in Law Awards
- Accountants Daily Podcast Network
- Australian Aviation Podcast Network
- Broker Daily Podcast Network
- Defence Connect Podcast Network
- HR Leader Podcast Network
- REB Podcast Network
- Relative Return
- Space Connect Podcast
- The Adviser Podcast Network
- The ifa Show
- The Lawyers Weekly Show
- The Smart Property Investment Show
PODCASTS
LEARNING AND EDUCATION
MOMENTUM MARKETS NETWORK
LINKS
STAY CONNECTED
Make your nest egg grow. Register now for nestegg updates.