How Saving is Influenced by Behavioral Biases

This note analyzes trends in the savings attitude of low-income people through a behavioral economics lens. It discusses various behavioral factors that affect savings behavior including status quo bias, hassle factor, hyperbolic discounting, present bias, mental accounting, and planning fallacy. The note provides an explanation on preferences for informal savings, procrastination towards savings commitment, discontinuance of committed savings, and preference for fixed-return schemes among low-income people. It states that although many research studies have demonstrated that low-income people have active and vibrant savings practices, providers across the globe continue to struggle to make formal savings products attractive to them. The note also provides alternative strategies and recommendations that can enhance commitment and usage of formal savings schemes. Key recommendations include:

• Design products aligned to the mental money management model of the clientele;
• Help low-income people commit to and start using formal savings mechanisms as tools in their daily life;
• Enable low-income people to continue savings at regular intervals;
• Assure clients about security of and return from formal savings.