Solutions

When businesses face challenges over how to manage interactions with consumers, they need practical solutions that address both the issues at hand and the bottom line. Our unique mix of professional and academic experts in the field of behavioral economics produces creative solutions that are grounded in reality. Here we present a small collection of examples of our work in practice. From questions of personal finance, to inspiring more responsible stewardship by consumers, behavioral tools unlock the door to improved performance.

 

Behavioral Marketing


How to Get Kids to Eat Fruit with the Kids’ Meal

two kids eating apples

The Problem: Quick-service restaurants are under tremendous pressure to improve the nutrition in kids’ meals. Parents want to feel good about the food they purchase, knowing kids are getting some of the needed fruit servings. Kids have their own expectations and don’t want to be controlled.

Our Approach: We conducted several experiments with children giving each a quick-service kid’s meal as well as interviews with parents. We found that more than 85% would ditch fruit if they were forced to choose between fruit or a less healthy side like French fries. However, when given smaller portions of the less healthy side together with fruit, children would eat a bit of both on average.

The Solution: By reducing the servings of French fries offered, and adding a small serving of fruit, children consume a more balanced meal. This meal meets their expectations and they do not feel bullied into eating fruit or giving up some of their French fries. Parents feel better about the meal and are more likely to return to the restaurant in the future, thus increasing potential sales.

 

Increasing Sales at the Vending Machine

Vending machine

The Problem: Vending machines located in work and institutional settings were seeing relatively meager sales, primarily in candy-bars. The owner of the vending machine was searching for higher sales. The site managers were worried about the high level of candy-bars and impact on the health of those who frequent the vending machines.

Our Approach: Using the sales data from the vending machines, we found large spikes in demand at times when nearby food vendors were closed. In follow-up interviews with patrons, it appeared that many were using the vending machine as meal replacement when they couldn’t purchase meals elsewhere. This often left peanut filled candy bars as the best option. These same patrons were willing to pay a premium for something that resembled a full meal (heat and serve dishes, or soup).

The Solution: Converting some of the vending machine to higher price and higher margin meals left sales of other options intact. Moreover, now patrons were able to purchase more nutritious and satisfying meals. Sales increased, leaving consumers, vendors and site managers happy.




Behavioral Finance


Is Getting a Reverse Mortgage a Good Idea? A Behavioral Finance Perspective

reverse mortgage

The Issue: Home equity is the largest asset for most U.S. households. As a result, traditional home equity loans and lines of credit can be used to access home equity for consumption during retirement. However, these traditional financial products require future monthly payments, sufficient income, and adequate credit scores. Thus, these types of financial products may not be accessible to older, retired individuals who cannot satisfy these criteria. A reverse mortgage is a type of financial product that was developed to facilitate retirement consumption from home equity without requiring households to sell their homes. Reverse mortgages also can insure borrowers against significant drops in housing prices.  

The Behavioral Considerations: There are significant costs and risks associated with a reverse mortgage. However, beyond the financial costs and risks, there are additional behavioral issues that need to be considered. As a general rule, borrowers should be cautious of the lump sum option unless the borrower requires a substantial amount of cash all at one time or the cash from the lump sum will be reinvested to gain a higher rate of return than the interest rate on the loan. Otherwise, borrowers risk being subject to behavioral biases that could negatively affect their financial situation. For example, prediction bias (the tendency for individuals to make forecasts that are either too low or too high) could lead individuals to underestimate their needs in the future. Hyperbolic discounting could cause retirees to consume too much too soon out of a lump sum payment and be left with not enough money later in retirement.

The Solution: The line of credit reverse mortgage option is usually the lowest cost and the most equity protecting option. This option ameliorates potential predication bias and hyperbolic discounting effects by limiting the amount of money borrowers can take at a single time. Since, the interest on the loan only accrues as the money is withdrawn, it generally incurs the least total interest expense. When used wisely, this option also is the way to extract the least amount of equity out of the home which increases the probability of being able to leave a significant equity stake to any heirs. Low-income, low-wealth, and poor-health households usually can gain the most from reverse mortgage products. However, all retirees should evaluate the costs, funds received, and risks to determine if obtaining a reverse mortgage is optimal for their specific situation.

Helping Companies Compose Better Annual Reports

annual report

The Problem: Annual reports are one of the primary channels through which firms communicate with shareholders. Annual reports contain accounting numbers summarizing the company’s past performance. They also contain a substantial amount of text. There has been much discussion and work on how to make accounting numbers more informative. But what about the structure of the text? Does it matter? If so, in what way?

Our Approach: We conjecture that the “readability” of the text matters to investors. Using a copy-editing software application that counts the pervasiveness of the most important ‘writing faults’ that make a document harder to read, our analysis provides evidence that issuing financial disclosure documents with low readability causes a firm to trade at a significant discount relative to the value of its fundamentals.

The Solution: Accounting numbers are important. However, our analysis suggests that investors also care about the text and whether it is easy to process. Our estimates suggest that by increasing readability by one standard deviation, firms enhance their appeal to investors and potentially increase their firm value by a full 2.5%.




Sustainability and Behavior


Reducing Waste Costs at the Stadium

ballpark garbage

The Problem: Attendees at the ballpark produce large quantities of garbage (wrappers, bottles, etc.) which typically end up in the landfill. Patrons tend to drop their garbage in place where they are sitting. Workers later collect the garbage, bagging it all together. Separating garbage is time intensive and expensive—more expensive than tipping fees for hauling the garbage to the landfill. If we could encourage patrons to separate the recyclables or compostables on their own, the ballpark could save significant money both in collection and tipping fees.

Our Approach: One natural approach might be just to provide receptacles and post signs instructing patrons to use them. Unfortunately, our trials inform us that patrons push back on having to take any garbage to the receptacles when they are so used to just leaving their garbage. They feel as if the ballpark management is playing nanny, which can actually lead patrons to increase the amount of waste they leave. Patrons need to feel that placing the garbage in the proper receptacle was their own choice, and one that they feel positive about.

The Solution: Providing small ways to gamify the placing of trash in the proper receptacles, together with using positive and exciting signage can help to reduce costs.  Signage encouraged patrons to place garbage in the proper receptacle using depictions of team characters. The signage focused on a game in which someone placing their garbage in the receptacle would be chosen at random to receive a small prize (ranging from a free hotdog to a free ball cap). Children were especially eager to deliver garbage to proper receptacle. All felt they were doing it for the chance at something they wanted rather than because the ballpark had pushed them into it.

 

 



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