IN GREEK MYTHOLOGY, Sirens were creatures whose irresistible music lured sailors to shipwreck on nearby rocks and drown. Ulysses, returning home from the Trojan wars, wanted to hear the music, but took the precaution of having the ears of his crew filled with beeswax to block out the sound. He then had his men tie him to the mast and ignore his pleas to be released until they had passed the island of the Sirens.
The plan worked. Ulysses heard the music and survived because he committed to a rational course of action at a neutral time (before he could hear the Sirens’ songs) and ensured that he stuck with his decision. In behavioral finance terms, his action was an example of a pre-commitment strategy that helped him avoid poor decisions.
Such behavior is known as a “Ulysses strategy” and has even been suggested as the basis of a new type of contract between clients and financial advisors (Behavioral Finance in Action, 2011).
In one of his projects, Karlan designed a savings product (SEED – Save, Earn, Enjoy Deposits) with a Philippine bank for people who wanted to restrict access to their savings, because they knew they could be tempted to access them before they reached their goal. “Traditional economics assumes people to be perfectly time-consistent,” explains Karlan. “That is, the tradeoffs I make today and tomorrow are estimated the same way that I plan to make all my future tradeoffs. But there are things you say you’re going to do in the future that, when the time comes, you don’t do. All that has changed between ‘now’ and ‘then’ is that the ‘then’ is the ‘now’ and you get tempted. We think we can resist temptation, but when it becomes ‘now’ we often can’t.”
From a traditional economic point of view, SEED made little sense. It offered no benefit over a normal savings account and actually involved a liquidity penalty. Account holders could only gain access when they achieved a self-set target. Yet, the product proved surprisingly popular with individuals who knew they had time-behavior issues. After 12 months, the average bank account savings of a SEED account holder increased 82%. Positive though the results were, as often with research, they opened up many more questions. Not the least of these is can such a device change long-term behavior? And so Karlan finds himself pondering the answer to this and other behavioral finance questions while his driver assists Ugandan police with their inquiries.
“If there is one thing I’ve learned, it is that we need to understand the needs of individuals better to develop better products” he muses. “Sometimes we are selling savings when credit would be better; sometimes we sell credits when we should be promoting savings. We tend to get caught up in the false promise of the product, without thinking about what is really helpful for people.”
The roadside transaction complete, America’s economic action man heads off and, as the telephone waves weaken and die, falls into silence.