Behavioral Invention: A Practitioner’s Perspective

For many years I worked as a partner at one of the world’s largest strategy consulting firms. As I specialized in consumer finance, I got to work with many of the biggest financial institutions in the world. Some of the work was mundane, but a lot of it touched on innovation. When clients asked me how they could get better at designing innovative products, I would prescribe good market research, solid modeling of operations, and financials with a healthy dose of creativity. The final ingredient was the wherewithal to constantly be testing new ideas. As I had always been interested in social impact, I also did quite a bit of work in the microfinance space. Questions about innovation came up there too, though were more focused on channel innovation. Here too, I followed the same recipe. It is only recently that I’ve realized that my formula was missing something big.

Let’s use micro-savings, where I did a lot of work, as an example. All the research and field experience suggested that savings accounts needed to be easily accessible, flexible, and cheap to ensure adoption. This is practically conventional wisdom now. When I began to read some behavioral economics, I learned about the importance of commitment devices for savings – features (e.g. an early withdrawal fee) that make it painful or difficult to go back on a prior commitment. This is probably quite a familiar concept by now. Putting this together with the idea of making savings accessible, flexible and cheap, led me to a rather troubling insight. All of the informal savings instruments we see have some sort of commitment device built in, e.g. someone comes around every day to collect deposits, a ROSCA only lets you get your money back when it’s your turn. On the other hand, we are trying to supplant these informal mechanisms with formal accounts that are totally flexible and accessible. In other words, we’re taking away the commitment devices. If we succeed, isn’t it possible that the poor may save less than before?

This example was one of a few that made me realize we were missing something. In this case, we didn’t account for a particular psychology related to saving. Is this an isolated oversight? Surely, a creative designer with a good instinct for people might see this. In fact, maybe somebody already has. However, can’t we do better than relying on a few individuals’ creativity? Can we come up with a more repeatable process for product design that incorporates a deeper understanding of consumer behavior? Perhaps behavioral economics can help.

Behavioral scientists, and now behavioral economists, have been producing a vast array of insights, like the demand for commitment devices, for several decades. Yet, few people, particularly in financial services, are applying these to product design. Why is this gap between science and practice so difficult to bridge? A scenario from a different domain may help answer the question. Let’s say we want to build a commercially viable solar-powered car. We have on our team a physicist, a machinist and a designer. The physicist knows how solar cells function, how torque works and the various other laws of physics that are relevant. The designer can make the car comfortable to drive, beautiful, and something that consumers would want desperately. The machinist can build the car perfectly given a blueprint. Do you think these three could be successful? Possibly. However, if we also had someone who specialized in cleverly translating the scientific principles from physics into a working machine that looks and feels like the designer imagined, we would fare much better. In other words, we need a mechanical engineer who is good at designing and building new machines. The person we need is the quintessential “inventor” as portrayed by novels and films. Notice that we tend to associate these quintessential inventors with creative breakthroughs, but we forget that those breakthroughs come from a foundation of deep scientific knowledge. Sadly, we don’t have many such inventors working on financial inclusion.

How do we build a capability for invention so that every product we launch can be great? Based on my experience over the last couple of years trying to be an inventor, I think three components are essential. First, we need to develop an invention process. That can be done by impact-minded behavioral researchers working closely with creative practitioners. Interestingly, such a discipline, called financial engineering, already exists in capital markets. We don’t have behaviorally informed financial engineering for consumer finance, and especially not for financial inclusion.

Second, we need labs to invent in. Financial institutions must build the capacity to invent, which is very different from traditional new product development or marketing. They must be willing to be novel, i.e., not resort to the safety of replication. They must have the patience to tinker with new products for a while until they are perfected. And, they must pay close attention to detail in execution. Many good designs fail in the field because some small detail in the sign-up process or some script was executed poorly.

Finally, we need to fund all this activity with risk-tolerant capital. Financial institutions ought to be the source, but they’re unlikely to step forward. Traditional financial products work okay and generate sufficient profits, so they don’t have a compelling reason to invest in risky invention. Others will have to step in. The risk is necessary if we want to design products that are not only profitable, but also achieve our goals of responsible financial inclusion among the poor.

A recent Financial Times article entitled, “Innovators don’t ignore customers” argued that the rapidly dropping share price of Netflix, a DVD rental and online film service could be explained by the fact that the company lost touch with what its customers wanted. Keeping a sharp eye on client demand is thus not only the responsible or developmental thing to do–it simply makes good business sense.