Saving With Shoeboxes: An Open Letter To My Bank

by on Jul.23, 2009, under rfc

Suppose you go to the movies. You buy a gallon bag of popcorn for $5. Your twin also pays $5, but she receives her popcorn in four sealed quart bags. You are both equally hungry, have equivalent stomachs, and have the same love for salty treats during showings of Up. Will you both eat the same amount of popcorn?

Probably not. At least, that’s the answer suggested by the behavioral economist Dilip Soman. I subscribe to the podcast Arming the Donkeys by Dan Ariely. On last week’s show, Dan interviewed Dilip about “The Effect of Bracketing on Spending“, cowritten with Amar Cheema.

The basic finding of Soman and Cheema is this: portions affect consumption. Nothing new to dietitians, perhaps, but definitely new to economists. Soman explains that, ceteris paribus, your twin will eat less than you, because putting the same amount of popcorn into different bags creates “brackets” that contextualize consumption. There’s nothing to stop you from eating all of the giant tub of popcorn, but the tiny barrier of opening the bag makes you think about how much you are eating and gives you the chance to reevaluate your total consumption.

Soman and Cheema found the same effect held true with gambling. Roughly speaking, give a gambler an envelope with $X, or give them 10 envelopes each containing a tenth of $X, and they will gamble differently. According to Cheema, partitioning this way can reduce spending by 50%.

Now, what on earth does this have to do with my bank?

During my final year of college I lived off-campus with a group of friends. Because I was the most responsible of all my housemates (which really says more about them than about me) I was charged with handling the house funds. I opened up a new checking account with a separate debit card. Every month, each housemate would give me a $500 check. I’d deposit the checks into this new checking account to keep it separate from my personal checking account.

Here is why this matters: I was unconsciously subjecting myself to the bracketing effect by keeping house money in a separate account.

Let’s say I had $2500 in the house account and $2500 in my personal account. My statement would show that I had $5000 to my name. But, subjectively, I didn’t have $5000. Because half of that was kept in this separate shoebox labeled “house money”, I spent as if I only had $2500. The bracketing of my assets into two distinct categories – “house” and “personal” – made it easier for me to earmark my total assets and see where my money went before I spent it.

This is critically different from existing money management tools like Mint or Bank of America’s My Portfolio Service. Both use Yodlee, which lets you track your money, see where it is going, see what you are spending it on, etc. It is a great way to enhance the salience of your spending and realize that the $2 a day you spend on coffee in the morning adds up to an HDTV over the course of the year.

However, as far as I’ve seen them implemented, these tools only offer ex post facto analyses of your spending behavior, not ex ante bracketing of your assets. In other words, they help you understand where the money has gone after you’ve spent it, but they don’t help you see where your money will go before you spend it. In this sense, “money management” in a misnomer: Yodlee-based services are money trackers. They’re like the detective that helps you figure out where your jewelry went, not the alarm system that prevents the burglar from running off with it in the first place. This is useful but – and maybe I’m weird – I prefer prevention!

What I’d like to see from my bank is online banking software that provided true money management which leverages the bracketing effect without having to create a new account. Right now, when I log into my online banking, I see my checking account, with a (depressingly small) dollar amount next to it. When I click on that account, I currently see all my recent expenditures. What I should be able to do is  see, create, and manipulate ad-hoc envelopes or categories.

Suppose I have $5,000 in my checking account. That is a nice chunk of change, I say to myself – I can clearly go out and buy an iPod touch (with Flight Control of course)! I think this because I only see a $5,000 tub, and though I know I have to pay rent, save money for the holidays, and put away a little bit for that vacation I want to take next summer, I think that I can certainly spare myself a measly $200.

But suppose that when I clicked on that checking account I could see the constitutive categories I had created for myself. I would see that the $5000 I thought I had is mostly spoken for. I have assigned $1000 to rent; $200 for utilities; $500 for holiday gifts; $800 for LASIK; $250 each for food and car insurance; and $1000 more for that vacation. Suddenly, my $5000 has become $2000! Suddenly the iPod Touch doesn’t seem like such a good idea. I am perhaps more sad, but I am also less likely to overdraw or (worse) be forced to load up on my credit card come December.

Note that these are not new accounts, with the attendant legal, procedural, or administrative headaches opening a new account entails. Rather, these are bottom-up user-created taxonomies that exist within an existing account.

This is a perfect example of how behavioral economics can help everyone overcome those pesky and irrational cognitive biases. It would be easy to implement and  empower people to save or spend smarter. It could completely revolutionize the way people understand and interact with their assets.

Banks, credit unions, lend me your ears! Empower us with the bracketing effect. You may lose out on some overdraft fees, but you will gain a lot, including, if nothing else, my eternal gratitude. I’ll even buy you popcorn – in quart bags, of course.

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16 comments for this entry:
  1. A list of little nudges « Nudge blog

    […] Chris Peterson wants an online bank account that takes the many “mental accounts” he has in his head […]

  2. chris

    Gilad – do you mean because they offer the same thing?

  3. Nudge - Chris Peterson

    […] don’t normally post about pingbacks, but I got a shoutout from the Nudge blog today about my “Saving with Shoeboxes” post describing design improvements that might improve money management in online […]

  4. Donnie

    Gilad means that you can create separate Savings accounts with ING Direct. I have mine labeled Emergency Fund, Computer Fund, and Donnie Fund. You can have only one checking account, labeled whatever you want.

  5. chris

    Donnie – do you have to jump through any extra hoops with ING for that? For instance, I can create several accounts with Bank of America, but I actually have to go in to open up a new account, as opposed to being just able to create/delete “shoeboxes” on the fly, which is what I’d really like to do.

    I envision it working almost like a folder system on a harddrive. An account, in this case, is analogous to a physical drive: you go through a lot of effort to ‘install’ one, get it running, etc, and when you move data there, it is THERE, and not elsewhere.

    On the other hand, within a single harddrive, I can create as many ad hoc folders as I want within which I allocate my files.

    Can ING do that? Or any other bank that you know of? I hope BoA picks up on the idea – I can’t imagine it is difficult to implement – but that might be a gamechanger for me!

  6. Kelley

    This is something I have been doing through my MS Money account since I first got a checking account when I was 16. Each month a budget for gas, groceries, car insurance, savings, student loans, etc is set aside, so I know what is expendable (just as you’re describing here). The ending balance is what I really have to spend. I only access my online bank account to balance the computerized checkbook a couple of times a week. Point is, “shoebox saving” could be accomplished without the bank doing anything, or even without financial software. An Excel spreadsheet could accomplish this end as well.

  7. Remy Green

    Petey, this is good stuff! Good post!

  8. aaron

    re: ING savings

    You can create new ‘shoeboxes’ very nearly on the fly ( had a really good tutorial on this, but I can’t find it now, maybe he put it in his book & took it off his site…). The initial setup took me about a week (they pinged the checking account to make sure I had proper access to it & that verification took a while). Now any time I want to set up a new shoebox, all I have to do is click ‘open new account’, select ‘orange savings’, give it a name, tell it where to draw money from (each of my shoeboxes draws money from my checking after each of my pay-days).

    I don’t know about deleting one, because I haven’t done that yet.

  9. Kevin

    Have you considered something like Lets you set up envelopes to assign money to for a single account. So you don’t have a bunch of accounts out there to manage, you just have one with money assigned to various functions.


  10. chris

    Kevin –

    I’ve never heard of mvelopes but yes this seems to be exactly what I am talking about. I’m going to do some research on them to see if they are on the up and up but that could be a gamechanger for me. Thanks!

  11. Envelopes Exist - Chris Peterson

    […] 2009, under general When I advocated some money management tools levering the bracketing effect in “Saving With Shoeboxes”, I thought I was taking some obscure academic research and applying it in a novel, original […]

  12. Bill Clerico

    love the post. part of what we’re doing at wepay is making it easy for people to set up as many accounts as they’d like. and then, if you want to share some of those accounts with other people (say you’re saving up for something) – you can do that.

    we’re still in private beta, but contact invites at wepay dot com and we’d be glad to hook you up!


  13. In Search of Shoeboxes: Goodbye BoA, Hello ING! - Chris Peterson

    […] chris on Mar.03, 2010, under general Readers of this blog will recall Saving With Shoeboxes: An Open Letter To My Bank, in which I reviewed some research from behavioral economics and suggested that banks might […]

  14. More Shoeboxes Stuff - Chris Peterson

    […] I already do this with my dozen savings accounts from ING Direct – “Car”, “Rent”, “Groceries”, “Vacation”, etc – but it’s nice to have some more empirical validation for what I’m pushing. […]

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