Yale School of Management

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The Power of Peer Pressure

By Anne Kates Smith, Senior Editor
From Kiplinger's Personal Finance, October 2016

Is peer pressure a bad thing? Most parents of middle schoolers would surely say yes. But comparing yourself with others may provide a helpful nudge when it comes to some areas of your adult life, such as saving for retirement or staying healthy. And yet, like those fraught relationships in middle school, it's complicated.

Behavioral economists have long relied on peer pressure to achieve public policy goals or to promote good health or financial security. For example, software firm Opower, a unit of Oracle Corp., works with utilities to provide 18 million homes with energy-usage reports that include comparisons with neighbors’ usage. You might see that you used more electricity over the past month than similar homes in your area, as well as how much more that cost you. Since the program began in 2009, customers competing with the Joneses have trimmed energy usage by more than 11 terawatts, representing $1.1 billion in savings, according to Opower.

Empower Retirement, a retirement-plan administrator serving 8 million participants, takes advantage of its rich customer database to spur saving. “We have your age, gender, salary, savings rate and how much you’ve saved,” says Empower president Ed Murphy. Savers can see how they stack up against others most like themselves, as well as against super savers in the top 10% of their peer group. Whether you call it peer pressure or inspiration, such comparisons boosted savings rates by 25%, Empower found.

Robert Cialdini, psychology professor emeritus at Arizona State University and author of Influence: Science and Practice, doesn’t like the term pressure. Says Cialdini, who conducted the original Opower research, “You’re not pressuring anyone. Just telling people honestly what their peers are doing is enough to change behavior.”

Pressure that backfires. Except sometimes, it isn’t enough. Yale finance professor James Choi was surprised by his findings last year that 401(k) participants who were saving too little put aside even less after being clued in to what their coworkers were saving. “These people got discouraged and demoralized to see how far behind their peers they were. They just disengaged,” Choi says. His conclusion: “Peer comparison is at best not very effective and, at worst, could backfire.” It might be better to focus on other strategies to increase savings, such as automatically enrolling people in 401(k) plans and increasing their contribution rates, Choi says.

But advocates of such comparisons say the key is choosing the right peers in the first place. In some cases, that means avoiding the top dogs. New research from the Perelman School of Medicine at the University of Pennsylvania found that by challenging workers to a 7,000-step-per-day competition, employers who wanted to promote healthy lifestyles had the most success when teams were given the chance to win some money (duh) and were compared with peers who were in the 50th percentile of steppers—in other words, just average. Teams that got the financial incentive but were compared with colleagues who had stepped their way into the 75th percentile did not do as well.

People are especially likely to turn to peers when things are unfamiliar or when they’re uncertain about what they should do in a particular situation, says Cialdini. “You don’t look inside yourself when you’re uncertain—all you see is ambiguity. You look outside, to experts or peers.”

Backing up peer comparisons with actionable advice is key. It doesn’t do much good to know you’re using more energy than your neighbors unless you also get advice on energy-efficient appliances, say, or how to better insulate your home. Similarly, budgeting tips, cash-flow management tools and debt-repayment strategies can help put retirement savings on a faster track.

Adolescence has proved time and again that peer pressure is powerful. The challenge is to harness it effectively.

Read original Article

The Effect of Providing Peer Information on Retirement Savings Decisions, John L. Beshears, James J. Choi, David Laibson, Brigitte C. Madrian, Katherine L. Milkman