Nobel Prize validates theory on customer motivations

Dr. Dan Geller

The Nobel Prize in Economics awarded Oct. 8 to professor Richard H. Thaler for his behavioral economics work on irrational financial decisions confirms the Money Anxiety Theory and its application in banking.

Research in behavioral economics shows that money anxiety is a major factor impacting financial decision-making. The 2013 book, “Money Anxiety,” which I wrote, demonstrates how money anxiety shapes our financial decision making. For example, when money anxiety is elevated during recessions, people tend to shift money from higher yielding bank accounts to much lower yielding bank accounts just to feel that their money is more readily available. This is a phenomenon known as “mattress money.”

This research has far reaching implications on the banking industry. The study, “Dynamics of Yield Gravity” which I co-authored with professor Nahum Biger, shows that banks are at risk of not having enough term liquidity (certificates of deposits) during the next financial crisis that would be needed to comply with the latest liquidity requirements of the FDIC. That’s because interest rates of deposits lack the ability to attract term deposits during times of high money anxiety. The study was presented at the International Conference on Business and Economics in April and at the 2017 Australian Conference of Economists in July.

The study shows that during the Great Recession and its aftermath, 2008-2012, people gave up five times higher interest rates just for the feeling that their money is readily available to them. The average rate of certificate of deposits was nearly five times that of liquid accounts (checking, savings and money market). Yet the amount of bank deposits in CDs decreased by 22 percent, while balances of liquid accounts increased by 78.9 percent.

A major finding in the study was that high money anxiety is the cause of this phenomenon. From 2008 through 2012, the Money Anxiety Index, which measures the level of financial stress and anxiety, increased from 58.8 to 100.82 index points. This finding is supported by the American Psychological Association survey on stress in America, which found that the level of financial stress and anxiety increased during the same time period.

The implications of the study are that banks are likely to underperform on the Net Stable Funding Ratio (NSFR) requirement of sufficient one-year liquidity during the next recession, as well as experience lower net interest margin due to higher levels of interest expense on liquid accounts. Here are the main issues and proposed solutions:

Implications on interest expense

Problem: Financial institutions tend to misprice deposits because they do not incorporate behavioral economics factors when forecasting and pricing their deposits.

Solution: Deposit pricing models should include behavioral economics factors to ensure that interest rates are optimal for the economic environment. Otherwise, unnecessary interest expense can put the financial institutions at risk of low net interest margins.

Implications on term liquidity

Problem: Diminishing yield gravity during economic slowdown will prevent financial institutions from complying with Basal III’s Net Stable Funding Ratio (NSFR) requirement of one-year liquidity.

Solution: Financial institutions can’t rely on yield alone to attract term liquidity during economic slowdown (high money anxiety). Product features and other non-yield incentives should be used instead.

The Money Anxiety Index currently is 51.6 percent, declining by 1.7 points in the third quarter of this year, reflecting stronger confidence in the economy. Solid consumer spending and investments pushed second quarter GDP to 3.1 percent annualized. The Money Anxiety Index measures various economic indicators and factors associated with consumers’ level of financial worry and stress. The Money Anxiety Index functions as an early-warning system to shifts in the economy, allowing financial advisors time to react to changes in the economic cycle. Follow the index at

Dan Geller is a behavioral economist. Through his research firm, Analyticom, he provides scientific forecasting and pricing tools designed to improve financial performance. He can be reached at [email protected]