By JEN WIECZNER
Lose weight. Run a marathon. (Okay, a half-marathon.) And -- oh, yeah -- sock away a little more in the 401(k) plan. Improving one's financial habits may not top everybody's list of New Year's resolutions, but recent studies suggest that some tactics people use to follow through on their intentions -- especially relying on different types of peer pressure -- can also help them with their money habits. The only problem: They can also backfire.
Whether practiced in group-support settings like Alcoholics Anonymous or in a more public forum (thanks, reality TV), peer pressure has long proved effective in getting people to modify their behavior. Now researchers are applying it more often to money issues, and not just in the U.S. In a 2010 study by American and Chilean researchers, a group of entrepreneurs began meeting regularly to set weekly savings targets, discuss their goals and confess their missteps. Over the course of a year, the group averaged a monthly savings of 11 percent of their income -- putting away twice as much money as a control group that didn't have the meetings. "It's the concept of keeping up with the Joneses turned on its head," says Frank Murtha, a psychologist and founder of the behavioral-finance consultancy MarketPsych.
Peer pressure on a larger scale is trickier, of course, but experts say applying what could be called The Biggest Loser effect may help. That's when a combination of support and shame, and the desire to conform to social norms, persuades people to publicly set a goal and then achieve it. Applying similar principles, the British government recently altered some letters to delinquent taxpayers to include a message urging them to join the 94 percent of their fellow citizens who had paid their taxes. As a result, 70 percent more people either paid or renegotiated payment on their bill, yielding $400 million in recoupments.
But in the world of money, peer pressure can have an equally powerful negative impact -- just ask anyone who's spent too much on a fancy meal with friends or invested in the dot-com bubble. Even when pressure is applied in the right direction, there is often a boomerang effect, as people do the exact opposite of what is encouraged. When unionized employees in one study were told that most of their colleagues were contributing to a company 401(k) plan, they actually saved less than workers who didn't get the same information. "These peer effects can backfire," says Brigitte Madrian, an economist and Harvard professor who worked on the study. The effectiveness of pressure may also depend on whether the goals are realistically within reach, Madrian adds; while people can always afford to stop smoking, they aren't always flush enough to put away a chunk for retirement. Says Ron Shevlin, a senior analyst at research firm Aite Group, "The jury is still out on whether or not this truly works."
But some analysts and companies think using pressure effectively is just a matter of tinkering with the formula and that if you know what other people are doing, you'll adjust accordingly. ING's CompareMe tool, which has had more than a million visitors since it launched in 2009, allows people to plug in factors like age, income and hobbies and see how they stack up in terms of retirement savings, credit card debt and student loans. When ING provided similar comparison data to a survey group of 28,000 people in several companies' retirement plans, 16 percent of users increased their contribution rate. Bundle.com, a personal finance website backed by Citigroup, uses anonymized data from Citi's credit card transactions to show people similar benchmarks for expenditures. "If I find a good bunch of people who are spending a whole lot less than I am on groceries maybe I'm making a mistake," says the site's founder, Jaidev Shergill.
Technology may make these kinds of tactics more prevalent in the future, experts say, as apps allow people to compare themselves with their peers on the go and nudge them to think twice about a big-ticket purchase. Says Murtha, "Maybe we can get Matt Damon to record a PSA."