Household Cash Management

Project Start:08/2020
Researchers:Fabian Braun, Andrej Gill, Andreas Hackethal, Florian Hett, Michael Kosfeld, Christine Laudenbach
Category: Household Finance
Funded by:SAFE

The household finance literature has been documenting systematic “mistakes” in individual decision making across a wide array of domains, ranging from pension planning to portfolio allocation and to mortgage financing. The strands of literature typically (i) identify the structure of these mistakes (ii) understand their causes and underlying mechanisms and (iii) design and test solutions to overcome them. In this research group we plan to perform each of these three steps focusing on a specific area of household financial decision making, namely cash management. By cash management we mean how individual households organize and manage the match between their (daily, regular, and irregular) consumption expenditures and the required liquidity to finance it. This is not a novel field as many papers have dealt with credit card usage, for example. However, the recent availability of transaction-based consumption and account data as well as new consumer environments within novel digital services (predominantly but not exclusively by FinTechs) provide researchers with much more granular data and also new opportunities to conduct field experiments – allowing substantial and novel insights into this very topic. Each of the three subprojects that constitute our research group stresses a different step within the overall analysis mentioned above: Diagnostics, Indication, Treatment. In the “Diagnostics” subproject, we investigate households’ cash management in times of severe and systematic shocks. Arguably, times of severe economic shocks should in one way or another translate into changes in consumption patterns. What we are interested in is how the corresponding cash management response to these systematic shocks looks like and to what extent this reaction can be interpreted as “optimal” or rather displays systematic mistakes. In order to do so, we exploit the fact that we have access to detailed consumption transaction data that spans the time around the ongoing Corona crisis, which arguably constitutes a major systematic economic shock with severe implications for individual consumption and cash management decisions. In the “Indication” subproject, we focus on a specific well-known manifestation of inferior household cash management – the systematic reliance on overdraft accounts – and dig deeper in order to carve out the forces responsible for it. Here we rely on a data set displaying a unique combination of detailed account transaction data on the one side and state-of-the-art behavioral measures elicited through online experiments on the other side. This provides a unique opportunity to investigate the underlying causes for a well-known area of financial mistakes and thereby helps to design effective policies in overcoming them. In the third project, which we name “Therapy”, we test a specific treatment that aims to improve household cash management. More specifically, we analyze the effect of an experiential learning treatment provided by a co-operating FinTech. The combination of the detailed consumption data and the randomized roll-out of this comprehensive treatment allow us to investigate the effectiveness of “financial education” in overcoming financial mistakes, in particular within the realm of household cash management. Thereby, we also address the more fundamental question on the actual malleability of bad financial decision-making in this domain.