How labeling cash transfers increased the likelihood of spending it on intended goods by 38%

Framing effects: the idea that our decisions are shaped by how options are presented to us. 

Mental Accounting: attributing value to money (or other goods) differently based on the mental category we assign it to. 

Labeling effect: when a person’s spending decisions are influenced by the label attached to money received. 

Winter Fuel Payment (WFP): an unconditional state pensioner benefit paid annually to cover additional winter heating costs to people over the age of 60 in the UK.

Asking pensioners to return unnecessary benefits 

Government benefits play a significant role in inclusive growth and sustainable development of a country. The WFP is a social benefit that has been criticized for its unconditional nature - meaning it’s sent to all residents over 60.^1,2 It's estimated that 80% of pensioners don’t need the benefit, yet £2.1bn was spent on the WFP in 2014/2015. To resolve this issue, pensioners who don’t need the allowance are encouraged to return it. However, only 400 out of 12 million recipients did so in 2015.³ One reason for why the money isn’t returned may be because it's spent on other goods. 

Ensuring benefits are spent on intended goods

As the COVID-19 pandemic continues to adversely impact economies, it has become even more important for governments to ensure funds are used efficiently. As unconditional cash transfers give the recipients autonomy on how to spend the money, legal means can not be used to control their spending decisions. This makes it more challenging to ensure that government benefits through unconditional cash transfers are used for their intended purpose. 

Acquiring fuel expenditure data

To get a comprehensive measure of household expenditure in the UK, the study used The Living Costs and Food Survey data from 1988-1996, and from 2000-2008. The survey consists of an expenditure diary in which every purchase is recorded over a two week period, and a questionnaire that records infrequently bought items. Information on fuel expenditure was derived from both the questionnaire and diary. The sample of households included was carefully selected to control for any confounding factors. 

Finding the labeling effect

It’s possible that an increase in fuel spending is observed due to an increase in income after receiving the WFP, and not a labeling effect. To test for the labeling effect, the researchers looked at the proportion of income that was spent on fuel. Generally, as our income increases we spend a smaller proportion of our total income on necessary goods (eg. food and utilities).The researchers also controlled for several other factors such as location, household size, education, and year.

The EAST framework

This study utilized the EAST framework, which outlines four ideals for policy makers to use when applying behavioral science. The framework suggests that a policy should be Easy, Attractive, Social, and Timely (EAST). Labeling is an easy change for the policy makers to implement and it makes the spending decision easier for the receiver. Adding a label to the transfer makes the purpose of the transfer more salient, which makes it more attractive for the receiver to spend money on its intended purpose. The label also brings in a social aspect to the transfer as it now gives a suggestion for the spending norm. If a money transfer is framed as “winter fuel”, the receiver is nudged into thinking this is what other receivers are probably spending the money on. Finally, the policy is timely since the payment is transferred during the winter months.

Labeling the WFP ensures that it’s spent on household fuel costs

After adding a label to the WFP, there was a significant increase in the proportion of money spent on household fuel, and an insignificant increase in spending on other goods.This indicates that the WFP was indeed spent on fuel instead of other necessary goods. More specifically, they found that the likelihood of a household spending the WFP on household fuel when the transfer was labeled was 41%, and with a neutral label it was 3%. This increase in the likelihood of spending the WFP on household fuel is attributed to the labeling effect.

Labels make unconditional money transfers more effective

The results of this research suggest that a simple label on unconditional cash transfers can influence how the money is spent. Labels can be used to incentivise spending on certain goods and services, while intentionally not having a label might be better suited for cash transfers intended to redistribute resources. 

• The results of this study provide useful information for the effective implementation of government benefits which can in turn benefit society as a whole.
• The study uses results from surveys that are sent across the UK. As such, the participants are anonymous and inclusive. 
• The researchers conducted a very thorough statistical analysis to ensure the validity of their findings. 

Why do we think less about some purchases than others?

Rationally the value of a $100 will be the same no matter how it’s earned, where it’s spent, or what it’s spent on. But humans don’t always see it this way. This article explains how the mental accounts we create shape the way we spend money by assigning subjective value to it.

TDL Study: Improving Financial Decision-Making

We make decisions on how to spend our money on a daily basis. These decisions can at times be stressful, which makes it even harder to make sound financial decisions. This study uncovers tips on how to minimize the negative impact stress has on our financial decisions.