Economist Urges CUs to Look at Data Differently
SAN ANTONIO — Steven Levitt, an academic economist with the University of Chicago and co-author of the bestselling books Freakonomics and Super Freakonomics believes credit unions would benefit if more of them looked at data, particularly information related to incentives, in unusual and novel ways.
The award-winning economist told credit union executives attending PSCU's 2011 Senior Leadership Workshop & Member Forum that economists really have little to offer in the way of understanding of macroeconomics but understand both the impact of incentives and the importance of data very well.
He used as an example a story of an IRS employee in the mid-1980s who noticed that there were occasionally tax returns where parents listed their children with names like “Fluffy.” At the time, the agency did not require Social Security numbers for dependent children on tax returns, and the employee told the agency that it might find requiring such numbers a useful way of ending one method of tax cheating.
It turns out the employee had been correct and when the IRS took the trouble to change the tax forms, millions of children seemed to have disappeared from the country overnight. And the government realized an additional $3 billion in tax revenue.
“The problem is that too often we don't consider the impact of incentives or how incentives which might not be obvious are having an impact on our lives and businesses,” he said. “Carefully studying data, such as the names of children on tax forms, and looking at it in a new way such as asking why a parent would name a child Fluffy can lead to significant improvement in business processes.”
Levitt was largely self-deprecating in his remarks. After noting that surveyed economists had judged a commanding control of mathematics to be an essential part of their profession, Levitt revealed that he had never done particularly well in mathematics. Instead he likened his position to that of his father, a medical researcher, who had made a name for himself studying the causes, impacts and role of intestinal gas in humans. He does something similar in economics, he said, studying parts of the economy that people frequently don't think about or disdain if they do–particularly the role incentives play in driving economic and other social behaviors.
Credit unions in particular want to look at incentives they might use, Levitt suggested, because they are often involved in selling their members on an idea that goes along with a financial product and service. It's not enough to merely offer a CU member a very strong credit card product–any number of banks might offer one of those and maybe better. The key is to offer that credit card as part of a larger idea from the CU. For example, the notion that the CU can be trusted in some way that many banks cannot or that by using the card they are strengthening a financial institution with headquarters in their own community. “Credit unions are fortunate in that they already have a reputation among many consumers for just these sorts of values,” he said.
Levitt also touched upon the challenge in providing incentives to credit union employees, stating almost immediately that research indicated that financial incentives were not the most effective since employees tended to acclimate themselves to them more quickly. He contrasted this with the sort of employee incentive that he had seen when employees of an organization or company truly believed in its mission. As an example he recalled some work he had done with Google on a project to use data drawn from Google searches to possibly predict and locate the source of disease epidemics before public health authorities could do so.
The project ultimately failed because Google employees thought that it would ultimately violate Google's commitment to keep users’ data private, Levitt reported, but it illustrated something very powerful about Google's relationship to its employees.
“Whether or not you agreed that the Google concerns were material, and I tended not to, you had to at least agree that here were employees who cared passionately about what they believed Google to be about,” Levitt said.
That sort of incentive far outweighed financial incentives because they are to a great extent self-perpetuating, he said.