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Researcher Spotlights: Yiwei Zhang, Consumer Science assistant professor

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Researcher Spotlights are Q&As that shine a light on School of Human Ecology faculty members’ unique scholarship and research interests.

Yiwei Zhang is an assistant professor of Consumer Science. She is an applied microeconomist who studies financial decision making, and her research lies at the intersection of economics and psychology.

Zhang is particularly interested in understanding how consumers, especially those considered low-income or economically vulnerable, make financial decisions, and how those decisions affect well-being and market outcomes. She also explores how households’ financial decisions may be unintentionally influenced by their surroundings.

How did you become interested in this area of study?

I started my career as a behavioral economist. Broadly, that means thinking about the predictable “mistakes” people make and modeling them based on what an economist thinks a rational, fully informed person would do. I really liked that area of research, in part because a lot of the things that were considered behavioral biases are things that I frequently do in my own life. I think of these “biases” as just being human.

It wasn’t until later that I became interested in how these intersected with people’s financial decisions specifically, and I spent some time before my postdoctoral work as an economist for the Consumer Financial Protection Bureau. The bureau had a lot of different responsibilities, but part of it was thinking through how to regulate financial institutions so they can provide services to consumers while also making sure these institutions aren’t taking advantage of consumers. I think it’s while working there that I realized it’s a tricky problem to solve.

Also while I was at the bureau, I noticed that there were a lot of strategies that consumers, particularly low-income consumers, were using to manage their financial lives that I didn’t feel were talked about much. They were very smart and sophisticated strategies, but they were under the radar, because there’s an unfortunate tendency to think of lower-income households as being financially unsophisticated.

What’s your motivation for doing this type of work, and how does it impact human well-being?

A lot of the work that I do is not necessarily prescriptive — I don’t tend to do research where it would be translated into advice for the everyday consumer. Usually, it’s more aimed at helping policymakers better understand a situation so they can design effective policies or interventions, or for practitioners like financial advisors who may be thinking about how to provide resources to help consumers’ financial well-being. What I’m trying to study is how real people behave and make decisions.

For example, I have a recent project that I’ve been working on that might give a good sense of how I think about research questions. We know from existing research that people, when they’re super financially strained, will prioritize bills in a very strategic way. For example, you might know that you can go without paying your phone bill for a week or two before it gets cut off, so you pay your water bill first. People will strategically prioritize, and that’s good. The study I’m working on looks at how this tendency to strategically prioritize bill payments may interact with existing policies that governments have in place to protect consumers. For example, lots of states in the U.S. have laws on the books that make it illegal for electric or heating utilities companies to disconnect service for unpaid bills during certain times of the year. These policies are usually focused on the weather: in the winter, if you don’t pay your gas bill, the gas company can’t turn off your heat just because you haven’t paid, because we would like people to live. They’re just temporary moratoriums — they often kick in around October or November and end around March. Once March comes around, you do have to pay, or your service will be disconnected. But during that winter period, you have a little bit of a break.

The intention of these policies was ensuring people don’t experience severe hardship during weather that threatens safety, like very hot or cold temperatures. To me, as an economist, these policies also sound like getting an interest-free loan from your utility company, because they let you take a break from making your utility payments and instead redirect your very limited resources toward other needs. My suspicion is that financially savvy low-income consumers may use these “interest-free loans” in very strategic ways, like forgoing utility bill payments when the moratoriums are in place in order to avoid having to, for example, take out potentially very expensive loans.

So, if I find that people do behave this way, my takeaway isn’t to advise people not to pay their utility bills — it’s to show policymakers that these protections have potentially unforeseen or unintended effects on people’s behavior.

Where do you see an opportunity to shift a conversation within your field?

When we think about how to best help people who are financially struggling, there’s usually some focus on teaching people how to budget or improving financial literacy. But there are also bigger systemic problems that require a different type of solution.

For example, I have a recent paper that studies how consumers set financial budgets when they’re faced with highly unpredictable incomes. One thing we found in our study is that the tendency to set a budget is strongly associated with better financial outcomes and higher levels of well-being. This might suggest a policy prescription that focuses on financial literacy and encouraging people to budget. But, in this same study, we also find that it’s really unpleasant and challenging for people to set budgets when their incomes are hard to predict. So, the very households who you think might benefit most from budgeting are exactly those for whom doing so is most costly and for whom efforts to encourage budgeting might be least effective. This points toward policy solutions that are focused less on promoting individual-level financial management strategies to deal with very volatile income streams and more on finding more systemic solutions that help insure people against this kind of volatility.

Are there any common misconceptions about your work?

Budgeting is a big part of what I study, and there is a tendency among economists to overlook the details of what goes on in this aspect of people’s financial lives. There’s often an assumption that everybody faces a budget constraint — expenses have to equal income plus borrowing — and then works to set up the rest of their financial lives in the best way possible that also recognizes this constraint. However, there’s not a lot of focus on how people actually do this.

It’s one thing to say “you can’t spend more than you earn” and call that a budget. But when you ask people how they actually think about their budgets, they tend to give you much more nuanced answers to that question. One of the things I’m interested in is thinking about what the implications of some of those nuances might be for people’s day-to-day lives as well as in aggregate.

What do you see as the most critical question currently facing your field?

It’s tough to identify just one! A question I think deserves more attention is how we address energy insecurity, or the inability of people to not just pay their monthly energy bills but also to manage potentially large swings in those bills over the year. People needing to make a “heat-or-eat” tradeoff isn’t a new question, but it’s one that I think will become increasingly relevant in the face of ongoing climate change.

What else should the Human Ecology community know about you?

In my non-research life, I’m always on the hunt for new places to eat or drink in Madison, so if anyone ever wants to join, please come find me!