Behavioral economics lect 7: nudge part 2 (Automatic enrollment (Solution:…
Behavioral economics lect 7: nudge part 2
What makes saving for retirement difficult?
Households save less than what the standard economic model predicts, because:
Saving requires self-control
Determining the appropriate savings rate is difficult
: Automatic enrollment to counteract procrastination and the status quo bias.
people choose the low default savings rate, while they might have chosen a higher savings rate if there were a higher default or no default.
Alternative: Save More Tomorrow plan
Behavioral phenomena related to saving
Loss aversion → we weigh a loss more heavily than an equal reduction of a gain.
increasing current savings involves a loss relative to our reference point of current consumption
increasing savings at a salary increase involves a reduction in a gain relative to our reference point of current consumption
Procrastination & status quo bias
→ we stick to the status quo and procrastinate on decisions to deviate from the status quo
→ we think that in the future it will be more attractive to start saving than it is right now
Save more tomorrow
Savings increased at the next salary increases
→ makes the plan attractive because of loss aversion
Savings increased until a maximum percentage
→ no extra costs of staying in the plan, so status quo bias and
procrastination predict that people will not opt out of the plan.
Contract now to increase savings in the future
makes the plan attractive because of hyperbolic discounting
Employee can opt out any time.
Results of first implementation
Average savings increased from 3.5% to 13.6%
Only 20% dropped out after 4 pay raises – they stopped increasing their savings rate, but did not decrease it either.