They first give some examples of behavioral economics in everyday life:
If people's magazine subscriptions are automatically renewed, they renew a lot more than if they have to send in a renewal form. Moreover, people are influenced by how problems are framed. If told that salami is "90 per cent fat-free" they are far more likely to buy salami than if they are told it is "10 per cent fat"…
Findings of this kind suggest that even when people have freedom of choice they are influenced, or nudged, by the context in which their decisions are made. This power gives business and governments opportunities. Automatically enrolling people in a savings plan dramatically increases participation, even though people retain the right to opt out.
My first impression after reading the article was the seriousness this newspaper commands even though it's printed on pink paper. But seriously, it's the last sentence in the quote above that I found to be interesting. If sellers can exploit the complacency of the American consumer, why can't savers do the same? I think the idea of automatic enrollment programs would definitely be a good thing. It plays to the out-of-sight, out-of-mind mentality we all have in some aspect. If you automatically enroll people in a 401(k) or IRA while giving them the opportunity to opt out, you don't take the freedom of choice away, and you get people to save.
Some people may be against this on "nanny-state" grounds—many feel that they should be able to do whatever they want with their money and they shouldn't have a company "making" them save money. In response, I'd say that (1) an opt-out feature is available for those smart enough to take it, and (2) given the state of Social Security and Medicare solvency, it's important to have a "safety net" available just in case said nanny-state haters get to a point where they will need the government to help out in old age.
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3 comments:
Would it be safe to assume that the reason most companies don't automatically enroll customers in 401(k) plans is because while it sounds good to say that they have competitive 401(k) matching plans, actually having to follow up on the matching is still money out of their pockets? So they're saying that they have this great thing to psychologically form a positive association with potential employees, but are actually counting on a percentage of their employees to forget to enroll.
I admit that I'm only speculating and that my knowledge of how 401(k) plans and Roth IRAs work is limited, but I do love a good conspiracy theory when I get to make one up!
Agree with you. I'm deeply interested in choice architecture myself. And on a side note, my career started at the company that started the continuous service (SM) subscription model for magazines.
Tweezy,
Actually, company big wigs are rewarded for getting people to invest. For businesses large enough to have 401K plans, the more you get employees to contribute, the more money executives can invest (read: hide) from the Tax Man. Our company does it after 5 years through a salary reduction program. After your 5th year, the company will reduce your salary by $3,000 an invest it for you in company stock. (It's spread over 24 payments).
The firm nudge? You can call them and ask them to give you the cash directly, invest it in your own IRA, or let it remain in company stock (which most folks do). Our stock has historically ran about a stable 15% return per year, which is very significant.
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