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Optimal Defaults and Active Decisions

  • James Choi
  • David Laibson
  • Brigitte Madrian
  • Andrew Metrick

Defaults often have a large influence on consumer decisions. We identify an overlooked but practical alternative to defaults: requiring individuals to make an explicit choice for themselves. We study such “active decisions†in the context of 401(k) saving. We find that compelling new hires to make active decisions about 401(k) enrollment raises the initial fraction that enroll by 28 percentage points relative to a standard opt-in enrollment procedure, producing a savings distribution three months after hire that would take 30 months to achieve under standard enrollment. We also present a model of 401(k) enrollment and derive conditions under which the optimal enrollment regime is automatic enrollment (i.e., default enrollment), standard enrollment (i.e., default non-enrollment), or active decisions (i.e., no default and compulsory choice). Active decisions are optimal when consumers have a strong propensity to procrastinate and savings preferences are highly heterogeneous. Financial illiteracy, however, favors default enrollment over active decision enrollment.

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 666156000000000488.

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Date of creation: 10 Feb 2005
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Handle: RePEc:cla:levrem:666156000000000488
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  1. James Choi & David Laibson & Brigitte Madrian, 2008. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Yale School of Management Working Papers amz2369, Yale School of Management, revised 05 May 2008.
  2. John Beshears & James Choi & David Laibson & Brigitte Madrian, 2008. "Simplification and Saving," Yale School of Management Working Papers amz2392, Yale School of Management.
  3. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  4. James J. Choi & David Laibson & Brigitte C. Madrian, 2011. "$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 748-763, August.
  5. Henrik Cronqvist & Richard H. Thaler, 2004. "Design Choices in Privatized Social-Security Systems: Learning from the Swedish Experience," American Economic Review, American Economic Association, vol. 94(2), pages 424-428, May.
  6. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2002. "For Better or For Worse: Default Effects and 401(k) Savings Behavior," JCPR Working Papers 256, Northwestern University/University of Chicago Joint Center for Poverty Research.
  7. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
  8. Mark J. Warshawsky & John Ameriks, . "How Prepared Are Americans for Retirement?," Pension Research Council Working Papers 98-11, Wharton School Pension Research Council, University of Pennsylvania.
  9. Brigitte C. Madrian & Dennis F. Shea, 2001. "THE POWER OF SUGGESTION: INERTIA IN 401(k) PARTICIPATION AND SAVINGS BEHAVIOR," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1149-1187, November.
  10. Gabriel D. Carroll & James J. Choi & David Laibson & Brigitte Madrian & Andrew Metrick, 2005. "Optimal Defaults and Active Decisions," NBER Working Papers 11074, National Bureau of Economic Research, Inc.
  11. Engen, Eric & Gale, William & Uccello, Cori, 1999. "The Adequacy of Household Saving," MPRA Paper 56442, University Library of Munich, Germany.
  12. Alberto Abadie & Sebastien Gay, 2004. "The Impact of Presumed Consent Legislation on Cadaveric Organ Donation: A Cross Country Study," NBER Working Papers 10604, National Bureau of Economic Research, Inc.
  13. Ted O'Donoghue and Matthew Rabin ., 1997. "Doing It Now or Later," Economics Working Papers 97-253, University of California at Berkeley.
  14. Erik Hurst, 2004. "Grasshoppers, Ants and Pre-Retirement Wealth: A Test of Permanent Income Consumers," Working Papers wp088, University of Michigan, Michigan Retirement Research Center.
  15. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2002. "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance," JCPR Working Papers 257, Northwestern University/University of Chicago Joint Center for Poverty Research.
  16. Richard H. Thaler & Cass R. Sunstein, 2003. "Libertarian Paternalism," American Economic Review, American Economic Association, vol. 93(2), pages 175-179, May.
  17. Richard H. Thaler & Shlomo Benartzi, 2004. "Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages S164-S187, February.
  18. Mark Aguiar & Erik Hurst, 2004. "Consumption vs. Expenditure," NBER Working Papers 10307, National Bureau of Economic Research, Inc.
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