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Why Do Defaults Affect Behavior? Experimental Evidence from Afghanistan

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  • Blumenstock, Joshua
  • Callen, Michael
  • Ghani, Tarek

Abstract

We report on an experiment examining why default options impact behavior. Working with one of the largest private firms in Afghanistan, we randomly assigned each of 949 employees to different variants of a new default savings account. Employees assigned a default contribution rate of 5% are 40 percentage points more likely to contribute than employees assigned to a default contribution rate of zero; to achieve this effect through financial incentives alone would require a 50% match from the employer. Our design permits us to rule out several common explanations for default effects, including employer endorsement, employee inattention, and a lack of awareness about how to switch. Instead, we find evidence that the default effect is driven largely by a combination of present-biased preferences and the cognitive cost of calculating alternate savings scenarios. Default assignment also causes employees to develop savings habits that outlive our experiment: they are more likely to believe that savings is important, less likely to report being too financially constrained to save, and more likely to make an active decision to save at the end of our trial.

Suggested Citation

  • Blumenstock, Joshua & Callen, Michael & Ghani, Tarek, 2017. "Why Do Defaults Affect Behavior? Experimental Evidence from Afghanistan," CEPR Discussion Papers 12142, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12142
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    6. Dawoon Jung & Tushar Bharati & Seungwoo Chin, 2020. "Does Education Affect Time Preference? Evidence from Indonesia," Economics Discussion / Working Papers 20-17, The University of Western Australia, Department of Economics.
    7. Asen Ivanov, 2019. "Optimal Pension Plan Default Policies when Employees are Biased," Working Papers 893, Queen Mary University of London, School of Economics and Finance.
    8. Goldin, Jacob & Reck, Daniel, 2020. "Optimal defaults with normative ambiguity," LSE Research Online Documents on Economics 105863, London School of Economics and Political Science, LSE Library.
    9. Batista, Catia & Vicente, Pedro C., 2020. "Improving access to savings through mobile money: Experimental evidence from African smallholder farmers," World Development, Elsevier, vol. 129(C).
    10. Shilpa Aggarwal & Valentina Brailovskaya & Jonathan Robinson, 2020. "Saving for Multiple Financial Needs: Evidence from Lockboxes and Mobile Money in Malawi," NBER Working Papers 27035, National Bureau of Economic Research, Inc.
    11. Orazio Attanasio & Matthew Bird & Lina Cardona-Sosa & Pablo Lavado, 2019. "Freeing Financial Education via Tablets: Experimental Evidence from Colombia," NBER Working Papers 25929, National Bureau of Economic Research, Inc.
    12. Jacob Goldin & Tatiana Homonoff & Richard W. Patterson & William L. Skimmyhorn, 2020. "How Much to Save? Decision Costs and Retirement Plan Participation," NBER Working Papers 27575, National Bureau of Economic Research, Inc.
    13. Eva Haaser & Melanie Koch, 2019. "Do Default Assignments Increase Savings of the Poor? Empirical Evidence," DIW Roundup: Politik im Fokus 130, DIW Berlin, German Institute for Economic Research.
    14. Atasoy, Ayse Tugba & Madlener, Reinhard, 2020. "Default vs. Active Choices: An Experiment on Electricity Tariff Switching," FCN Working Papers 7/2020, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    15. Catia Batista & Pedro C. Vicente, 2018. "Is mobile money changing rural Africa? Evidence from a field experiment," NOVAFRICA Working Paper Series wp1805, Universidade Nova de Lisboa, Faculdade de Economia, NOVAFRICA.
    16. Thunström, Linda & Gilbert, Ben & Ritten, Chian Jones, 2018. "Nudges that hurt those already hurting – distributional and unintended effects of salience nudges," Journal of Economic Behavior & Organization, Elsevier, vol. 153(C), pages 267-282.
    17. de Bresser, Jochem & Knoef, M.G., 2019. "Heterogeneous Default Effects on Retirement Saving : Sledgehammers or Precision Instruments," Other publications TiSEM c889dcee-39b2-4817-99fc-7, Tilburg University, School of Economics and Management.
    18. Zarek C. Brot-Goldberg & Timothy Layton & Boris Vabson & Adelina Yanyue Wang, 2021. "The Behavioral Foundations of Default Effects: Theory and Evidence from Medicare Part D," NBER Working Papers 28331, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Behavioral Models; Defaults savings; Digital Finance; Mobile Money; peer effects;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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