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Optimal Defaults and Active Decisions

Author Info

Listed author(s):
  • Gabriel D. Carroll
  • James J. Choi
  • David Laibson
  • Brigitte Madrian
  • Andrew Metrick

Abstract

Defaults can have a dramatic 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 three years to achieve under standard enrollment. We also present a model of 401(k) enrollment and characterize the optimal enrollment regime. Active decisions are optimal when consumers have a strong propensity to procrastinate and savings preferences that are highly heterogeneous. Naive beliefs about future time-inconsistency strengthen the normative appeal of the active-decision enrollment regime. However, financial illiteracy favors default enrollment over active decision enrollment.

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File URL: http://www.nber.org/papers/w11074.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11074.

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Date of creation: Jan 2005
Publication status: published as Carroll, Gabriel D., James J. Choi, David Laibson, Brigitte C. Madrian, and Andrew Metrick. “Optimal Defaults and Active Decisions.” Quarterly Journal of Economics 124, 4 (November 2009).
Handle: RePEc:nbr:nberwo:11074
Note: AG LS PE
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Find related papers by JEL classification:
  • D0 - Microeconomics - - General
  • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
  • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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  1. The Argument Clinic
    by Richard Thaler in cato unbound on 2010-04-16 18:05:17
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