Optimal Defaults and Active Decisions

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.

The Impact of Choice Architecture on Sustainable Consumer Behavior: The Role of Guilt

“…The opt-out policy (i.e., requiring online users to explicitly request their exclusion from further contacting lists) is more effective in capturing consumers' agreement for further online contact compared to the opt-in policy (Johnson et al 2002). Yet Agnew et al (2008) failed to confirm the power of defaults in annuity choice, while Carroll et al (2009) claim that depending on the conditions, different default policies may engage higher compliance rates.…”

“…Although the power of the opt-out policy seems to capture higher levels of consumer compliance with the desired option, its superiority is still debatable, and scholars call for further evidence (Carroll et al 2009;Keller et al 2011). Johnson and Goldstein (2003) showed that the opt-out policy results in almost twice as high organ donation rates compared to the opt-in policy, while actual participation in organ donation programs is also significantly higher in countries that apply the presumed consent policy (i.e., opt-out) compared to participation rates in countries that apply the opt-in policy.…”

“…Although the importance of defaults is established (Thaler and Sunstein 2008) and their effectiveness has been shown (Ansher et al 2013), our understanding regarding the underlying mechanism and the conditions that urge consumers to comply or not with the default policy is still obscure (Carroll et al 2009). Furthermore, while a number of studies have examined the effect of defaults in consumer choice (Brown and Krishna 2004;Johnson and Goldstein 2003;Keller et al 2011;Park et al 2000), the impact of default policies as antecedents of sustainable consumer behavior has never been investigated.…”

“…The role of choice architecture (Thaler and Sunstein 2008) or defaults-defined as ''the alternative the consumer receives if he/she does not explicitly request otherwise'' (Brown and Krishna 2004, p. 530)-has been established in different contexts, and it is particularly prominent in public policy studies (Brown and Krishna 2004;Carroll et al 2009;Johnson et al 2002;Johnson and Goldstein 2003). Public and private institutions daily apply default policies as a means of shaping choice.…”

What Should Your DC Default Be?

“…m R 1 can not solve the optimal contribution rate. 14 We need to use the value function itself to search the optimal contribution rate numerically. …”