Defaults are stronger than you think

When you got your current phone, how many of the ringtone and notification settings did you change? Most people keep the factory settings. Brigitte Madrian and Dennis Shea showed that the same thing happens with money.

What we know

The setting was a 401(k) retirement savings plan at a large US company. At first, employees had to sign up if they wanted to join. Then the company changed the rule for new hires: they were enrolled from the start, and anyone who did not want to take part had to opt out. Only the default changed. The benefits of the plan and the available choices stayed the same.

Comparing employees hired after the change with those hired before it, the researchers found:

• Participation rose sharply. Simply removing the sign-up step made a clear difference in how many people joined.
• Many people kept the defaults. A large share of those enrolled automatically stayed with both the contribution rate and the investment allocation the company had picked. Among earlier hires, very few had chosen that same combination on their own.

The authors point to two reasons: inertia, meaning people put off the paperwork, and a tendency to read the default as the company’s advice.

Notice what did not change: the plan was just as good or as bad as before. Only the starting point moved, and that alone shifted what many people ended up doing. That is why the authors called it the power of suggestion.

How to read it

• It is a before-and-after comparison around a policy change, a quasi-experiment. It is not a randomized trial, but because the setting depended only on when someone was hired, differences in personal motivation are less likely to explain the result.
• Defaults have a downside. If the default contribution rate is low, people who might have chosen to save more on their own can end up staying at the low rate. A default strongly shapes whether people join. It does not make the amount they save right for them.
• It is one company in the US. We have not found a comparable study in Japan.
• It is about saving behavior, not income. It does not show how much anyone’s wealth grew.

Save More Tomorrow, also from the US (D6), is another example of a decide-once, runs-automatically design that raised saving rates. In both cases, it is the setup, not willpower, that carries the behavior.

A small step today

Reset your own money defaults on purpose.

• Set up a transfer so that a fixed amount moves to a separate account as soon as you are paid. A small amount is fine.
• If you already save automatically, check whether the amount is still whatever you first picked without much thought.
• If your employer offers a retirement plan, check whether you are enrolled and what your contribution rate is.

A default is an ally that repeats your decision every month. You still need to look at it once yourself to see whether it fits you. On the day you review it, log “Paid myself first” in the app.

Sources

• [D7] Madrian & Shea (2001) The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior. Quarterly Journal of Economics.
• [D6] Thaler & Benartzi (2004) Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving. Journal of Political Economy.