Shlomo Benartzi

Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving

As firms switch from defined‐benefit plans to defined‐contribution plans, employees bear more responsibility for making decisions about how much to save. The employees who fail to join the plan or who participate at a very low level appear to be saving at less than the predicted life cycle savings rates. Behavioral explanations for this behavior stress bounded rationality and self‐control and suggest that at least some of the low‐saving households are making a mistake and would welcome aid in making decisions about their saving. In this paper, we propose such a prescriptive savings program, called Save More Tomorrow™ (hereafter, the SMarT program). The essence of the program is straightforward: people commit in advance to allocating a portion of their future salary increases toward retirement savings. We report evidence on the first three implementations of the SMarT program. Our key findings, from the first implementation, which has been in place for four annual raises, are as follows: (1) a high proportion (78 percent) of those offered the plan joined, (2) the vast majority of those enrolled in the SMarT plan (80 percent) remained in it through the fourth pay raise, and (3) the average saving rates for SMarT program participants increased from 3.5 percent to 13.6 percent over the course of 40 months. The results suggest that behavioral economics can be used to design effective prescriptive programs for important economic decisions.

Behavioral Economics and the Retirement Savings Crisis

Behavioral economics can be scaled up to have a major, positive impact on certain behaviors, such as retirement savings. Many countries are facing a retirement savings crisis. In the United States, for example, the fraction of workers at risk of having inadequate funds to maintain their lifestyle through retirement is estimated to have increased from 31% to 53% from 1983 to 2010 (1). Roughly half of U.S. employees (78 million) have no access to retirement plans at their workplace (2). Fortunately, there are solutions to these problems. We simply have to change the choice architecture of retirement plans by utilizing the findings of behavioral economics research (3) and make such plans available to all workers. We describe a large-scale field demonstration of the potential impact of such research-based changes in how we save.

The Law and Economics of Company Stock in 401(k) Plans

Some 11 million participants in 401(k) plans invest more than 20 percent of their retirement savings in their employer’s stock. Yet investing in the stock of one’s employer is risky: single securities are riskier than diversified portfolios, and an employee’s human capital typically is positively correlated with the companys performance. In the worst‐case scenario, workers can lose their jobs and much of their retirement wealth simultaneously. For workers who expect to work for a company for many years, a dollar of company stock can be valued at less than 50 cents after accounting for risk. However, employees still invest voluntarily in their employers stock, and many employers insist on making matching contributions in stock. We provide evidence that employees underestimate the risk of owning company stock, while employers overestimate the benefits associated with employee stock ownership. We then analyze the likely effects of current and proposed regulations in this context.

Should Governments Invest More in Nudging

Governments are increasingly adopting behavioral science techniques for changing individual behavior in pursuit of policy objectives. The types of “nudge” interventions that governments are now adopting alter people’s decisions without coercion or significant changes to economic incentives. We calculated ratios of impact to cost for nudge interventions and for traditional policy tools, such as tax incentives and other financial inducements, and we found that nudge interventions often compare favorably with traditional interventions. We conclude that nudging is a valuable approach that should be used more often in conjunction with traditional policies, but more calculations are needed to determine the relative effectiveness of nudging.

Energy Efficiency in Small and Medium-Sized Manufacturing Firms: Order Effects and the Adoption of Process Improvement Recommendations

In many manufacturing operations, profitable energy efficiency opportunities remain unexploited. Although previous studies have tried to explain the underinvestment, we focus on how the way in which a portfolio of opportunities is presented in a list affects adoption decisions. We use information on over 100,000 energy-saving recommendations made to more than 13,000 small and medium-sized manufacturing firms under the Industrial Assessment Centers program of the U.S. Department of Energy. We find that adoption rates are higher for initiatives appearing early in a list of recommendations. This sequence effect is consistent and large: simply moving a recommendation one position lower has the same effect on average as increasing up-front implementation cost by at least 17% from the average value. Given this impact of sequence on adoption of individual recommendations, we utilize variations within our data to examine how various sequencing approaches affect adoption at the portfolio level. Sequences in which recommendations are listed from best to worst payback achieve higher potential energy savings given the investments in energy efficiency made by the firms. We also observe a choice overload effect at the portfolio level, but the magnitude of this effect is small.

Accounting Recognition and the Determinants of Pension Asset Allocation

We identify and test motives for corporate pension asset allocations using a proprietary asset allocation database covering the 1988–1994 period. We focus on the question of whether the recognition of additional minimum pension liability in accordance with SFAS No. 87 affects asset allocation. Our results are consistent with the claim that companies allocate their pension assets to avoid the recognition of an additional minimum liability. In particular, companies that are close to the recognition threshold prefer fixed-income investments rather than equity investments. By investing in fixed-income securities, firms increase the correlation between pension assets and liabilities, reducing the likelihood of a pension deficit. Our results also suggest that firms allocate their pension assets between equities and fixed-income investments to reduce the volatility of pension contributions. Finally, we find that larger firms and firms with a young workforce invest more in equity securities than in fixed-income securities.

The Illusion of Wealth and Its Reversal

Research on choice architecture is shaping policy around the world, touching on areas ranging from retirement economics to environmental issues. Recently, researchers and policy makers have begun paying more attention not just to choice architecture but also to information architecture, or the format in which information is presented to people. In this article, the authors investigate information architecture as it applies to consumption in retirement. Specifically, in three experiments, they examine how people react to lump sums versus equivalent streams of monthly income. Their primary question of interest is whether people exhibit more or less sensitivity to changes in retirement wealth expressed as lump sums (e.g.,

Temporal Reframing and Savings: A Field Experiment

100,000) or monthly equivalents (e.g.,

Naive Diversification Strategies in Defined Contribution Saving Plans

500 per month for life). They also test whether people exhibit an “illusion of wealth,” by which lump sums seem more adequate than monthly amounts in certain conditions, as well as the opposite effect, in which lump sums seem less adequate. They conclude by discussing how format-dependent perceptions of wealth can affect policy and consumers’ financial decision making.

Do Changes in Dividends Signal the Future or the Past

A growing percentage of American workers are now freelancers and thus responsible for their own retirement savings, yet they face a number of psychological hurdles that hamper them from saving enough money for the long-term. Although prior theory-derived interventions have been successful in addressing some of these obstacles, encouraging participation in saving programs is a challenging endeavor for policymakers and consumers alike. In a field setting, we test whether framing savings in more or less granular formats (e.g., saving daily versus monthly) can encourage continued saving behavior through increasing the take-up of a recurring deposit program. Among thousands of new users of a financial technology app, we find that framing deposits in daily amounts as opposed to monthly amounts quadruples the number of consumers who enroll. Further, framing deposits in more granular terms reduced the participation gap between lower and higher income consumers: three times as many consumers in the highest rather than lowest income bracket participated in the program when it was framed as a