Optimal Defaults and Active Decisions
Defaults often have a large influence on consumer decisions. We identify an overlooked but practical alternative to defaults: requiring individuals to make explicit choices for themselves. We study such “active decisions” in the context of 401(k) saving. We find that compelling new hires to make...
| Main Authors: | , , , , |
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| Other Authors: | |
| Format: | Article |
| Language: | en_US |
| Published: |
MIT Press
2010
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| Online Access: | http://hdl.handle.net/1721.1/58100 |
| _version_ | 1826201843384975360 |
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| author | Carroll, Gabriel Drew Choi, James J. Laibson, David Madrian, Brigitte C. Metrick, Andrew |
| author2 | Massachusetts Institute of Technology. Department of Economics |
| author_facet | Massachusetts Institute of Technology. Department of Economics Carroll, Gabriel Drew Choi, James J. Laibson, David Madrian, Brigitte C. Metrick, Andrew |
| author_sort | Carroll, Gabriel Drew |
| collection | MIT |
| description | Defaults often have a large influence on consumer decisions. We identify an
overlooked but practical alternative to defaults: requiring individuals to make explicit
choices 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 thirty months to achieve under
standard enrollment. We also present a model of 401(k) enrollment and derive
conditions under which the optimal enrollment regime is automatic enrollment
(i.e., default enrollment), standard enrollment (i.e., default nonenrollment), or active
decisions (i.e., no default and compulsory choice). Active decisions are optimal
when consumers have a strong propensity to procrastinate and savings preferences
are highly heterogeneous. Financial illiteracy, however, favors default enrollment
over active decision enrollment. |
| first_indexed | 2024-09-23T11:57:55Z |
| format | Article |
| id | mit-1721.1/58100 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T11:57:55Z |
| publishDate | 2010 |
| publisher | MIT Press |
| record_format | dspace |
| spelling | mit-1721.1/581002022-10-01T07:18:06Z Optimal Defaults and Active Decisions OPTIMAL DEFAULTS AND ACTIVE DECISIONS Carroll, Gabriel Drew Choi, James J. Laibson, David Madrian, Brigitte C. Metrick, Andrew Massachusetts Institute of Technology. Department of Economics Carroll, Gabriel Drew Carroll, Gabriel Drew Defaults often have a large influence on consumer decisions. We identify an overlooked but practical alternative to defaults: requiring individuals to make explicit choices 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 thirty months to achieve under standard enrollment. We also present a model of 401(k) enrollment and derive conditions under which the optimal enrollment regime is automatic enrollment (i.e., default enrollment), standard enrollment (i.e., default nonenrollment), or active decisions (i.e., no default and compulsory choice). Active decisions are optimal when consumers have a strong propensity to procrastinate and savings preferences are highly heterogeneous. Financial illiteracy, however, favors default enrollment over active decision enrollment. 2010-09-01T20:01:05Z 2010-09-01T20:01:05Z 2009-11 Article http://purl.org/eprint/type/JournalArticle 0033-5533 http://hdl.handle.net/1721.1/58100 Carroll, Gabriel D. et al. “Optimal Defaults and Active Decisions*.” Quarterly Journal of Economics 124.4 (2009): 1639-1674. ©2009 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology. en_US http://dx.doi.org/10.1162/qjec.2009.124.4.1639 Quarterly Journal of Economics Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use. application/pdf MIT Press MIT Press |
| spellingShingle | Carroll, Gabriel Drew Choi, James J. Laibson, David Madrian, Brigitte C. Metrick, Andrew Optimal Defaults and Active Decisions |
| title | Optimal Defaults and Active Decisions |
| title_full | Optimal Defaults and Active Decisions |
| title_fullStr | Optimal Defaults and Active Decisions |
| title_full_unstemmed | Optimal Defaults and Active Decisions |
| title_short | Optimal Defaults and Active Decisions |
| title_sort | optimal defaults and active decisions |
| url | http://hdl.handle.net/1721.1/58100 |
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