Bridge over ocean
26 October 2006 Multimedia

Decisions by Default — Part II

  1. James Poterba
  2. Jeffrey H. Brown

Economic theorists have long explored how people should rationally make life-cycle saving and investment decisions. But how do people actually behave in the real world? In this webcast we will focus on the insights gained from studies of observed behavior. How can we explain systematic deviations from rational saving and investing decisions? What features can designers of financial products incorporate that most effectively correct irrational behavior? To what extent can product and program features improve households' well-being and retirement security? For instance, behavior tends to exhibit inertia: Employees tend to accept the default options in voluntary employee benefit programs. If a firm's 401(k) plan default is to enroll new hires automatically or require them to make a choice, the fraction of employees enrolled will be much higher than if the plan default is non-enrollment. Based on this finding, some firms have changed their plan design to either automatic enrollment or compulsory choice. What, then, should the default investment option be for employees who, for whatever reason, are unable to make a choice?

Please note that text may be difficult to read in this recording. The presentation slides are available for download in the video player.

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