Behavioral Economics and Behavior Change
David Laibson
Robert I. Goldman Professor of Economics
Harvard University
NIA, May 2011
Funding from the National Institute of Aging.
Pension coverage by type of pension plan among all
private sector workers in US
35%
Defined Contribution Only
30%
25%
20%
Both
15%
10%
Defined Benefit Only
0%
2
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
5%
Source: EBRI and Department of Labor
$100 bills on the sidewalk
Choi, Laibson, Madrian (2010)
 In 401(k)’s, employer match is a risk-free high return
 401(k) is particularly appealing if you are over 59½
– Can withdraw money without penalty
 We study seven companies and find that on average,
half of employees over 59½ are taking full advantage of
their employer match
– Average loss is 1.6% of salary per year
 Educational intervention has no effect
3
Households are retiring with
very little financial wealth
HRS (65-69): In 2008, the median holding of
financial assets is $12,500
among 1-person households
HRS (65-69): In 2008, the median holding of
financial assets is $111,600
among 2-person households
4
Source: Venti, Poterba, and Wise 2011
“If 5 people all have the winning numbers in the lottery and the
prize is two million dollars, how much will each of them get?”
Fraction of people who answer “400,000”
Source: HRS; Agarwal, Driscoll, Gabaix, Laibson (2009)
Middle-income retirees are in trouble
 Social Security replaces less than ½ of their income.
 DB pensions are vanishing.
 The median household retires with $200,000 of nonannuitized wealth, most of which is home equity.
 OOP health care costs are expected to consume
$300,000+ for a two-person household.
 These OOP estimates are rising about 10% per year.
 Do Americans understand the problem?
8
Procrastination in retirement savings
Choi, Laibson, Madrian, Metrick (2002)
 Survey
– Mailed to a random sample of employees
– Matched to administrative data on actual savings behavior
Typical breakdown among 100 employees
Out of
every 100
surveyed
employees
68 self-report
saving too little
24 plan to
raise
savings rate
in next 2
months
3 actually follow through
10
Do people want to tie themselves to the mast?
Beshears, Choi, Laibson, Madrian, Sakong (2010)
(cf. Ashraf and Karlan 2004)
 Give subjects a budget ($50, $100, or $500) and ask
them to allocate between:
– Freedom account (22% interest)
– Commitment account (22% interest): restrictions on
withdrawal before self-selected goal date, about 100
days in the future
 Economically speaking, the Freedom account
dominates the Commitment account (Freedom
account has greater liquidity)
Proportion invested in commitment account
Beshears, Choi, Laibson, Madrian, Sakong (2010)
0.6
0.5
0.4
0.3
0.2
0.1
0
No withdrawal 10% penalty
20% penalty
Nature of early withdrawal rule in the illiquid account
We don’t know
how to contain health care costs,
but we do know how to raise savings.
13
Defaults
Automatic enrollment
 An example: Welcome to the company
 If you don’t do anything
–You are automatically enrolled in the 401(k)
–You save 2% of your pay
–Your contributions go into a default fund
 Call this phone number to opt out of enrollment
or change your investment allocations
Madrian and Shea (2001)
Choi, Laibson, Madrian, Metrick (2004)
401(k) participation by tenure at firm
100%
Automatic
enrollment
80%
60%
Standard
enrollment
40%
20%
0%
0
6
12
18
24
30
36
Tenure at company (months)
42
48
Do workers like automatic enrollment?
 In firms with standard 401(k) plans (no auto-enrollment),
2/3 of workers say that they should save more
 Opt-out rates under automatic enrollment are typically
only 10% (opt-out rates rarely exceed 15%)
 Under automatic enrollment HR reports “no complaints”
 97% of employees in auto-enrollment firms approve of
auto-enrollment
 Even among the subset of workers who opt out of
automatic enrollment, approval is 79%
 The US government just adopted automatic enrollment
16
Opt-in enrollment
Opt-out enrollment (auto-enrollment)
PROCRASTINATION
UNDESIRED
BEHAVIOR:
Non-participation
START HERE
DESIRED
BEHAVIOR:
participation
Choice-based regimes: Active decisions
Choi, Laibson, Madrian, Metrick (2010)
Active decision mechanisms require employees to
make an active choice about 401(k) participation.
 Welcome to the company
 You are required to submit this form within 30 days of
hire, regardless of your 401(k) participation choice
 If you don’t want to participate, indicate that decision
 If you want to participate, indicate your contribution
rate and asset allocation
 Being passive is not an option
401(k) participation increases under
active decisions
401(k) participation by tenure
100%
Active decision
80%
Standard enrollment
60%
40%
20%
0%
0
6
12 18
24
30
36 42
Tenure at company (months)
48
54
Active Choice
PROCRASTINATION
UNDESIRED
BEHAVIOR:
Must choose for oneself
Non-participation
START HERE
DESIRED
BEHAVIOR:
participation
Simplified enrollment raises participation
Fraction Ever Participating in Plan
Beshears, Choi, Laibson, Madrian (2006)
50%
2005
2004
40%
30%
2003
20%
10%
0%
0
3
6
9
12 15 18 21 24 27 30 33
Time since baseline (months)
21
Quick enrollment
PROCRASTINATION
UNDESIRED
BEHAVIOR:
Non-participation
START HERE
DESIRED
BEHAVIOR:
participation
Quick enrollment
PROCRASTINATION
UNDESIRED
BEHAVIOR:
Non-participation
START HERE
DESIRED
BEHAVIOR:
participation
Improving participation in 401K plans
(for a typical firm)
Default non-enrollment
40%
(financial incentives alone)
Quick Enrollment
50%
(“check a box”)
Active choice
70%
(perceived req’t to choose)
Default enrollment
90%
(opt out)
0%
20%
40%
60%
80%
100%
Participation Rate (1 year of tenure)
24
Research Impact:
Savings Policy
 Motivation behind the “Autosave” features of the
Pension Protection Act of 2006
– Regulations contain numerous footnotes to NIA- research.
 Motivation behind the “Auto IRA” proposal currently
under legislative consideration
 Kiwisaver plan in New Zealand
 Pensions reform in the U.K.
 Myriad other financial reforms across the world.
Research Impact:
Employer-Sponsored Savings Plans
Representing 43% of employees
at firms with 401(k) plans
Emotional system (dopamine reward system)
vs. Fronto-Parietal System
Frontal
cortex
Dopaminergic
Reward Systems
27
Parietal
cortex
Neural mechanisms
Stay on your diet
(dLPFC)
I want a donut
(dopamine
reward system)
McClure, Laibson, Loewenstein, Cohen (2004)
McClure, Ericson, Laibson, Loewenstein, Cohen (2007)
Hare, Camerer, Rangel (2009)
Figner, Knoch, Johnson, Krosch, Lisanby, Fehr, Weber (2010)
McClure, Laibson, Loewenstein, and Cohen
Science (2004)
Emotional system responds only to immediate rewards
7
T13
0
Neural activity
x = -4mm
29
VStr
y = 8mm
MOFC
z = -4mm
MPFC
PCC
Seconds
= Earliest reward available today
= Earliest reward available in 2 weeks
= Earliest reward available in 1 month
0.4%
2s
Analytic brain responds equally to all rewards
VCtx
PMA
RPar
DLPFC
VLPFC
LOFC
x = 44mm
0.4%
2s
x = 0mm
0
30
T13
15
= Earliest reward available today
= Earliest reward available in 2 weeks
= Earliest reward available in 1 month
Brain Activity in the Frontal System and
Emotional System Predicts Behavior
Brain Activity
McClure, Laibson, Loewenstein, Cohen (2004)
Frontal
system
0.05
0.0
Emotional
System
-0.05
Choose
Smaller
Immediate
Reward
31
Choose
Larger
Delayed
Reward
Conceptual Summary
 Practical solutions that lead to behavior change
 Principal application: retirement savings
 Neuroeconomic foundations
32
Translation to the health domain
Similarities with saving behavior:
 Employees and employers have many aligned goals
– Improve employee health and control costs
 Employees want behavior change (just not right now)
– Improve diet
– Increase physical activity
– Stop smoking
– Adhere to therapeutic recommendations
33
Translation to the health domain
Similarities with saving behavior:
 Employees have a hard time aligning their good
intentions and their actions
 When costs precede benefits, decision-makers fail
34
Example of an effective free intervention:
flu shot communication
 Control: normal (informational) mailing
 Treatment 1: normal mailing + make a date plan
 Treatment 2: normal mailing + make a date/time plan
36
Ask employees to make a precise plan
Milkman, Beshears, Choi, Laibson, and Madrian
(forthcoming 2011, Proceedings of the National Academy of Sciences;
under embargo until publication)
38%
37%
36%
35%
34%
33%
32%
31%
37
Flu shot1 letter
2
Flu shot letter
+ date plan
Flu shot3 letter
+ date plan
+ time plan
Use Active Choice to encourage
adoption of Home Delivery
of chronic medication
Beshears, Choi, Laibson, and Madrian (in preparation)
•
•
•
•
•
•
•
Voluntary
No plan design change
Lower employee co-pay
Time saving for employee
Lower employer cost
Better medication adherence
Improved safety
Member Express Scripts Scientific Advisory Board
(All payments donated to charity.)
38
Preliminary results from pilot study on
54,863 employees without home
delivery taking chronic medication
Among those making an active choice:
Fraction choosing home delivery:
52.2%
Fraction choosing standard pharmacy pick-up: 47.8%
Preliminary results from pilot study at
one company
Rxs by Mail*
350,000
After
300,000
Annual Savings
250,000
200,000
Plan
$2,413,641
150,000
Members
$1,872,263
100,000
50,000
0
* Annualized
Before
Total Savings
$4,285,904
Summary
 Behavioral economics explains why people often fail
to act in their own best interest
 Key problem
– costs come early and benefits come late
 Self-defeating behavior can be changed using
inexpensive, scalable interventions
 Defaults and other nudges have worked in the 401(k)
domain
 The same concepts are now being applied in the
health domain
41
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Behavioral Finance - American Economic Association