Frames, Defaults, and Nudges with Applications to Household Finance David Laibson Economics 1030 Harvard University April 13, 2017

Outline Effective interventions Ineffective interventions Class discussion Extensions to health behaviors

I. Effective Interventions Active Decisions (Carroll, Choi, Laibson, Madrian, and Metrick 2009) Automatic Enrollment (Madrian and Shea 2001; Choi, Laibson, Madrian and Metrick 2004) Quick Enrollment (Choi, Laibson, and Madrian 2006) We are studying 401(k) participation. 401(k)’s are tax deferred savings plans they are now the most important form of retirement income after Social Security About $10 trillion of balances in US (including rollovers) Contributions to 401(k)’s are tax-deferred Contributions to 401(k)’s are typically matched by the employer (e.g., dollar for dollar up to 6% of pay)

The power of deadlines: Active decisions Carroll, Choi, Laibson, Madrian, Metrick (2009) 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

Active decisions: conclusions Active decision raises 401(k) participation. Active decision raises average savings rate by 50 percent. Active decision doesn’t induce choice clustering. Under active decision, employees choose savings rates that they otherwise would have taken three years to achieve. (Average level as well as the entire multivariate covariance structure.)

Automatic enrollment 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 money market fund Call this phone number to opt out of enrollment or change your investment allocations

401(k) participation increases under automatic enrollment Madrian and Shea (2001) Choi, Laibson, Madrian, Metrick (2004)

Employees enrolled under automatic enrollment cluster at the default contribution rate (even if it’s a bad savings rate). Default contribution rate under automatic enrollment

Participants stay at the automatic enrollment defaults for a very long time.

Simplified enrollment raises participation Beshears, Choi, Laibson, Madrian (2006) 2005 2004 2003

Outline Effective interventions Ineffective interventions Class discussion Extensions to health behaviors

II. Ineffective Interventions Paying employees to save Educating employees

$100 bills on the sidewalk Choi, Laibson, Madrian (2004) Employer match is an instantaneous, riskless return on investment Particularly appealing if you are over 59½ years old Have the most experience, so should be savvy Retirement is close, so should be thinking about saving Can withdraw money from 401(k) without penalty We study seven companies and find that on average, half of employees over 59½ years old are not fully exploiting their employer match Average loss is 1.6% of salary per year Educational intervention has no effect

Disclosure Choi, Laibson, Madrian (2010) Experimental study with 400 subjects Subjects are Harvard staff members Read prospectuses of 4 S&P500 index funds Subjects allocate $10,000 across 4 index funds Subjects get to keep their gains net of fees

Data from Harvard Staff Control Treatment Fees salient $518 $494 Fees from random allocation $431 3% of Harvard staff in Control Treatment put all $$$ in low-cost fund 9% of Harvard staff in Fee Treatment put all $$$ in low-cost fund

Outline Effective interventions Ineffective interventions Class discussion Extensions to health behaviors

III. What should the decision regime be? Active Choice Default participation (opt-out) Savings rate? Auto-escalation (SMART)? Asset allocation? Opt-in Quick enrollment? Personal financial planner sits down with you Something else? How should we “Nudge” (Thaler and Sunstein).

Active Choice: everyone required to choose Auto-enrollment: default is enrollment with option to opt-out Opt-in: default is non-enrollment (with quick enrollment) Take the role of the “social planner” (e.g., a policymaker creating regulations or laws that establish guidelines for retirement savings plans) What is socially optimal policy? For the purposes of class discussion, assume that you must choose one of the three options above. Explain the policy that you like. We’ll vote at the end of the discussion.

IV. Translation to the health domain Similarities with saving behavior: Individuals and society have many aligned goals Improve individual health and control social costs

Will information work? Example New York City calorie disclosure (Elbel et al 2009) Calories from fast food purchases Before After NYC (intervention city) 825 846 Newark (control city) 823 826

Translation to the health domain Similarities with saving behavior: Individuals and society have many aligned goals Improve individual health and control social costs Education is not going to drive behavior change on its own Individuals want behavior change (just not right now) Improve diet Increase physical activity Stop smoking Adhere to therapeutic recommendations Utilize wellness programs How can we align intentions and actions?

Example of a 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 Empower good intentions

Control Condition Employees informed of the dates/times of workplace flu clinics

Date Plan Condition Employees invited to choose a concrete DATE for getting a flu vaccine Employees informed of the dates/times of workplace flu clinics

Date/Time Plan Condition Employees invited to choose a concrete DATE AND TIME for getting a flu vaccine Employees informed of the dates/times of workplace flu clinics

Flu shot adherence Milkman, Beshears, Choi, Laibson, and Madrian (2011) Flu shot letter 33.0% Flu shot letter + date plan 34.6% Flu shot letter + date plan + time plan 37.2%

Use Active Choice to encourage adoption of Home Delivery of chronic medication Beshears, Choi, Laibson, and Madrian (2016) Voluntary Lower employee co-pay Time saving for employee Lower employer cost Improved safety Better medication adherence(?) Member Express Scripts Scientific Advisory Board (Payments donated to charity by Express Scripts.)

Preliminary results from pilot study on a large firm Among those making an active choice: Fraction choosing home delivery: 52.2% Fraction choosing standard pharmacy pick-up: 47.8%

Home Delivery Utilization for All Drug Classes (including ineligible classes) This graph displays the fraction of prescriptions that are filled through Home Delivery in a given month. The universe is all prescription refills in a given month. Note that Home Delivery prescriptions need to be refilled less often, since the supply of medicine goes up to 90 days. The supply limit for a retail prescription fill is 30 days. The Select Home Delivery program was in effect during the time period marked by the red vertical lines (November 2008-October 2009). In November 2009, a more aggressive approach to increasing take-up of home delivery was adopted by the company which accounts for the increase in home delivery utilization in this period. We do not analyze this second program in this paper.

Economic Consequences Annual Savings at one company Plan $350,000+ Members $820,000+ Total Annual Savings $1,170,000+

Outline Effective interventions Ineffective interventions Class discussion Extensions to health behaviors