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

2. Outline Effective interventions Ineffective interventions
Class discussion
Extensions to health behaviors

3. 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)

4. 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

5. 401(k) participation increases under active decisions

6. 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.)

7. 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

8. 401(k) participation increases under automatic enrollment Madrian and Shea (2001) Choi, Laibson, Madrian, Metrick (2004)

9. 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

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

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

12. Outline Effective interventions Ineffective interventions
Class discussion
Extensions to health behaviors

13. II. Ineffective Interventions
Paying employees to save
Educating employees

14. $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

15. 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

16. 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

17. Outline Effective interventions Ineffective interventions
Class discussion
Extensions to health behaviors

18. 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).

19. 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.

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

21. 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

22. 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?

23. 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

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

25. 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

26. 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

27. 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%

28. 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.)

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

30. 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.

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

32. Outline Effective interventions Ineffective interventions
Class discussion
Extensions to health behaviors