Optimal Defaults and Active Decisions
Author(s)
Carroll, Gabriel Drew; Choi, James J.; Laibson, David; Madrian, Brigitte C.; Metrick, Andrew
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Alternative title
OPTIMAL DEFAULTS AND ACTIVE DECISIONS
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Show full item recordAbstract
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.
Date issued
2009-11Department
Massachusetts Institute of Technology. Department of EconomicsJournal
Quarterly Journal of Economics
Publisher
MIT Press
Citation
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.
Version: Final published version
ISSN
0033-5533