Employers and policy makers have increasingly used default options in recent years to positively influence behavior, deploying one element of the “nudge” theory that won Chicago Booth’s Richard H. Thaler the 2017 Nobel Memorial Prize in Economic Sciences. When offering people program options, they include an automatic choice—the default that happens when people do nothing. A new employee doesn’t fill out forms to sign up for the retirement plan? No problem: that employee is simply enrolled in a predetermined default option. In this way, employers have vastly increased participation in retirement savings programs.
Once people are participating in a default option, they can stick with it for years, suggests research by Booth’s Thaler and University of Miami’s Henrik Cronqvist and China Europe International Business School’s Frank Yu, both graduates of Booth’s PhD program.
The researchers studied what happened when a Swedish government retirement savings program nudged the country’s working adults into a particular investment fund. The Swedish Premium Pension Plan, from 2000 through 2016, offered more than 7 million retirement savers a choice of 450-plus investment funds for their required paycheck deductions. Money from savers who didn’t make a choice went into a default fund, a low-fee option that mimicked a globally indexed equities fund. Savers who initially accepted the default were allowed to switch out of it at any time, but no investor was allowed to move money from other funds into the default fund. (This rule was changed in 2009.)
In addition, the government and fund sponsors initially used expensive advertising campaigns to nudge investors to make their own choices. These campaigns fell off after 2001, once almost all eligible investors were enrolled.
“Participants seem to have a ‘set it and forget it’ mindset,” the researchers write.
Advertising, the researchers find, can override the power of the default option. In 2000, when the government nudged people to be do-it-yourself portfolio managers and mutual-fund companies advertised pushing their own offerings, 67 percent of enrollees opted out of the default and picked their own portfolios. But the number of active choosers among each year’s new participants plunged, to 18 percent in 2001, and fell steadily thereafter. By 2016, 99 percent of new investors accepted the default.
As the ad campaigns faded, investors were reluctant to change their original choices, default or otherwise, even when circumstances presented good reason. “Participants seem to have a ‘set it and forget it’ mindset,” the researchers write. “When first confronted with a choice, they make a decision, and most fail to revisit it.”
Investors stayed with the default option even as the nature of the fund changed. In 2010, a regulatory change allowed the manager of the default fund to include as much as 50 percent leverage, greatly increasing investment risk. (The manager accomplished this by borrowing money to increase the equity exposure.) Very few default investors moved their money into other funds afterward, despite the availability of a fund that was almost identical to the original default.
People who actively chose their original portfolio also seemed reluctant to update their decision. Over 16 years, the median number of trades among this group was one per year, the study finds.
In the case of Allra funds, one of the offered choices, not even financial scandal or the ensuing government crackdown were enough to make investors move their money. In January 2017, journalists began reporting self-serving deals by company officials. The funds’ auditors resigned and reported questionable financial disclosures to authorities, and the Swedish government prohibited new investors from coming in. Even a month after Deloitte reported Allra to the authorities on March 16, 2017, and thereafter resigned as auditor, only 32 percent of the start-of-the-year investors had opted to divest.
The researchers make several recommendations based on the observed power of the default option and advertising. They suggest that the default fund return to a conservative, unleveraged global index fund, arguing that investors who want more risk should actively have to choose it.
The sheer number of fund options—there are almost 900 now—may overwhelm savers and make the default fund more attractive, the researchers suggest. If policy makers want more people to invest actively, reducing the number of funds might help.
But the researchers caution against extrapolating their findings to make broad generalizations about the staying power of nudges. They note that nudges range from default options to reminders to the size and color of a font on a form. The behaviors that nudges attempt to influence vary widely too. The stickiness of any nudge, they conclude, will depend greatly on the context.