Nudging by Default

“Defaults (and their designers) hold immense power,” Lena Groeger writes at ProPublica, “they make decisions for us that we’re not even aware of making”:

Consider the fact that most people never change the factory settings on their computer, the default ringtone on their phones, or the default temperature in their fridge. Someone, somewhere, decided what those defaults should be – and it probably wasn’t you.

Another example: In the U.S. when you register for your driver’s license, you’re asked whether or not you’d like to be an organ donor. We operate on an opt-in basis: that is, the default is that you are not an organ donor. If you want to donate your organs, you need to actively check a box on the DMV questionnaire. Only about 40 percent of the population is signed up to be an organ donor. In other countries such as Spain, Portugal and Austria, the default is that you’re an organ donor unless you explicitly choose not to be. And in many of those countries over 99 percent of the population is registered.

In other words, default settings serve as a powerful means of “nudging” people to prefer one choice over another. Groeger discusses how this principle applies to the realm of retirement savings:

Many companies’ retirement plans, like 401(k)’s, are opt-in: You have to hike over to HR and get enrolled, and sometimes you have to understand a bit about investing. But an alternative strategy has seen massive success: automatic enrollment. This means that employees are enrolled by default, unless they decide not to contribute. Research shows that under these circumstances, participation in 401(k)’s skyrockets and the retirement savings don’t appear to cut savings in other accounts.

As an added bonus, unlike tax subsidies for contributing to your retirement savings, automatic enrollment programs cost the government nothing.

It’s true that the same mechanism that gets so many people enrolled in the first place (it’s the default), keeps them stuck at the low default contribution rate (often 3 percent). That’s not much to be contributing year after year. To combat the problem, many employers now implement automatic escalation, which means you agree upfront to raise your contribution by 1 or 2 percent every year.