Decision-Making Approaches and the Propensity to Default: Evidence and Implications

Abstract

This paper examines heterogeneity in the responsiveness to default options in a large state retirement plan, focusing on individuals' decision-making approaches as well as their economic and demographic characteristics. Using a survey of plan participants, we find that procrastination and the need for cognitive closure are important determinants of the likelihood of default. We also explore an important implication of defaulting -individuals who default are significantly more likely to subsequently express a desire to enroll in a different plan. The desire to change plans is also correlated with numerous economic and decision-making characteristics, including procrastination.

Why Behavioural Policy Needs Mechanistic Evidence

“… 5 This claim is supported by a recent observational study: ‘We find that the likelihood of default is significantly lower for those with higher levels of general and decision-specific knowledge’ (Brown et al 2012: 22). …”

“…For example, if a policy produces effects that appear as welfare improving in comparison to the status quo, then the discovery that the policy operates through a manipulating mechanism constitutes a reason to reject this comparative judgement. Furthermore, if the mechanistic evidence allows quantitative inferences (Brown et al 2012 for example differentiate the population by ‘reasons for defaulting’) – e.g. that under policy intervention, 40% of the behaviour is produced by a manipulative and 60% by a non-manipulative mechanism – then this information can be used to weigh the purported welfare effect.…”

“…. a surprising degree of heterogeneity, with no more than about one-third of employees citing any one particular reason for defaulting’ (Brown et al 2012: 22).…”

“… 10 That defaults affecting choices through cognitive effort are more manipulative than those affecting choices through the recommendation effect is supported by the following study of choosers’ subsequent regrets. The study investigated a large public retirement system that explored employees’ reasons to default and whether they subsequently regret their decision (Brown et al 2012). It found that reasons like being ‘too busy’, ‘lack[ing] of information’ or the choice being ‘too complex’ increased the probability of employees choosing the default.…”

“…This is evidence for some defaults producing the effect through the cognitive effort mechanism. It also showed that the same people who chose the default for these reasons were more likely to regret their decision later: between 55% and 75% of those defaulting regretted or strongly regretted being in the default plan (Brown et al 2012: 23). In contrast, of those who chose the default because of the recommendation effect, only 43% regretted or strongly regretted being in the default plan.…”