The Welfare Economics of Default Options in 401(k) Plans

Bernheim, B. Douglas; Fradkin, Andrey; Popov, Igor

doi:10.3386/w17587

Cited by 66 publications

(98 citation statements)

References 18 publications

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“…Choi et al (2016) and Goda et al (2014) show in field experiments that employees raise their 401(k) contribution rates if they are exposed to arbitrary high contribution examples in communications. Bernheim et al (2015) argue that a model with anchoring is able to explain default effects better than a model where defaults are driven by opt-out costs and time inconsistency.(5) The default may become a reference point around which gains and losses are evaluated. Loss aversion would then cause people to be reluctant to move away from the default.…”

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confidence: 99%

Behavioral Household Finance

Beshears

Choi

Laibson

et al. 2018

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This chapter provides an overview of household finance. The first part summarizes key facts regarding household financial behavior, emphasizing empirical regularities that are inconsistent with the standard classical economic model and discussing extensions of the classical model and explanations grounded in behavioral economics that can account for the observed patterns. This part covers five topics: consumption and savings, borrowing, payments, asset allocation, and insurance. The second part addresses interventions that firms, governments, and other parties deploy to shape household financial outcomes: education and information, peer effects and social influence, product design, advice and disclosure, choice architecture, and interventions that directly target prices or quantities. This chapter is divided into two parts, each of which is further divided into several sections. The first part summarizes key facts regarding household financial behavior, emphasizing empirical regularities that are inconsistent with the standard classical economic model and discussing both extensions of the classical model and explanations grounded in behavioral economics that can account for the observed patterns. This part covers five topics: (I) consumption and savings, (II) borrowing, (III) payments, (IV) asset allocation, and (V) insurance. The second part addresses interventions that firms, governments, and other parties deploy to shape household financial outcomes: (VI) education and information, (VII) peer effects and social influence, (VIII) product design, (IX) advice and disclosure, (X) choice architecture, and (XI) interventions that directly target prices or quantities. The final section of the paper (XII) concludes. John BeshearsWe offer broad coverage of the household finance literature, but we limit the scope of our discussion along some dimensions. We focus on the U.S. institutional context and on empirical work based on U.S. data, although we do bring evidence from other wealthy countries to bear when germane and occasionally reference evidence from developing countries. We address household asset allocation but do not draw out its implications for asset pricing, which are covered by the asset pricing chapter in this handbook. Although household decisions regarding health care are relevant to household finance, we largely omit this literature from our chapter because it is covered in depth in the chapter on behavioral health economics. Finally, there is some overlap between our section on financial product design and the chapter on behavioral industrial organization; we refer readers to that chapter for related material on that topic. Part 1: Facts I. Consumption and SavingsBeginning with the seminal work of Modigliani and Brumberg (1954) and Friedman (1957), economists have embraced the view that households choose to save and borrow to smooth consumption over the lifecycle. Intuitively, if agents have concave utility functions over consumption, then they should spread consumption across time to optimally...

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confidence: 99%

Behavioral Household Finance

Beshears

Choi

Laibson

et al. 2018

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“…One can model decision-makers' sensitivity to the default by supposing that selecting an option other than the default requires incurring an additional utility cost (see Bernheim, Fradkin and Popov, 2015). Whether this "as-if cost" to opting out of the default actually reduces decision-makers' welfare depends on the reason decision-makers are sensitive to the default in the first place.…”

Section: Defaultsmentioning

confidence: 99%

Rationalizations and Mistakes: Optimal Policy with Normative Ambiguity

Goldin¹,

Reck

2018

AEA Papers and Proceedings

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Behavior that appears to violate neoclassical assumptions can often be rationalized by incorporating an optimization cost into decision-makers' utility functions. Depending on the setting, these costs may reflect either an actual welfare loss for the decisionmakers who incur them or a convenient (but welfare irrelevant) modeling device. We consider how resolution of this normative ambiguity shapes optimal policy in a number of contexts, including default options, inertia in health insurance plan selection, take-up of social programs, programs that encourage moving to a new neighborhood, and tax salience.

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“…Unfortunately, it is not always possible to identify trusted choices. In such cases, approaches that allow for ambiguity may be best (Bernheim and Rangel, 2009;Bernheim, Fradkin and Popov, Forthcoming). Alternatively, if researchers are willing to make reasonable assumptions about the nature of consumer mistakes, then rich choice data may make it possible to separately infer consumer preferences and biases without relying on trusted choices.…”

Section: Welfare Analysismentioning

confidence: 99%

Failing to Choose the Best Price: Theory, Evidence, and Policy

Grubb

2015

Rev Ind Organ

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Both the "law of one price" and Bertrand's (1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In practice, consumers often fail to choose the best price because they search too little, become confused comparing prices, and then show excessive inertia through too little switching away from past choices or default options. This is particularly true when price is a vector rather than a scalar, and consumers have limited experience in the relevant market. All three mistakes may contribute to positive markups that fail to diminish as the number of competing sellers increases. Firms may have an incentive to exacerbate these problems by obfuscating prices, thereby using complexity to make price comparisons difficult and soften competition. Possible regulatory interventions include simplifying the choice environment, for instance by restricting price to be a scalar, advising consumers of their expected costs under each option, or choosing on behalf of consumers. * Boston College, michael.grubb@bc.edu, https://www2.bc.edu/michael-grubb/. I am grateful to Mark Armstrong, Ben Handel, and Rani Spiegler for careful reading and many helpful comments on an earlier draft. I also thank Vera Sharunova for her excellent research assistance.

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The Welfare Economics of Default Options in 401(k) Plans

Cited by 66 publications

References 18 publications

Behavioral Household Finance

Behavioral Household Finance

Rationalizations and Mistakes: Optimal Policy with Normative Ambiguity

Failing to Choose the Best Price: Theory, Evidence, and Policy

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