Optimal Default Options: The Case for (Weighted) Opt-Out Minimization

45 Pages Posted: 19 Feb 2021 Last revised: 27 Dec 2021

See all articles by B. Douglas Bernheim

B. Douglas Bernheim

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Jonas Mueller Gastell

Stanford Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: December 22, 2021

Abstract

We examine the problem of setting optimal default options such as passively selected contribution rates in employee-directed pension plans. Existing results suggest that a simple rule of thumb, opt-out minimization, is optimal under special conditions, but this result is fragile, and the literature does not provide a general analytic solution. We demonstrate with considerable generality that weighted opt-out minimization is approximately optimal, and we provide clear mathematical intuition for the robustness of this result. We also identify surprisingly broad conditions under which unweighted opt-out minimization is approximately optimal. We conduct simulations to evaluate the accuracy of the approximation.

Keywords: Default option, opt-out minimization

JEL Classification: D10, D11, D14

Suggested Citation

Bernheim, B. Douglas and Mueller Gastell, Jonas, Optimal Default Options: The Case for (Weighted) Opt-Out Minimization (December 22, 2021). Available at SSRN: https://ssrn.com/abstract=3749537 or http://dx.doi.org/10.2139/ssrn.3749537

B. Douglas Bernheim (Contact Author)

Stanford University - Department of Economics ( email )

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Jonas Mueller Gastell

Stanford Department of Economics ( email )

Stanford, CA
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