Optimal Defaults and Active Decisions

59 Pages Posted: 18 Feb 2005 Last revised: 7 Jan 2010

See all articles by Gabriel D Carroll

Gabriel D Carroll

Massachusetts Institute of Technology (MIT)

James J. Choi

Yale School of Management; National Bureau of Economic Research (NBER)

David Laibson

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

Brigitte C. Madrian

Brigham Young University Marriott School of Business; National Bureau of Economic Research (NBER)

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Date Written: January 2005

Abstract

Defaults can have a dramatic influence on consumer decisions. We identify an overlooked but practical alternative to defaults: requiring individuals to make an explicit choice for themselves. We study such "active decisions" in the context of 401(k) saving. We find that compelling new hires to make active decisions about 401(k) enrollment raises the initial fraction that enroll by 28 percentage points relative to a standard opt-in enrollment procedure, producing a savings distribution three months after hire that would take three years to achieve under standard enrollment. We also present a model of 401(k) enrollment and characterize the optimal enrollment regime. Active decisions are optimal when consumers have a strong propensity to procrastinate and savings preferences that are highly heterogeneous. Naive beliefs about future time-inconsistency strengthen the normative appeal of the active-decision enrollment regime. However, financial illiteracy favors default enrollment over active decision enrollment.

Suggested Citation

Carroll, Gabriel D and Choi, James J. and Laibson, David I. and Madrian, Brigitte C. and Metrick, Andrew, Optimal Defaults and Active Decisions (January 2005). NBER Working Paper No. w11074. Available at SSRN: https://ssrn.com/abstract=653021

Gabriel D Carroll

Massachusetts Institute of Technology (MIT) ( email )

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James J. Choi (Contact Author)

Yale School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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David I. Laibson

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Brigitte C. Madrian

Brigham Young University Marriott School of Business ( email )

Provo, UT 84602
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andrew Metrick

Yale School of Management ( email )

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HOME PAGE: http://faculty.som.yale.edu/andrewmetrick/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

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