Passive Decisions and Potent Defaults
26 Pages Posted: 29 Aug 2003 Last revised: 6 Feb 2022
Date Written: August 2003
Abstract
Default options have an enormous impact on household choices.' Defaults matter because opting out of a default is costly and these costs change over time, generating an option value of waiting. In addition, people have a tendency to procrastinate. We develop a theory of optimal defaults based on these considerations. We find that it is sometimes optimal to set extreme defaults, which are far away from the mean optimal savings rate. A default that is far away from a consumer's optimal savings rate may make that consumer better off since such a bad' default will lead procrastinating consumers to more quickly opt out of the default. We calibrate our model and use it to calculate optimal defaults for employees at four different companies. Our work suggests that optimal defaults are likely to be at one of three savings rates: the minimum savings rate (i.e., 0%), the match threshold (typically 5% or 6%), or the maximal savings rate.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance
By James J. Choi, David Laibson, ...
-
401(K) Plan Asset Allocation, Account Balances, and Loan Activity in 2000
By Sarah Holden and Jack Vanderhei
-
401(K) Plan Asset Allocation, Account Balances, and Loan Activity in 2001
By Sarah Holden and Jack Vanderhei
-
401(K) Plan Asset Allocation, Account Balances, and Loan Activity in 1999
By Sarah Holden and Jack Vanderhei
-
401(K) Plan Asset Allocation, Account Balances, and Loan Activity in 2002
By Sarah Holden and Jack Vanderhei
-
401(K) Plan Asset Allocation, Account Balances, and Loan Activity in 2003
By Sarah Holden and Jack Vanderhei
-
401(K) Plan Asset Allocation, Account Balances, and Loan Activity in 2004
By Sarah Holden and Jack Vanderhei
-
401(K) Plan Asset Allocation, Account Balances, and Loan Activity in 2005
By Sarah Holden and Jack Vanderhei
-
401(K) Plan Asset Allocation, Account Balances, and Loan Activity in 1998
By Jack Vanderhei, Sarah Holden, ...
-
401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2009
By Jack Vanderhei, Sarah Holden, ...