rotmanmagazine.ca / 35that a few pounds put away now would be worth a lot more in
the future. But it also involved paperwork, a bit of hassle, and it
didn’t feel like something that had to be done today. Retirement
was years away, after all. ‘Yes’, he thought, ‘I’ll do it tomorrow, or
maybe next week.’
In 2012, something happened: His employer wrote to him
to say that, as a result of a small change in the law, they would
now automatically enroll him in the company-sponsored pension
scheme, unless he indicated that he would rather not partake. If
he didn’t want to enroll in the scheme for now, it was simple: He
just had to ask to leave the scheme within a month, and he would
get another prompt in a couple of years’ time.
The ‘default’ had been flipped, from one in which John
would have to actively choose to join the pension scheme (‘opt in’),
to one in which he would be automatically enrolled unless he said
otherwise (‘opt out’). John read the letter, and went to a short talk
on the new arrangements. It was a bit of a relief: He didn’t have to
do anything. His pension was sorted.
John was not alone. Within six months of this change (which
targeted all large UK firms), more than a million new savers start-
ed pensions. In short, more than 90 per cent of eligible workers
chose not to opt out. The proportion of the employees of large
firms saving for pensions rose from just over 60 per cent, where it
had hovered for decades, to over 80 per cent (the overall percent-
age is pulled down by those who were not immediately eligible
for a pension, such as those on extended leave). By early 2015,
this simple change in the default had led to more than five million
extra UK workers saving for their pensions.
This stunning result illustrates the power of a simple nudge
to change behaviour, and to turn around a problem that policy-
makers on both sides of the Atlantic had wrestled with for half
a century. Despite subsidies running into many billions — more
than £20 billion per annum in the UK and $100 billion in the
U.S. — millions of people apparently preferred not to save. It was
enough to make many experts conclude that there was some-
thing deep in Anglo-Saxon culture against saving: We just pre-
ferred to live and spend for today.
The primary tool, employed on both sides of the Atlantic for
decades, had been the use of generous tax breaks and subsidies
to encourage people to save. And yet, as one leading economist
put it, many people continued to ‘leave money on the table’. Re-
cent analysis by Harvard Economist Raj Chetty has shown just
how cost-ineffective such tax subsidies are. His analysis, using
European data, shows that every $1 of taxpayers’ subsidy to en-
courage people to save more for their pensions led to a miserly
one cent of extra saving by workers. The main effect of these huge
subsidies was simply to encourage a small minority of savvy sav-
ers — perhaps 15 per cent — to move their investments into the
most tax-efficient schemes. In contrast, changing the default to
one in which savers were asked to ‘opt out’ led to substantial in-
creases in saving, literally overnight — and very little reduction
in saving elsewhere.
Changing the default also beats educational efforts, hands
down. A wide variety of studies by behavioural economists shows
that financial education — though often called for by industry
and some politicians — has very modest effects. These studiesThe MINDSPACE model
Messenger We are heavily influenced by who
communicates informationIncentives Our responses to incentives are shaped
by predictable mental shortcuts, such
as strongly avoiding lossesNorms We are strongly influenced by what others do
Defaults We ‘go with the flow’ of pre-set options
Salience Our attention is drawn to what is novel
and seems relevant to usPriming Our acts are often influenced
by subconscious cuesAffect Our emotional associations can powerfully
shape our actionsCommitments We seek to be consistent with our public
promises and reciprocate actsEgo We act in ways that make us feel better
about ourselves