Household Financial Decision Making

Individuals make many well-documented mistakes with their finances, such as not saving enough for retirement, paying too much in fees, and running up credit card debt. Recognizing that complexity is a significant barrier to financial decision making, Professor Beshears has explored how simplification can help. Looking at the retirement savings problem, he has studied a mechanism that allows employees to enroll in their employer’s retirement savings plan at an asset allocation and contribution rate pre-selected by their employer and found that enrollment increased by 10 to 20 percentage points above a standard opt-in plan. Further, the effectiveness of this mechanism increases substantially when employees are offered repeated opportunities to use it. A similar mechanism is effective in motivating employees to increase the percentage of salary that they contribute to their savings plan. These innovations work because they give people simple, understandable choices, yet without eliminating the full range of options previously available. The results suggest applications in enrolling in health insurance plans and creating advance medical directives.