Behavioral economics approaches have greater impact on savings than financial outcomes..

It is interesting to read such papers.

Brigitte Madrian of Harvard says that so far we have sued traditional route to increases savings – matching contributions. With behavioral economics we have more tools like text reminders,  simplification, automatic enrollment etc. These latter approaches have a great impact than the traditional approach:

Including a matching contribution increases savings plan participation and contributions, although the impact is less significant than the impact of nonfinancial approaches. Conditional on participation, a higher match rate has only a small effect on savings plan contributions. In contrast, the match threshold has a substantial impact, probably because it serves as a natural reference point when individuals are deciding how much to save and may be viewed as advice from the savings program sponsor on how much to save. Other behavioral approaches to changing savings plan outcomes—including automatic enrollment, simplification, planning aids, reminders, and commitment features—potentially have a much greater impact on savings outcomes than do financial incentives, often at a much lower cost.

It is like a literature survey which looks at various studies on both the topics – traditional vs behavioral.  In the end she points to some limitations of traditional models:

Traditional economic models fail to characterize the most interesting features of the savings choices that individual make. Savings rates cluster heavily around focal points, including the match threshold (as traditional economic theory would predict) and numbers that are multiples of five (something traditional economic theory would not predict). This finding suggests that the match threshold may be a much more important parameter in a matching scheme than the match rate.

Traditional economic models also fail to incorporate the many psychological frictions that impede savings, including present bias, complexity, inattention, and temptation. In many cases, countering these frictions leads to increases in saving plan participation and asset accumulation that surpass the effects of a typical matching contribution, potentially at a lower cost.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: