Issue 22 of Hacking Human Nature for Good
We hope you’ve enjoyed this brief overview of behavioral economics. We’d like to leave you with one last example of a great program that incorporates behavioral economics to shift people’s behavior in a positive way: Save More Tomorrow. It is designed to help increase retirement savings rates.
Before we go into the program details, let’s remember why saving for retirement is so difficult and why so few people save enough. Figuring out how much to save and where to allocate funds are complex decisions… and as you know by now, complex decisions can cause us to avoid making a decision altogether. Saving for retirement is something that requires sacrificing the present in favor of the future, so hyperbolic discounting comes into play. And lastly, we procrastinate on unpleasant tasks, resulting in a status quo bias.
Keeping these factors in mind, the Save More Tomorrow Program is designed to counteract them by having employees commit to increases in contributions in advance, before a raise or pay increase. This increase occurs concurrently with the first paycheck they receive after a raise in order to mitigate loss aversion. Contribution increases happen on a pre-set schedule until a maximum is hit. In this way, status quo bias and inertia actually play to the employee’s advantage.
In their initial study of the program, Richard Thaler and Shlomo Benartzi found that 78% of people who initially had refused to increase their savings now agreed to do so in the future. After four years, program participants went from a savings rate of 3.5% to a whopping 13.6% (17). Because of the scale of this impact, many other firms are now integrating parts of Save More Tomorrow’s design into their retirement programs.
We hope you’ve found some new ways to think about how to drive positive change through your product or service, as well as your role as a choice architect. Now you know how to shape your users’ decisions by selecting the environment where the decisions are made, and through the experiences that you create. Good luck!
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Want more behavioral economics? Check out the second course from Irrational Labs here or why not Dan's latest book Payoff: The Hidden Logic That Shapes Our Motivations.
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Thaler, R., & Benartzi, S. (2004). Save more tomorrow™: Using behavioral economics to increase employee saving. Journal of Political Economy, 112(S1), S164-S187. doi:10.1086/380085