The Marketplace of Perceptions summarizes the field of behavioral economics. An example:
Pre-commitments of this sort are one way of getting around not only the lure of temptation, but our tendency to procrastinate on matters that have an immediate cost but a future payoff, like dieting, exercise, and cleaning your office. Take 401(k) retirement plans, which not only let workers save and invest for retirement on a tax-deferred basis, but in many cases amount to a bonanza of free money: the equivalent of finding “$100 Bills on the Sidewalk” (the title of one of Laibson’s papers, with James Choi and Brigitte Madrian). That’s because many firms will match employees’ contributions to such plans, so one dollar becomes two dollars. “It’s a lot of free money,” says Laibson, who has published many papers on 401(k)s and may be the world’s foremost authority on enrollment in such plans. “Someone making $50,000 a year who has a company that matches up to 6 percent of his contributions could receive an additional $3,000 per year.”The rational model unequivocally predicts that people will certainly snap up such an opportunity. But they don’t — not even workers aged 59 1/2 or older, who can withdraw sums from their 401(k) plans without penalty. (Younger people are even more unlikely to contribute, but they face a penalty for early withdrawal.) “It turns out that about half of U.S. workers in this [above 59 1/2] age group, who have this good deal available, are not contributing,” says Laibson. “There’s no downside and a huge upside. Still, individuals are procrastinating — they plan to enroll soon, year after year, but don’t do it.” In a typical American firm, it takes a new employee a median time of two to three years to enroll. But because Americans change jobs frequently — say, every five years — that delay could mean losing half of one’s career opportunity for these retirement savings.
Laibson has run educational interventions with employees at companies, walking them through the calculations, showing them what they are doing wrong. “Almost all of them still don’t invest,” Laibson says. “People find these kinds of financial transactions unpleasant and confusing, and they are happier with the idea of doing it tomorrow. It demonstrates how poorly the standard rational-actor model predicts behavior.”
It’s not that we are utterly helpless against procrastination. Laibson worked with a firm that forced its employees to make active decisions about 401(k) plans, insisting on a yes or no answer within 30 days. This is far different from giving people a toll-free phone number to call whenever they decide to enroll. During the 30-day period, the company also sent frequent e-mail reminders, pressuring the staff to make their decisions. Under the active-decision plan, enrollment jumped from 40 to 70 percent. “People want to be prudent, they just don’t want to do it right now,” Laibson says. “You’ve got to compel action. Or enroll people automatically.”