“In a world where everyone is identical, where we’re all homogeneous, where we all want the same savings rate and the same asset allocation, what should I do? Obviously, automatic enrollment. In a world where everyone is highly heterogeneous, I want to force people to choose for themselves. Why? Because if I pick a default people may stay at the default far too long. They may spend their life at that default, always planing to opt-out and never getting around to it. So if Richard’s optimal saving rate is 8 percent and I default him in at 5 percent he may spend 15 years planing to make the change to 8 percent and never getting around to doing it. So defaults can be very dangerous in a world where people are highly heterogeneous and where they are highly prone to procrastinate. And you may want one or the other system depending on how much people procrastinate and how heterogeneous our popular of consumers is. So the key point here is sometimes the best default is no default, is a compulsory decision.”
From behavioral economist David Laibson in his “Psychology of Saving and Investment” lecture. Of course, automatic enrollment in a 401(k) plan as described in Nudge avoids this dilemma by enrolling people without setting a default contribution rate. We’ll have more on default choice decisions from halfway across the globe later this week.
Addendum: The “Richard” in this quote is not Richard Thaler. Just a coincidence.