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This article from NYTimes.com
has been sent to you by vkaminski@aol.com. /-------------------- advertisement -----------------------\ Share the spirit with a gift from Starbucks. Our coffee brewers & espresso machines at special holiday prices. http://www.starbucks.com/shop/subcategory.asp?category_name=Sale/Clearance&ci=274&cookie_test=1 \----------------------------------------------------------/ Why It Takes Psychology to Make People Save January 13, 2002 By LOUIS UCHITELLE When it comes to saving for retirement, Americans are not rational. They know they do not put away enough, surveys show. But ask them to save more in their 401(k) plans and they balk. A buck in hand is irresistibly spent. Try a different approach. Ask them to commit now to increasing their savings in the future, make the increase coincide with the next raise, and they cheerfully sign up. Various quirks embedded in human nature come into play. Saving more in the future seems much less of a sacrifice. When the future arrives, opting out succumbs to inertia. And timing the increase to coincide with a raise, so that one cancels out the other, is much more palatable than a cut in take-home pay. In the human psyche, giving up a raise not yet in hand is easier for people to accept emotionally than a loss, even the illusion of a loss. After all, the money "lost" is still there, in one's savings account. Standard economics allows for none of these quirks. Over a lifetime, people rationally save an optimal amount, mainstream economics holds. Confronted with the reality that people do not save enough, the mainstream has no solution, except to reiterate that people are rational, so whatever they save must be enough. No wonder behavioral economics is making such a splash, becoming the "in" specialty of young economists from the best graduate schools. "You have to force savings and take the money away before people have it and can't resist spending it," said Richard H. Thaler, a University of Chicago economist. Mr. Thaler is a pioneer in the development of behavioral economics over the last 25 years, and now he is a leader in finally applying the insights to daily life. So far the application focuses on persuading people to save more in 401(k) plans. But there are other potential uses. Fiscal policy is one. Allowing for human quirks, what is the most effective way to spend public money to promote jobs and economic growth? "If we invested six months in designing a stimulus package using insights from behavioral economics, there is good reason to think it might work," Mr. Thaler said. That is still off in the future. Medicine offers an immediate application. Some dentists, for example, are beginning to ask behavioral economists how to get patients to return every six months for teeth cleaning. Reminder postcards don't often work. People put them in a drawer and procrastinate - another human quirk that messes up mainstream theory, with its faith in rationally taking good care of teeth. Most people delay, unless the dentist extracts a commitment, by persuading a patient, when he or she comes in for a cleaning, to make an appointment on the spot for the next cleaning, six months hence. "The postcard system only facilitates procrastination," said David I. Laibson, a behavioral economist at Harvard, who gets calls from dentists. THE most promising application so far is retirement savings. At a time when workers must save for their own retirement, they are in danger of inadequate income in old age unless they contribute 10 percent of their pay to 401(k) plans, pension experts say. And that does not count losses in 401(k) money invested in high-technology stocks or in the Enron Corporation (news/quote). Such hearty contributions are certainly in the interest of the Vanguard Group, which administers 401(k) plans for companies like Philips Electronics (news/quote) North America, a unit of Royal Philips Electronics. Philips also has a stake: under federal law, top executives cannot have retirement savings too out of line with those of ordinary employees. So Vanguard and Philips turned to Mr. Thaler and to Shlomo Benartzi, at the University of California at Los Angeles. Executives had read a paper they wrote, entitled "Save More Tomorrow," reporting on the results at a Midwestern company where 162 employees, more than half the staff, had agreed in advance to annual increases in their 401(k) contributions, each increase coinciding with a raise. Over three years, the contributions rose to 11.6 percent of income from 3.5 percent. Most of the 16,000 Philips employees enrolled in 401(k) plans save 6 percent or less. So Philips is experimenting. With Vanguard administering the test and Mr. Thaler and Mr. Benartzi giving advice, the company will ask 2,000 workers next month to commit to annual increases in 401(k) contributions of one, two or three percentage points. The first increase would be in April, when Philips gives annual raises, although this year, in a recession, a raise is not a sure thing, says Lisa Pyne, Philips's benefits director. Still, she is counting on inertia to keep people from opting out - even the 3 percenters who, absent a raise, might notice the slight decline in take-home pay. "Behavioral economics seems to work," Ms. Pyne said. http://www.nytimes.com/2002/01/13/business/yourmoney/13VIEW.html?ex=1011981914&;ei=1&en=192ceb9ad23813d2 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact Alyson Racer at alyson@nytimes.com or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@nytimes.com. Copyright 2001 The New York Times Company
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