Sometimes we choose by not choosing.
Behavioral economists have long recognized our tendency to avoid making decisions. The more difficult the decision, the more we avoid the question all together. Thaler and Sunstein wrote a book called “Nudge.” In it, they cite all kinds of instances of this tendency to avoid choosing.
Of course, the business world had this figured out a long time ago. Get someone to set up a bank draft for their gym membership, and they’ll keep paying long after the last time they darkened the door. Set up automatic subscriptions on magazines and newspapers, and humans will pay for unread material for years. Give customers a free trial by getting them to commit to deferred enrollment. The trial will pass, and no choice is made. Get your customers to set up automatic deposits and bill paying on a bank account, and they’ll never change banks.
In the case of retirement, not choosing can have serious consequences. Academic studies and observations have led to real policy changes in this area. The changes did not take away our choices. They simply framed the situation so that we made better “not choosing” choices. In 2006, the Pension Protection Act allowed for more automatic enrollment in 401(k)s. For those employees who kept meaning to sign up for their 401(k) but never got around to it, now they could “not choose” and accumulate funds for retirement. The new law even allowed for automatic increases in employee contributions with salary increases. You could “not choose” your entire career and still have a nice nest egg.
Contributing to a 401(k) is only half the equation, though. Employees must choose investment funds within the plan. Oy-Vey. More choices. The 2006 Act allowed employers to make lifecycle funds the default choice. Now, instead of all your contributions sitting in low paying money market funds, you could be invested in an array of funds based on your age and retirement date.
Remember, choosing to NOT contribute or choosing a fund other than the default is always an option. It’s just that most people never get around to making those active choices. They just let things rock along and avoid making the hard decisions.
Add up all the costs you incur by “not choosing:” the gym, the subscriptions, the bank fees, your retirement plan. Not choosing may be the easier path, but it will cost you!
Nancy Lottridge Anderson, Ph.D., CFA, is president of New Perspectives Inc. in Ridgeland — (601) 991-3158. She is also an assistant professor of finance at Mississippi College. Her e-mail address is firstname.lastname@example.org, and her website is www.newper.com.