- Person
- Richard Thaler
- Lived
- b. 1945
- Field
- Behavioral economics
- From
- American
The story
Richard Thaler was born in East Orange, New Jersey, in 1945 into a Jewish family; his father was an actuary for the Prudential insurance company. As a young economist Thaler grew fascinated by the ways real people depart from the perfectly rational decision-makers of economic theory. One of the most costly is procrastination about saving: many people know they should put more aside for retirement but find it painful to cut their spending today, and keep putting off the decision.
Thaler’s research on self-control suggested a solution. People find it much easier to promise to save more in the future than to save more now, especially if the extra saving comes out of a pay rise they have not yet received. With his former Cornell student Shlomo Benartzi he designed Save More Tomorrow, a voluntary plan in which employees agree in advance that part of each future raise will go into their retirement account. They stay in the plan unless they choose to leave, and can leave at any time.
The results were striking. At the first company to adopt the plan, 78 percent of employees offered it joined, and participants’ average saving rate rose from 3.5 percent to 13.6 percent of pay in less than four years. The Royal Swedish Academy of Sciences later described the programme as having been used successfully at a number of companies in the United States.
The idea fitted with another of Thaler’s themes, the power of defaults. When workers are enrolled in a pension plan automatically unless they opt out, participation rises dramatically; opt-out rates have averaged around ten percent. The U.S. Pension Protection Act of 2006 encouraged employers to combine automatic enrolment with automatic increases in contributions, and by 2011 most American employers offering 401(k) plans used automatic enrolment and about half offered automatic escalation. Benartzi and Thaler estimated that automatic escalation was adding billions of dollars a year to workers’ retirement savings.
In their 2008 book Nudge, Thaler and the legal scholar Cass Sunstein argued that governments and employers should design choices in this way, helping people do what they themselves want while leaving them free to choose otherwise. The British government’s Behavioural Insights Team, set up in 2010, took advice from Thaler, and nudge units have since spread to many countries.
Why it matters
Automatic enrolment and automatic escalation, championed by Thaler, now help millions of workers in the United States and other countries build retirement savings they might otherwise never have started.
About Richard Thaler
Founder of behavioral economics and, with Cass Sunstein, of “nudge” policy, such as automatic pension enrolment that has helped millions save for retirement. Nobel Prize 2017.
Sources
- Behavioral Economics and the Retirement Savings Crisis Chicago Booth Review
- Popular information: The Prize in Economic Sciences 2017 NobelPrize.org
- Richard H. Thaler, Biographical NobelPrize.org
- Thaler Nudges the Brits (and the Swedes?) Marginal Revolution
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.