The Behavioral Economics of Undersaving: Evidence from Field Experiments on Employee 401(k) Enrollment and Savings Decisions

The majority of Americans are not saving enough to maintain their standard of living after retirement. This lack of personal savings not only poses a policy problem, but also a challenge for traditional economic models of saving, which presume that people smooth consumption over their lifetimes. Previous economic research has proposed several theoretical mechanisms that could explain low saving, such as deficits in information and present-biased preferences. Yet despite considerable empirical research, we have little causal evidence on which mechanisms drive undersaving, particularly in the context of developed economies. This dissertation investigates causes and potential remedies for inadequate saving in 401(k)s—the most common type of retirement savings accounts in the US—through a series of field experiments implemented at financial services firms. In the first paper we test proposed mechanisms affecting savings and present some of the first direct experimental evidence implicating present bias in low 401(k) contributions. We show that this behavior and stated beliefs are not accommodated by the most commonly used formal model of present bias without extreme preference parameters. In the second paper, we ask whether design features of online 401(k) enrollment interfaces can encourage higher savings, without changing the underlying economic structure. We treat these presentational aspects as the “psychological design,” which standard economic theory deems irrelevant to choice. However, we demonstrate that psychological design can impact enrollment decisions through a series of field studies with a large 401(k) provider in which we experimentally vary the enrollment interface used by several hundred plans. Our enhanced design interface leads to a substantial increase in average contributions and also appears to amplify employee sensitivity to match-generosity, pointing to a complementarity between the use of design and economic structure to encourage savings. Using lab studies, we find little evidence to support the possibility that the observed effects of design occur through inferential channels. Collectively, the findings in this dissertation provide insight into non-standard models that may better explain how individuals make consequential financial decisions. They also provide scalable strategies to encourage savings.