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UCLA Anderson Review: Lack of Urgency Can Undermine a Popular Behavioral Nudge

From UCLA Anderson Review: One of the most pernicious behavioral biases is the struggle to make choices that require delayed gratification. We are not built to naturally — or easily — limit ourselves today (forgoing dessert, saving a dollar for retirement rather than spending it today) for a payoff that could be months, or decades, away. The pre-commitment nudge addresses this tension by asking individuals to agree to embark on a good-for-you-but-difficult behavior sometime in the future. Given our outsize focus on the here and now, we’re more amenable to a change that we can schedule to start later. Nearly 20 years ago, research published in the Journal of Political Economy, by University of Chicago’s Richard Thaler and UCLA Anderson’s Shlomo Benartzi, ignited one of the most practical and consequential implementations of pre-commitment. A field experiment confirmed employees weren’t typically game for increasing their retirement plan savings rate today but were receptive to increasing their 401(k) savings rate in the future. Specifically, participants had the choice to pre-commit to boosting their contribution rate every time they received a raise. Eighty percent of participants were still participating after four salary increases, and the average savings rate rose from 3.5% to 13.6%. That research helped propel the 2006 codification allowing auto-escalation of participant 401(k) contribution rates. Today, auto-escalation is embedded in in the majority of plans that automatically enroll new participants. Urgency Matters in Decision-Making Long after that work, a team of behavioral science academics that included Benartzi, along with UCLA Anderson’s Joseph S. Reiff, Ph.D. candidate, and Hengchen Dai, Harvard’s John Beshears and Wharton’s Katherine L. Milkman, stumbled upon a surprising nuance to the pre-commitment nudge that undermines its intended purpose. Examining results from a field experiment, conducted in 2013-2014 that targeted more than 5,000 employees at four universities who weren’t participating in their retirement plan, the researchers saw a flaw in the pre-commitment approach. There were two types of nudges: One group was asked if they were ready to start saving immediately. Another group was given a savings choice: Would they like to start immediately or at some future date within the next several months? The expectation going into this research was that this “simultaneous” offer of save now or save tomorrow would be more effective than only offering the option to begin immediately. It wasn’t. Read more at the UCLA Anderson Review.