TY - JOUR AU - Carroll,Gabriel D. AU - Choi,James J. AU - Laibson,David AU - Madrian,Brigitte AU - Metrick,Andrew TI - Optimal Defaults and Active Decisions JF - National Bureau of Economic Research Working Paper Series VL - No. 11074 PY - 2005 Y2 - January 2005 UR - http://www.nber.org/papers/w11074 L1 - http://www.nber.org/papers/w11074.pdf N1 - Author contact info: Gabriel Carroll MIT Department of Economics 50 Memorial Drive Cambridge, MA 02142 E-Mail: gdc@mit.edu James J. Choi Yale School of Management 135 Prospect Street P.O. Box 208200 New Haven, CT 06520-8200 E-Mail: james.choi@yale.edu David Laibson Department of Economics Littauer M-12 Harvard University Cambridge, MA 02138 Tel: 617/496-3402 Fax: 617/495-8570 E-Mail: dlaibson@gmail.com Brigitte C. Madrian John F. Kennedy School of Government Harvard University 79 JFK Street Cambridge, MA 02138 Tel: 617-495-8917 Fax: 617-496-5960 E-Mail: Brigitte_Madrian@Harvard.edu Andrew Metrick Yale School of Management 135 Prospect Street P.O. Box 208200 New Haven, CT 06520 Tel: 203/432-3069 E-Mail: metrick@yale.edu AB - Defaults can have a dramatic influence on consumer decisions. We identify an overlooked but practical alternative to defaults: requiring individuals to make an explicit choice for themselves. We study such "active decisions" in the context of 401(k) saving. We find that compelling new hires to make active decisions about 401(k) enrollment raises the initial fraction that enroll by 28 percentage points relative to a standard opt-in enrollment procedure, producing a savings distribution three months after hire that would take three years to achieve under standard enrollment. We also present a model of 401(k) enrollment and characterize the optimal enrollment regime. Active decisions are optimal when consumers have a strong propensity to procrastinate and savings preferences that are highly heterogeneous. Naive beliefs about future time-inconsistency strengthen the normative appeal of the active-decision enrollment regime. However, financial illiteracy favors default enrollment over active decision enrollment. ER -