Decision-Making Traits and the Propensity to Default: Evidence and Implications

Over the past decade, default options have become ubiquitous features of public and private retirement plans because of the powerful effect of defaults on behavior. However, evidence is still limited on why people are sensitive to defaults and why this sensitivity varies across the population. We explore this heterogeneity, examining not only demographic and economic correlates of defaults, but also measures of decision making traits that are well-established in the psychology literature. Using an extensive survey of participants of a large public retirement system in which individuals are faced with a one-time irrevocable choice among three distinct retirement plans, we provide new evidence on economic and psychological characteristics most closely associated with being defaulted rather than making an active choice. In addition to the important role played by economic measures such as income, we find that procrastination and the need for cognitive closure are important psychological determinants of the likelihood of default. We also explore an important implication of defaults: namely, that individuals who default are much more likely to subsequently express a desire to be in a different plan. The desire to switch plans is also correlated with numerous economic and psychological characteristics, again including procrastination. Given the important role of procrastination, we conducted a simple field experiment to show that sending out enrollment reminders closer to the default date have a modest effect of reducing defaults among a subset of the population.