Placeholder Image

Subtitles section Play video

  • I'm going to talk today about saving more,

  • but not today, tomorrow.

  • I'm going to talk about Save More Tomorrow.

  • It's a program that Richard Thaler

  • from the University of Chicago and I

  • devised maybe 15 years ago.

  • The program, in a sense,

  • is an example of behavioral finance

  • on steroids --

  • how we could really use behavioral finance.

  • Now you might ask, what is behavioral finance?

  • So let's think about how we manage our money.

  • Let's start with mortgages.

  • It's kind of a recent topic,

  • at least in the U.S.

  • A lot of people buy

  • the biggest house they can afford,

  • and actually slightly bigger than that.

  • And then they foreclose.

  • And then they blame the banks

  • for being the bad guys who gave them the mortgages.

  • Let's also think about

  • how we manage risks --

  • for example, investing in the stock market.

  • Two years ago, three years ago, about four years ago,

  • markets did well.

  • We were risk takers, of course.

  • Then market stocks seize

  • and we're like, "Wow.

  • These losses, they feel, emotionally,

  • they feel very different

  • from what we actually thought about it

  • when markets were going up."

  • So we're probably not doing a great job

  • when it comes to risk taking.

  • How many of you have iPhones?

  • Anyone? Wonderful.

  • I would bet many more of you

  • insure your iPhone --

  • you're implicitly buying insurance by having an extended warranty.

  • What if you lose your iPhone?

  • What if you do this?

  • How many of you have kids?

  • Anyone?

  • Keep your hands up

  • if you have sufficient life insurance.

  • I see a lot of hands coming down.

  • I would predict,

  • if you're a representative sample,

  • that many more of you

  • insure your iPhones than your lives,

  • even when you have kids.

  • We're not doing that well when it comes to insurance.

  • The average American household

  • spends 1,000 dollars a year

  • on lotteries.

  • And I know it sounds crazy.

  • How many of you spend a thousand dollars a year on lotteries?

  • No one.

  • So that tells us that the people not in this room

  • are spending more than a thousand

  • to get the average to a thousand.

  • Low-income people

  • spend a lot more than a thousand on lotteries.

  • So where does it take us?

  • We're not doing a great job managing money.

  • Behavioral finance is really a combination

  • of psychology and economics,

  • trying to understand

  • the money mistakes people make.

  • And I can keep standing here

  • for the 12 minutes and 53 seconds that I have left

  • and make fun of all sorts of ways

  • we manage money,

  • and at the end you're going to ask, "How can we help people?"

  • And that's what I really want to focus on today.

  • How do we take an understanding

  • of the money mistakes people make,

  • and then turning the behavioral challenges

  • into behavioral solutions?

  • And what I'm going to talk about today

  • is Save More Tomorrow.

  • I want to address the issue

  • of savings.

  • We have on the screen

  • a representative sample

  • of 100 Americans.

  • And we're going to look at their saving behavior.

  • First thing to notice is,

  • half of them

  • do not even have access

  • to a 401(k) plan.

  • They cannot make savings easy.

  • They cannot have money go away from their paycheck

  • into a 401(k) plan

  • before they see it,

  • before they can touch it.

  • What about the remaining half of the people?

  • Some of them elect not to save.

  • They're just too lazy.

  • They never get around to logging into a complicated website

  • and doing 17 clicks to join the 401(k) plan.

  • And then they have to decide how they're going to invest

  • in their 52 choices,

  • and they never heard about what is a money market fund.

  • And they get overwhelmed and the just don't join.

  • How many people end up saving to a 401(k) plan?

  • One third of Americans.

  • Two thirds are not saving now.

  • Are they saving enough?

  • Take out those

  • who say they save too little.

  • One out of 10

  • are saving enough.

  • Nine out of 10

  • either cannot save through their 401(k) plan,

  • decide not to save -- or don't decide --

  • or save too little.

  • We think we have a problem

  • of people saving too much.

  • Let's look at that.

  • We have one person --

  • well, actually we're going to slice him in half

  • because it's less than one percent.

  • Roughly half a percent of Americans

  • feel that they save too much.

  • What are we going to do about it?

  • That's what I really want to focus on.

  • We have to understand

  • why people are not saving,

  • and then we can hopefully flip

  • the behavioral challenges

  • into behavioral solutions,

  • and then see how powerful it might be.

  • So let me divert for a second

  • as we're going to identify the problems,

  • the challenges, the behavioral challenges,

  • that prevent people from saving.

  • I'm going to divert and talk about bananas and chocolate.

  • Suppose we had another wonderful TED event next week.

  • And during the break

  • there would be a snack

  • and you could choose bananas or chocolate.

  • How many of you think you would like to have bananas

  • during this hypothetical TED event next week?

  • Who would go for bananas?

  • Wonderful.

  • I predict scientifically

  • 74 percent of you will go for bananas.

  • Well that's at least what one wonderful study predicted.

  • And then count down the days

  • and see what people ended up eating.

  • The same people that imagined themselves

  • eating the bananas

  • ended up eating chocolates

  • a week later.

  • Self-control

  • is not a problem in the future.

  • It's only a problem now

  • when the chocolate is next to us.

  • What does it have to do with time and savings,

  • this issue of immediate gratification?

  • Or as some economists call it, present bias.

  • We think about saving. We know we should be saving.

  • We know we'll do it next year, but today let us go and spend.

  • Christmas is coming,

  • we might as well buy a lot of gifts for everyone we know.

  • So this issue of present bias

  • causes us to think about saving,

  • but end up spending.

  • Let me now talk

  • about another behavioral obstacle to saving

  • having to do with inertia.

  • But again, a little diversion

  • to the topic of organ donation.

  • Wonderful study comparing different countries.

  • We're going to look at two similar countries,

  • Germany and Austria.

  • And in Germany,

  • if you would like to donate your organs --

  • God forbid something really bad

  • happens to you --

  • when you get your driving license or an I.D.,

  • you check the box saying,

  • "I would like to donate my organs."

  • Not many people like checking boxes.

  • It takes effort. You need to think.

  • Twelve percent do.

  • Austria, a neighboring country,

  • slightly similar, slightly different.

  • What's the difference?

  • Well, you still have choice.

  • You will decide

  • whether you want to donate your organs or not.

  • But when you get your driving license,

  • you check the box

  • if you do not want to donate your organ.

  • Nobody checks boxes.

  • That's kind of too much effort.

  • One percent check the box. The rest do nothing.

  • Doing nothing is very common.

  • Not many people check boxes.

  • What are the implications

  • to saving lives

  • and having organs available?

  • In Germany, 12 percent check the box.

  • Twelve percent are organ donors.

  • Huge shortage of organs,

  • God forbid, if you need one.

  • In Austria, again, nobody checks the box.

  • Therefore, 99 percent of people

  • are organ donors.

  • Inertia, lack of action.

  • What is the default setting

  • if people do nothing,

  • if they keep procrastinating, if they don't check the boxes?

  • Very powerful.

  • We're going to talk

  • about what happens if people are overwhelmed and scared

  • to make their 401(k) choices.

  • Are we going to make them automatically join the plan,

  • or are they going to be left out?

  • In too many 401(k) plans,

  • if people do nothing,

  • it means they're not saving for retirement,

  • if they don't check the box.

  • And checking the box takes effort.

  • So we've chatted about a couple of behavioral challenges.

  • One more before we flip the challenges into solutions,

  • having to do with monkeys and apples.

  • No, no, no, this is a real study

  • and it's got a lot to do with behavioral economics.

  • One group of monkeys gets an apple, they're pretty happy.

  • The other group gets two apples, one is taken away.

  • They still have an apple left.

  • They're really mad.

  • Why have you taken our apple?

  • This is the notion of loss aversion.

  • We hate losing stuff,

  • even if it doesn't mean a lot of risk.

  • You would hate to go to the ATM,

  • take out 100 dollars

  • and notice that you lost one of those $20 bills.

  • It's very painful,

  • even though it doesn't mean anything.

  • Those 20 dollars might have been a quick lunch.

  • So this notion of loss aversion

  • kicks in when it comes to savings too,

  • because people, mentally

  • and emotionally and intuitively

  • frame savings as a loss

  • because I have to cut my spending.

  • So we talked about

  • all sorts of behavioral challenges

  • having to do with savings eventually.

  • Whether you think about immediate gratification,

  • and the chocolates versus bananas,

  • it's just painful to save now.

  • It's a lot more fun

  • to spend now.

  • We talked about inertia and organ donations

  • and checking the box.

  • If people have to check a lot of boxes

  • to join a 401(k) plan,

  • they're going to keep procrastinating

  • and not join.