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Cues to Save Money

Americans have a notoriously low savings rate, a problem we explored in a podcast about prize-linked savings plans. In another podcast, “A Mouse in the Salad,” Richard Thaler (author of Nudge) discussed “anchoring,” a cognitive shortcut whereby we make decisions based on an anchoring number even if it is randomly generated.

A new NBER paper (ungated version here) by Yale’s James J. Choi and Cade Massey, along with Emily Haisley of Barclays Bank and Jennifer Kurkoski of Google, shows that anchoring very much affects how people save (or don’t save) their money.

The researchers conducted a field experiment in which employees at a technology company received an e-mail about their 401(k) savings plans. The control group received an email with just the basics: a reminder of employer matching contributions and of how much the employees had put away in their 401(k). Another group received the same email with a short anchoring message: “For example, you could increase your contribution rate by 1% of your income and get more of the match money for which you’re eligible.” The experiment also tested two other cues: suggesting a goal ($7,000, for example), and highlighting the company’s match incentive or the maximum possible contribution rate.

The researchers found that anchors increase or decrease 401(k) contribution rates by up to 1.4 percent of income. For all cues tested, low cues decrease contribution rates by up to 1.5 percent of income, while high cues increase contribution rates by up to 2.9 percent of income. Based on their findings, the authors reckon that a few carefully selected words could be an easy way to help people save:

Our findings provide both an opportunity and a warning for organizations and policy makers. The kinds of cues we investigate could be intentionally used to influence saving behavior more efficiently than through the use of more costly interventions, such as financial education or increases in matching incentives. But unintentional cues buried in mundane communications can also affect behavior. Thus, organizations and policymakers should take responsibility for the cues they disseminate and wield them mindfully.