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Why do defaults affect behavior? Experimental evidence from Afghanistan

Joshua Blumenstock, Mike Callen and Tarek Ghani

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We report on an experiment examining why default options impact behavior. Working with one of the largest private firms in Afghanistan, we randomly assigned each of 949 employees to different variants of a new default savings account. Employees assigned a default contribution rate of 5% are 40 percentage points more likely to contribute than employees assigned to a default contribution rate of zero; to achieve this effect through financial incentives alone would require a 50% match from the employer. Our design permits us to rule out several common explanations for default effects, including employer endorsement, employee inattention, and a lack of awareness about how to switch. Instead, we find evidence that the default effect is driven largely by a combination of present-biased preferences and the cognitive cost of calculating alternate savings scenarios. Default assignment also causes employees to develop savings habits that outlive our experiment: they are more likely to believe that savings is important, less likely to report being too financially constrained to save, and more likely to make an active decision to save at the end of our trial.

Keywords: defaults savings; behavioral models; peer effects; digital finance; mobile money (search for similar items in EconPapers)
JEL-codes: D14 (search for similar items in EconPapers)
Pages: 99 pages
Date: 2018-10-01
New Economics Papers: this item is included in nep-exp and nep-mfd
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Published in American Economic Review, 1, October, 2018, 108(10), pp. 2868–2901. ISSN: 0002-8282

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