Shlomo Benartzi: Saving for tomorrow, tomorrow

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.

And last, we talked about loss aversion,

and the monkeys and the apples.

If people frame mentally

saving for retirement as a loss,

they're not going to be saving for retirement.

So we've got these challenges,

and what Richard Thaler and I

were always fascinated by --

take behavioral finance,

make it behavioral finance on steroids

or behavioral finance 2.0

or behavioral finance in action --

flip the challenges into solutions.

And we came up with an embarrassingly simple solution

called Save More, not today, Tomorrow.

How is it going to solve the challenges

we chatted about?

If you think about the problem

of bananas versus chocolates,

we think we're going to eat bananas next week.

We think we're going to save more next year.

Save More Tomorrow

invites employees

to save more maybe next year --

sometime in the future

when we can imagine ourselves

eating bananas,

volunteering more in the community,

exercising more and doing all the right things on the planet.

Now we also talked about checking the box

and the difficulty of taking action.

Save More Tomorrow

makes it easy.

It's an autopilot.

Once you tell me you would like to save more in the future,

let's say every January

you're going to be saving more automatically

and it's going to go away from your paycheck to the 401(k) plan

before you see it, before you touch it,

before you get the issue

of immediate gratification.

But what are we going to do about the monkeys

and loss aversion?

Next January comes

and people might feel that if they save more,

they have to spend less, and that's painful.

Well, maybe it shouldn't be just January.

Maybe we should make people save more

when they make more money.

That way, when they make more money, when they get a pay raise,

they don't have to cut their spending.

They take a little bit

of the increase in the paycheck home

and spend more --

take a little bit of the increase

and put it in a 401(k) plan.

So that is the program,

embarrassingly simple,

but as we're going to see,

extremely powerful.

We first implemented it,

Richard Thaler and I,

back in 1998.

Mid-sized company in the Midwest,

blue collar employees

struggling to pay their bills

repeatedly told us

they cannot save more right away.

Saving more today is not an option.

We invited them to save

three percentage points more

every time they get a pay raise.

And here are the results.

We're seeing here a three and a half-year period,

four pay raises,

people who were struggling to save,

were saving three percent of their paycheck,

three and a half years later

saving almost four times as much,

almost 14 percent.

And there's shoes and bicycles

and things on this chart

because I don't want to just throw numbers

in a vacuum.

I want, really, to think about the fact

that saving four times more

is a huge difference

in terms of the lifestyle

that people will be able to afford.

It's real.

It's not just numbers on a piece of paper.

Whereas with saving three percent,

people might have to add nice sneakers

so they can walk,

because they won't be able to afford anything else,

when they save 14 percent

they might be able to maybe have nice dress shoes

to walk to the car to drive.

This is a real difference.

By now, about 60 percent of the large companies

actually have programs like this in place.

It's been part of the Pension Protection Act.

And needless to say that Thaler and I

have been blessed to be part of this program

and make a difference.

Let me wrap

with two key messages.

One is behavioral finance

is extremely powerful.

This is just one example.

Message two

is there's still a lot to do.

This is really the tip of the iceberg.

If you think about people and mortgages

and buying houses and then not being able to pay for it,

we need to think about that.

If you're thinking about people taking too much risk

and not understanding how much risk they're taking

or taking too little risk,

we need to think about that.

If you think about people spending a thousand dollars a year

on lottery tickets,

we need to think about that.

The average actually,

the record is in Singapore.

The average household

spends $4,000 a year on lottery tickets.

We've got a lot to do,

a lot to solve,

also in the retirement area

when it comes to what people do with their money

after retirement.

One last question:

How many of you feel comfortable

that as you're planning for retirement

you have a really solid plan

when you're going to retire,

when you're going to claim Social Security benefits,

what lifestyle to expect,

how much to spend every month

so you're not going to run out of money?

How many of you feel you have a solid plan for the future

when it comes to post-retirement decisions.

One, two, three, four.

Less than three percent

of a very sophisticated audience.

Behavioral finance has a long way.

There's a lot of opportunities

to make it powerful again and again and again.

Thank you.

(Applause)