TEDSalon NY2011

Shlomo Benartzi: Saving for tomorrow, tomorrow

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It's easy to imagine saving money next week, but how about right now? Generally, we want to spend it. Economist Shlomo Benartzi says this is one of the biggest obstacles to saving enough for retirement, and asks: How do we turn this behavioral challenge into a behavioral solution?

- Economist
Shlomo Benartzi uses behavioral economics to study how and why we plan well for the future (or fail to), and uses that to develop new programs to encourage saving for retirement. Full bio

I'm going to talk today about saving more,
00:15
but not today, tomorrow.
00:18
I'm going to talk about Save More Tomorrow.
00:21
It's a program that Richard Thaler
00:23
from the University of Chicago and I
00:25
devised maybe 15 years ago.
00:27
The program, in a sense,
00:30
is an example of behavioral finance
00:32
on steroids --
00:34
how we could really use behavioral finance.
00:36
Now you might ask, what is behavioral finance?
00:39
So let's think about how we manage our money.
00:42
Let's start with mortgages.
00:45
It's kind of a recent topic,
00:48
at least in the U.S.
00:50
A lot of people buy
00:52
the biggest house they can afford,
00:54
and actually slightly bigger than that.
00:57
And then they foreclose.
01:00
And then they blame the banks
01:03
for being the bad guys who gave them the mortgages.
01:05
Let's also think about
01:08
how we manage risks --
01:10
for example, investing in the stock market.
01:12
Two years ago, three years ago, about four years ago,
01:14
markets did well.
01:17
We were risk takers, of course.
01:19
Then market stocks seize
01:22
and we're like, "Wow.
01:24
These losses, they feel, emotionally,
01:26
they feel very different
01:29
from what we actually thought about it
01:32
when markets were going up."
01:35
So we're probably not doing a great job
01:37
when it comes to risk taking.
01:40
How many of you have iPhones?
01:42
Anyone? Wonderful.
01:45
I would bet many more of you
01:48
insure your iPhone --
01:51
you're implicitly buying insurance by having an extended warranty.
01:54
What if you lose your iPhone?
01:57
What if you do this?
01:59
How many of you have kids?
02:01
Anyone?
02:03
Keep your hands up
02:05
if you have sufficient life insurance.
02:07
I see a lot of hands coming down.
02:10
I would predict,
02:12
if you're a representative sample,
02:14
that many more of you
02:16
insure your iPhones than your lives,
02:18
even when you have kids.
02:21
We're not doing that well when it comes to insurance.
02:23
The average American household
02:26
spends 1,000 dollars a year
02:30
on lotteries.
02:33
And I know it sounds crazy.
02:35
How many of you spend a thousand dollars a year on lotteries?
02:38
No one.
02:41
So that tells us that the people not in this room
02:43
are spending more than a thousand
02:46
to get the average to a thousand.
02:48
Low-income people
02:51
spend a lot more than a thousand on lotteries.
02:53
So where does it take us?
02:57
We're not doing a great job managing money.
02:59
Behavioral finance is really a combination
03:02
of psychology and economics,
03:05
trying to understand
03:07
the money mistakes people make.
03:09
And I can keep standing here
03:11
for the 12 minutes and 53 seconds that I have left
03:13
and make fun of all sorts of ways
03:17
we manage money,
03:19
and at the end you're going to ask, "How can we help people?"
03:21
And that's what I really want to focus on today.
03:24
How do we take an understanding
03:27
of the money mistakes people make,
03:29
and then turning the behavioral challenges
03:32
into behavioral solutions?
03:35
And what I'm going to talk about today
03:37
is Save More Tomorrow.
03:39
I want to address the issue
03:41
of savings.
03:43
We have on the screen
03:45
a representative sample
03:47
of 100 Americans.
03:49
And we're going to look at their saving behavior.
03:51
First thing to notice is,
03:54
half of them
03:56
do not even have access
03:58
to a 401(k) plan.
04:00
They cannot make savings easy.
04:02
They cannot have money go away from their paycheck
04:05
into a 401(k) plan
04:08
before they see it,
04:10
before they can touch it.
04:12
What about the remaining half of the people?
04:14
Some of them elect not to save.
04:17
They're just too lazy.
04:20
They never get around to logging into a complicated website
04:22
and doing 17 clicks to join the 401(k) plan.
04:25
And then they have to decide how they're going to invest
04:28
in their 52 choices,
04:30
and they never heard about what is a money market fund.
04:32
And they get overwhelmed and the just don't join.
04:36
How many people end up saving to a 401(k) plan?
04:38
One third of Americans.
04:43
Two thirds are not saving now.
04:46
Are they saving enough?
04:48
Take out those
04:50
who say they save too little.
04:52
One out of 10
04:54
are saving enough.
04:56
Nine out of 10
04:59
either cannot save through their 401(k) plan,
05:01
decide not to save -- or don't decide --
05:04
or save too little.
05:07
We think we have a problem
05:10
of people saving too much.
05:12
Let's look at that.
05:14
We have one person --
05:16
well, actually we're going to slice him in half
05:18
because it's less than one percent.
05:21
Roughly half a percent of Americans
05:24
feel that they save too much.
05:27
What are we going to do about it?
05:32
That's what I really want to focus on.
05:34
We have to understand
05:36
why people are not saving,
05:38
and then we can hopefully flip
05:40
the behavioral challenges
05:42
into behavioral solutions,
05:44
and then see how powerful it might be.
05:46
So let me divert for a second
05:49
as we're going to identify the problems,
05:51
the challenges, the behavioral challenges,
05:53
that prevent people from saving.
05:56
I'm going to divert and talk about bananas and chocolate.
05:58
Suppose we had another wonderful TED event next week.
06:02
And during the break
06:05
there would be a snack
06:07
and you could choose bananas or chocolate.
06:09
How many of you think you would like to have bananas
06:11
during this hypothetical TED event next week?
06:14
Who would go for bananas?
06:16
Wonderful.
06:18
I predict scientifically
06:20
74 percent of you will go for bananas.
06:22
Well that's at least what one wonderful study predicted.
06:25
And then count down the days
06:30
and see what people ended up eating.
06:33
The same people that imagined themselves
06:38
eating the bananas
06:41
ended up eating chocolates
06:43
a week later.
06:45
Self-control
06:47
is not a problem in the future.
06:49
It's only a problem now
06:52
when the chocolate is next to us.
06:54
What does it have to do with time and savings,
06:58
this issue of immediate gratification?
07:01
Or as some economists call it, present bias.
07:04
We think about saving. We know we should be saving.
07:08
We know we'll do it next year, but today let us go and spend.
07:10
Christmas is coming,
07:13
we might as well buy a lot of gifts for everyone we know.
07:15
So this issue of present bias
07:18
causes us to think about saving,
07:22
but end up spending.
07:24
Let me now talk
07:26
about another behavioral obstacle to saving
07:28
having to do with inertia.
07:30
But again, a little diversion
07:32
to the topic of organ donation.
07:34
Wonderful study comparing different countries.
07:37
We're going to look at two similar countries,
07:40
Germany and Austria.
07:43
And in Germany,
07:46
if you would like to donate your organs --
07:48
God forbid something really bad
07:50
happens to you --
07:52
when you get your driving license or an I.D.,
07:54
you check the box saying,
07:57
"I would like to donate my organs."
07:59
Not many people like checking boxes.
08:01
It takes effort. You need to think.
08:03
Twelve percent do.
08:05
Austria, a neighboring country,
08:08
slightly similar, slightly different.
08:11
What's the difference?
08:13
Well, you still have choice.
08:15
You will decide
08:17
whether you want to donate your organs or not.
08:19
But when you get your driving license,
08:22
you check the box
08:24
if you do not want to donate your organ.
08:26
Nobody checks boxes.
08:30
That's kind of too much effort.
08:32
One percent check the box. The rest do nothing.
08:34
Doing nothing is very common.
08:37
Not many people check boxes.
08:39
What are the implications
08:42
to saving lives
08:44
and having organs available?
08:46
In Germany, 12 percent check the box.
08:49
Twelve percent are organ donors.
08:51
Huge shortage of organs,
08:54
God forbid, if you need one.
08:56
In Austria, again, nobody checks the box.
08:58
Therefore, 99 percent of people
09:01
are organ donors.
09:04
Inertia, lack of action.
09:06
What is the default setting
09:08
if people do nothing,
09:10
if they keep procrastinating, if they don't check the boxes?
09:12
Very powerful.
09:15
We're going to talk
09:17
about what happens if people are overwhelmed and scared
09:19
to make their 401(k) choices.
09:23
Are we going to make them automatically join the plan,
09:26
or are they going to be left out?
09:29
In too many 401(k) plans,
09:31
if people do nothing,
09:34
it means they're not saving for retirement,
09:36
if they don't check the box.
09:39
And checking the box takes effort.
09:41
So we've chatted about a couple of behavioral challenges.
09:44
One more before we flip the challenges into solutions,
09:47
having to do with monkeys and apples.
09:50
No, no, no, this is a real study
09:52
and it's got a lot to do with behavioral economics.
09:54
One group of monkeys gets an apple, they're pretty happy.
09:58
The other group gets two apples, one is taken away.
10:01
They still have an apple left.
10:03
They're really mad.
10:05
Why have you taken our apple?
10:08
This is the notion of loss aversion.
10:11
We hate losing stuff,
10:14
even if it doesn't mean a lot of risk.
10:16
You would hate to go to the ATM,
10:19
take out 100 dollars
10:22
and notice that you lost one of those $20 bills.
10:24
It's very painful,
10:26
even though it doesn't mean anything.
10:28
Those 20 dollars might have been a quick lunch.
10:30
So this notion of loss aversion
10:34
kicks in when it comes to savings too,
10:38
because people, mentally
10:41
and emotionally and intuitively
10:43
frame savings as a loss
10:46
because I have to cut my spending.
10:48
So we talked about
10:51
all sorts of behavioral challenges
10:53
having to do with savings eventually.
10:55
Whether you think about immediate gratification,
10:59
and the chocolates versus bananas,
11:02
it's just painful to save now.
11:05
It's a lot more fun
11:08
to spend now.
11:10
We talked about inertia and organ donations
11:12
and checking the box.
11:15
If people have to check a lot of boxes
11:17
to join a 401(k) plan,
11:19
they're going to keep procrastinating
11:21
and not join.
11:23
And last, we talked about loss aversion,
11:25
and the monkeys and the apples.
11:27
If people frame mentally
11:29
saving for retirement as a loss,
11:32
they're not going to be saving for retirement.
11:35
So we've got these challenges,
11:38
and what Richard Thaler and I
11:40
were always fascinated by --
11:42
take behavioral finance,
11:44
make it behavioral finance on steroids
11:46
or behavioral finance 2.0
11:48
or behavioral finance in action --
11:50
flip the challenges into solutions.
11:52
And we came up with an embarrassingly simple solution
11:56
called Save More, not today, Tomorrow.
11:59
How is it going to solve the challenges
12:03
we chatted about?
12:05
If you think about the problem
12:07
of bananas versus chocolates,
12:09
we think we're going to eat bananas next week.
12:11
We think we're going to save more next year.
12:14
Save More Tomorrow
12:17
invites employees
12:20
to save more maybe next year --
12:22
sometime in the future
12:24
when we can imagine ourselves
12:26
eating bananas,
12:28
volunteering more in the community,
12:30
exercising more and doing all the right things on the planet.
12:32
Now we also talked about checking the box
12:36
and the difficulty of taking action.
12:39
Save More Tomorrow
12:42
makes it easy.
12:44
It's an autopilot.
12:46
Once you tell me you would like to save more in the future,
12:48
let's say every January
12:52
you're going to be saving more automatically
12:54
and it's going to go away from your paycheck to the 401(k) plan
12:57
before you see it, before you touch it,
13:00
before you get the issue
13:02
of immediate gratification.
13:04
But what are we going to do about the monkeys
13:07
and loss aversion?
13:10
Next January comes
13:12
and people might feel that if they save more,
13:14
they have to spend less, and that's painful.
13:16
Well, maybe it shouldn't be just January.
13:20
Maybe we should make people save more
13:22
when they make more money.
13:25
That way, when they make more money, when they get a pay raise,
13:28
they don't have to cut their spending.
13:31
They take a little bit
13:35
of the increase in the paycheck home
13:37
and spend more --
13:39
take a little bit of the increase
13:41
and put it in a 401(k) plan.
13:43
So that is the program,
13:45
embarrassingly simple,
13:47
but as we're going to see,
13:49
extremely powerful.
13:51
We first implemented it,
13:53
Richard Thaler and I,
13:55
back in 1998.
13:57
Mid-sized company in the Midwest,
14:00
blue collar employees
14:03
struggling to pay their bills
14:05
repeatedly told us
14:07
they cannot save more right away.
14:09
Saving more today is not an option.
14:12
We invited them to save
14:15
three percentage points more
14:17
every time they get a pay raise.
14:20
And here are the results.
14:23
We're seeing here a three and a half-year period,
14:26
four pay raises,
14:28
people who were struggling to save,
14:30
were saving three percent of their paycheck,
14:32
three and a half years later
14:34
saving almost four times as much,
14:36
almost 14 percent.
14:39
And there's shoes and bicycles
14:42
and things on this chart
14:44
because I don't want to just throw numbers
14:46
in a vacuum.
14:48
I want, really, to think about the fact
14:50
that saving four times more
14:53
is a huge difference
14:55
in terms of the lifestyle
14:57
that people will be able to afford.
14:59
It's real.
15:01
It's not just numbers on a piece of paper.
15:03
Whereas with saving three percent,
15:06
people might have to add nice sneakers
15:08
so they can walk,
15:10
because they won't be able to afford anything else,
15:12
when they save 14 percent
15:16
they might be able to maybe have nice dress shoes
15:18
to walk to the car to drive.
15:21
This is a real difference.
15:24
By now, about 60 percent of the large companies
15:26
actually have programs like this in place.
15:31
It's been part of the Pension Protection Act.
15:34
And needless to say that Thaler and I
15:37
have been blessed to be part of this program
15:39
and make a difference.
15:42
Let me wrap
15:44
with two key messages.
15:46
One is behavioral finance
15:49
is extremely powerful.
15:52
This is just one example.
15:55
Message two
15:58
is there's still a lot to do.
16:00
This is really the tip of the iceberg.
16:02
If you think about people and mortgages
16:05
and buying houses and then not being able to pay for it,
16:08
we need to think about that.
16:11
If you're thinking about people taking too much risk
16:13
and not understanding how much risk they're taking
16:16
or taking too little risk,
16:19
we need to think about that.
16:21
If you think about people spending a thousand dollars a year
16:23
on lottery tickets,
16:26
we need to think about that.
16:28
The average actually,
16:30
the record is in Singapore.
16:32
The average household
16:34
spends $4,000 a year on lottery tickets.
16:36
We've got a lot to do,
16:39
a lot to solve,
16:41
also in the retirement area
16:43
when it comes to what people do with their money
16:46
after retirement.
16:48
One last question:
16:50
How many of you feel comfortable
16:52
that as you're planning for retirement
16:55
you have a really solid plan
16:57
when you're going to retire,
17:00
when you're going to claim Social Security benefits,
17:02
what lifestyle to expect,
17:05
how much to spend every month
17:07
so you're not going to run out of money?
17:09
How many of you feel you have a solid plan for the future
17:11
when it comes to post-retirement decisions.
17:14
One, two, three, four.
17:19
Less than three percent
17:22
of a very sophisticated audience.
17:24
Behavioral finance has a long way.
17:26
There's a lot of opportunities
17:29
to make it powerful again and again and again.
17:31
Thank you.
17:35
(Applause)
17:37

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About the Speaker:

Shlomo Benartzi - Economist
Shlomo Benartzi uses behavioral economics to study how and why we plan well for the future (or fail to), and uses that to develop new programs to encourage saving for retirement.

Why you should listen

Shlomo Benartzi studies behavioral finance with a special interest in personal finance. He is co-founder of the Behavioral Finance Forum (www.behavioralfinanceforum.com), a collective of 40 prominent academics and 40 major financial institutions from around the globe.  The Forum helps consumers make better financial decisions by fostering collaborative research efforts between academics and industry leaders.

Benartzi’s most significant research contribution is the development of Save More Tomorrow™ (SMarT), a behavioral prescription designed to help employees increase their savings rates gradually over time.