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30 Sep 2008 08:27 am

Libertarian Paternalism

Will Wilkinson reviews Nudge:

Thaler and Sunstein's best idea is the Save More Tomorrow Plan. Psychologists say folks really hate losing what they already have but don't so much mind forgoing an equivalent gain. There is also a well-known tendency to postpone efforts at self-control; the diet always starts tomorrow. These findings, Thaler and Sunstein argue, recommend an ingenious scheme benevolent employers can use to help their workers put more money in the bank.

Employees are offered the option to have a rising portion of future pay raises automatically deducted and placed into a savings or investment account. Since participants need do nothing now and are not required to cut back in order to save more, the percentage of total income saved increases more or less painlessly as pay goes up over time. Tests of the program show excellent results: Very few choose to stop their savings rate increases, and many end up maxing out their contributions to the plan. These results strongly support the idea that people would save more if savings programs were structured to work with the grain of our predictably crooked timber.

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