Sam Sivarajan is a wealth management consultant and the author of two bestselling books on investing and decision-making.
Denmark and Sweden have many things in common – a social system that is the envy of the world; a stable, harmonious population; similar cultural history. But one thing they don’t share is their approach to organ donation: almost 86 per cent of Swedes participate in organ donation; only 4 per cent of Danes do. What is the reason for this massive discrepancy?
Default options. In Denmark, the default option is that you are not consenting to organ donation – you have to specifically tick a box to enter the organ donation program. In Sweden, the default option is that you are automatically consenting to organ donation – you have to specifically tick a box to opt out of the organ donation program. This one tweak accounts for much of the massive difference in organ donation rates between the two countries.
There’s a related lesson that can be learned from an experiment with popcorn. In a study, moviegoers were given free popcorn. They got either a medium-sized bucket or a large-sized bucket, but there was a twist: the popcorn was stale – two weeks old. The researchers wanted to see if the bucket size affected how much people ate, despite it being so unappetizing. They discovered moviegoers still ate a third more when eating from a large container.
What do stale popcorn and organ donation rates in Scandinavia have to teach investors? Reducing portion sizes helps people manage their eating habits. Similarly, by setting up an automated transfer from their checking account to RRSP contributions, people soon don’t miss this amount and get used to spending less and saving more. And, as with organ donation, saving becomes the default position.
Richard Thaler, who won the Nobel Prize for his research in behavioural economics, studied the effectiveness of a variety of investment options that companies offered their employees for their retirement plans. The employees not only had to fill out the paperwork to join the company plan but had to wade through countless investment options and select ones for their retirement plan.
This daunting task meant that many employees never completed their application and never started saving for retirement. What Prof. Thaler and colleagues recommended pension plan designers do is to provide a default option. Doing nothing meant an employee was automatically entered into the retirement plan and enrolled into a predetermined default (or “balanced” option). The employee could then easily change the default option to any other option offered, but at least they had started on their retirement savings journey.
This change has had a positive impact over the past 20 years. Automatic or default enrolment options are increasing: 32 per cent of all plans offered default enrolment in 2012; 58 per cent of all plans offered default enrolment in 2022. And, 59 per cent of plans defaulted employees into a plan at a savings rate of 4 per cent of their earnings or more. More interestingly, nearly seven out of 10 plans automatically enrolled employees into a feature that increases the annual savings rate every year. Most plans also offered an option for members to decrease their annual savings rate; despite a challenging 2022, only 9 per cent of plan participants chose to do so that year.
This evidence is not only great news for those in retirement plans with default design features, but it also provides a framework for all investors to reach their goals by incorporating automated savings and investment features. Setting up a transfer from your chequing account to your savings account for $50, $100, $200 a month is easy to do and, like the popcorn experiment, while it can be hard at first, over time one gets used to not having this amount to spend. Or set up an automated deposit to be invested into a broad diversified ETF or mutual fund. While $100 a month doesn’t sound like much, investing that monthly sum in an ETF tracking the S&P 500 for the past 10 years would leave one with more than $20,000 today.
Automated default options work – whether to save lives through organ donation or to better prepare investors for their future. As Dwayne “The Rock” Johnson puts it, “success isn’t always about greatness. It’s about consistency. Consistent hard work leads to success. Greatness will come.”
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